The real cost of our emotions

It’s 2021 and we’re all sitting here wondering just what the heck happened last year. None of us could have ever expected 2020 to go the way it did. It was an intense ride of emotions ranging from fear and anger, to confusion to sadness – and round and round the carousel we went.

To make matters worse, and even more emotional, the COVID-19 situation directly linked to the dismal state of the global economy, left many industries in tatters as people scrambled to keep their families’ financial heads above water.

Towards the end of last year, a study performed by Momentum Investments revealed that emotions like fear and greed influence the decision-making of even the most astute investors. The study analysed the switching decisions of over 23 000 investors on the Momentum Wealth Platform (LISP).

The researchers discovered what they dubbed a “behaviour tax” as lower investment returns were directly linked to an investor’s behaviour, like hastily switching funds because markets are falling, compared to portfolios which are bought and held. This explains why following our gut instincts when investing, often does not serve us well.

I often see how this behaviour also impacts our personal finances. In fact, even more so, because emotions become amplified when the survival of your family, the happiness of your loved ones and your personal future become part of the decision-making process.

As creatures ruled by emotions, we all need to accept the fact that our finances are tied to our emotions. For instance, fear and greed both represent strong emotions that people link to perceptions of danger and opportunity. These emotions – backed by the powerful reward and stress chemicals of dopamine and cortisol – are ever-present in today’s modern society. They challenge the normal representation of rationality in decision-making, even when it comes to investing.

Let’s take, for instance, the most significant investment that any family will make in their lifetime… buying a house. Just think about the range of emotions involved in this critical financial decision. You may be filled with nostalgia about the house that you grew up in, fuelling the expectation that this is the life you want for your family – regardless of the financial impact this may have down the line or in today’s volatile economy.

Your emotions will convince you that a big house will make you happy. You could then end up with more house than you can afford because your emotions convinced you that this is the best decision. But the truth is, if you really think about it, you could probably be happy in a much smaller house.

That’s nostalgia, but what about worry? Where you cash out your investments because you lost your job.

What about jealousy? Where your neighbours’ fancy new car makes you believe you deserve the same.

How about regret? Where you are too busy living in the fear of your past mistakes, causing you to be scared of overcoming challenges and changing your situation.

What about just plain old feeling of being overwhelmed? This may resonate with many people given the impact 2020 has had on us and the uncertain and unpredictable future that is 2021. This can lead to all sorts of emotional decisions that may or may not be in the best interest of your personal financial goals.

The good news is that we can control our emotions. When it comes to emotions, it is the support of our families and partners that keep us tethered to reason. We need to rely on each other to help us realise when we are letting our emotions get the best of us.

If you and your partner are worried that you can’t keep each other in check, consider partnering with a financial adviser to expand your outlook, provide an objective analysis of your financial situation and introduce you to views and facts that aren’t based on your emotions.

In the end, greed, fear, jealousy, pride and overwhelming stress will always be a part of us. The trick is not to let these emotions lead you to financial ruin. Admit to yourself that you are only human, find the right support system, and then you would have already taken the first steps on your journey to success.

Don’t forget to catch the next episode of Geldhelde (Dstv channel 147 on 1 March at 19h30) where we will be tackling the issue of financial planning head on.

ENDS