Do our emotions work against us?
They can with investing. Our own fears or doubts or arrogance get in the way. For example, most of us are afraid of losses: the pain of losing money is a lot worse than the regret we might feel by missing out in an up market. So we leave our money in safe, low-interest bank deposits rather than risk it in a volatile market, even though we know inflation is eating it away. On the other hand, we also suffer from hindsight bias: in retrospect, an uncertain outcome seems obvious. And we kick ourselves for missing out on Apple or Amazon’s meteoric rise.
To be successful, we need to manage our passions as much as we manage our money. Shakespeare understood this. His plays are full of characters undone by their emotional state. Macbeth’s fears lead him first to murder his king, then his best friend. Hamlet’s doubts prevent him from accomplishing his personal mission just when it might have been successful. Coriolanus’ pride and disdain for the masses keep him from showing off when it might have saved him.
Their own flaws are what bring these heroes down. The lesson is that we need to have strategies for dealing with our fears, rashness, overconfidence, or procrastination. There are ways to do this: hiring a money manager, or avoiding listening to daily market chatter in order to stick to a long-term strategy. But we need to manage ourselves first.
Being emotional is part of being human. But we need to rule our feelings, not let our feelings rule us.
Douglas R. Tengdin, CFA
Chief Investment Officer