Investor Psychology

You Can't Escape Emotions, So Harness Them for Good

Investors and retirement savers are not robots. We are thinking, feeling, imperfect creatures. And that's not all bad.

We all like to think we make our decisions based on facts and logic. But unless you’re a robot, that isn’t the case.

Emotions always play some role in the choices we make, including — maybe even especially — when it comes to our money. And it’s no wonder, when so much of our self-worth is tied to our net worth.

That’s why the financial industry is so interested in the fields of behavioral economics and behavioral finance, studying the social, cognitive and emotional factors that can lead investors to depart from rational decision-making.

No one is perfect

Researchers have identified dozens of behavioral biases that can come into play as investors try to determine the best ways to both grow and protect their assets. There’s pride, regret, anger, fear and greed, just to name a few. Unfortunately, those emotions can lead to actions that are more destructive than constructive. If you can learn to contain them, you’re bound to lessen the negative impact on your portfolio.

That’s easier said than done, of course. Or, as Richard Thaler, the winner of the 2017 Nobel Prize in economics, puts it, we humans are consistently irrational.

Oh, how we hate to lose

Much of this irrationality can be attributed to the effect that losses have on our emotions — what researchers call loss-aversion bias. We feel the pain of a loss much more than the joy of a gain — particularly when it comes to our hard-earned money. And that can trip us up. For example, an investor might not be willing to get rid of a bad investment and switch over to a product or strategy with more potential.

The lemming factor

Another common mistake is to follow the herd. Again, it’s human nature to go with the latest trend; if everybody’s doing it, it must be a winner, right? Not necessarily. When investing your nest egg, you should do what’s best based on your unique goals. Many people put their money into investments without regard to how long it will take to recover from a loss — which can be devastating if you’re in or near retirement. Or they make an investment, then over-monitor and agonize about it, which could lead to buying high and selling low. “Fear of missing out” can take a chunk out of a portfolio at the most inopportune time.

In bull markets we trust

And then there’s the kind of over-confidence we’re seeing a lot of these days, thanks to this record-setting bull market. This is another significant problem for pre-retirees, who should be transitioning from the accumulation phase of their investing career to the preservation and distribution phase. It’s imperative that they move to a portfolio that is structured to last the entirety of their retirement — which could be 25 years or more. The impact of a downturn can be much more calamitous in retirement than when you’re working, especially if you’re depending on your investments for a portion of your income.

You’re likely wondering at this point if there’s some way you can channel Star Trek’s Mr. Spock, putting emotions aside and becoming super-rational — at least when it comes to your finances.

Probably not.

And that’s not all bad. Your brain uses emotions to convince you to act in a certain manner. So why not harness those feelings and use them in a positive way? If you are feeling anxious regarding current market trends, talk it out with your financial professional. The main thing is to keep your sights on your retirement income goals and refrain from making changes that don’t align with those goals.

The bottom line

No matter what’s driving you — fear, greed, pride, envy — do your homework, ask questions, read the fine print. And seek help from a financial professional, preferably a fiduciary who specializes in creating income in retirement and can help you protect your nest egg and your future income.

Kim Franke-Folstad contributed to this article.

About the Author

Richard Pucciarelli, Investment Adviser Representative

President and founder, Carolina Retirement Resources Inc

Dr. Richard Pucciarelli is the president and founder of Carolina Retirement Resources Inc. He has over 15 years experience serving retirees and pre-retirees in planning for and protecting their financial futures. Pucciarelli is an Investment Adviser Representative and a licensed insurance professional. He hosts the "Financial Symphony" show on WBT Radio 1110 AM every Saturday morning at 11 a.m.

Most Popular

Dying Careers You May Want to Steer Clear Of

Dying Careers You May Want to Steer Clear Of

It’s tough to change, but your job could depend on it. Be flexible in your career goals – and talk with your kids about their own aspirations, because…
September 13, 2021
5 Top Dividend Aristocrats to Beef Up Your Portfolio
dividend stocks

5 Top Dividend Aristocrats to Beef Up Your Portfolio

The 65-member Dividend Aristocrats are among the market's best sources of reliable, predictable income. But these five stand out as truly elite.
September 14, 2021
7 Best Commodity Stocks to Play the Coming Boom

7 Best Commodity Stocks to Play the Coming Boom

These seven commodity stocks are poised to take advantage of a unique confluence of events. Just mind the volatility.
September 8, 2021


Hidden Fees, Unintentional Wealth Transfers and Other Lurking Retirement Hazards
Making Your Money Last

Hidden Fees, Unintentional Wealth Transfers and Other Lurking Retirement Hazards

A secure retirement is a happy retirement. Here are three things you can do to improve your odds that your golden years will be bountiful and worry-fr…
September 28, 2021
Tax Changes and Key Amounts for the 2021 Tax Year
tax law

Tax Changes and Key Amounts for the 2021 Tax Year

Americans are facing a long list of tax changes for the 2021 tax year. Smart taxpayers will start planning for them now.
September 23, 2021
Namaste Invested: Look to Yoga to Build Your Wealth
Investor Psychology

Namaste Invested: Look to Yoga to Build Your Wealth

It’s uncanny how the principles of yoga apply to financial success. Here are five elements of yoga that are particularly useful for personal wealth.
September 23, 2021
ETFs and Mutual Funds with Todd Rosenbluth
Index Funds

ETFs and Mutual Funds with Todd Rosenbluth

Which is better: ETFs or mutual funds? And how do you decide where to put your investments? CFRA fund expert Todd Rosenbluth has some answers. Also, h…
September 22, 2021