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In order to understand how emotional investing can be costly, we need to first clarify that emotions are in fact a good thing. However, combining emotions with your investing could lead to costly consequences.

 

Emotions in the Bible

We see in the Bible that God has fearfully and wonderfully made us, and that includes our emotions!  To get a quick snapshot of places in the Word of God where emotions are present, take a look at these verses:

  • John 11:35 – Jesus wept.
  • Proverbs 16:32 – Better a patient man than a warrior, a man who controls his temper than one who takes a city.
  • Proverbs 28:26 – He who trusts in himself is a fool, but he who walks in wisdom is kept safe.
  • Psalm 34:18 – The LORD is close to the brokenhearted and saves those who are crushed in spirit.
  • 1 Timothy 6:10 – For the love of money is a root of all kinds of evil…
  • 1 Peter 5:7 – Cast all your anxiety on him because he cares for you.

We could go on for a while looking at the various places in Scripture that express the emotions and feelings, both good and bad, and the raw emotions that God has placed within us to respond to what is going on around us.  We are emotional creatures and sometimes we lean into them for guidance and direction.  However, using emotions to guide your decision making could lead you to make a damaging decision.

When emotions are driving decisions in the world of finances, it can be disastrous, just the same as doing so in your relationships with family and friends.

So, what is one to do when we are such emotional creatures, especially when it comes to our personal finances? How do we avoid emotional investing?

 

Emotional Investing

  • The two major emotions influencing investors are greed and fear.  Avoid making investment decisions based upon either! 
  • The reality is that market downturns (recessions and corrections) are common. 
  • The ideal way to invest is to buy low and sell high. However, when we let emotions dictate our choices, we tend to buy high and sell low. 
  • Do this over and over again and you will go broke. 
    • Emotional Investing Can Be Costly.
      • DALBAR Study – Many independent investors underperform the markets they’re invested in. This is not primarily because of fees or cost, but because they allow emotions to guide their investment decisions. 
      • Work with a seasoned financial advisor who may be able to help manage the tendencies of greed and fear. This should yield better overall results.
    • How you can deal with emotions while investing
      • Get the facts – Seek unbiased third party facts about the decision you are making. Don’t get sucked into the hype and hysteria promoted on popular radio, TV shows, and commercials. This is especially true during a market downturn. 
      • Seek wise counsel – In a multitude of counselors there is wisdom (Proverbs 11:14). Seek a godly person in your life who can help you sort through the options to be able to make a wise decision. 
      • Sleep on your decision – Avoid knee jerk reactions. Slow down and take your time. Remember, God is in control and He will provide for all of your needs. 
      • Follow the 6 Rules for Investing 

 

6 Rules for Investing

  1. Invest conservatively within different asset classes.
  2. Look for a ten year track record of the fund manager (not the fund).
  3. Reduce or avoid investing in “sin stocks.”
  4. Keep it simple!
  5. Minimize or avoid surrender and redemption fees.
  6. Use independent, third-party research.

 

What about Gold?

  • Many people fear that the economy will collapse and the US dollar will become worthless. “After all,” they say, “the dollar is no longer backed by gold, therefore it has no intrinsic value.” They go on to suggest (or demand) that gold is the safest place to store our hard earned cash. But will gold really help if the economy fails? 
    • The last time gold was used as a currency after an economic disaster was the fall of the Roman Empire (over 1500 years ago!). 
  • Let’s look at two modern examples of the currency used during an economic collapse. 
    1. Post Civil War South – The confederate dollar became completely worthless! People traded crops and resources in order to survive. 
    2. Post Katrina New Orleans – What people really needed was food, clean water, generators, gasoline, and dry clothes. People weren’t looking for gold, they just needed to survive.
  • So, is gold as a safe investment?
    • In our opinion, NO. Owning gold and silver coins is a fun hobby, but too often is a lousy investment. Psalm 20:7 “Some trust in chariots and some in horses [some trust in gold!] but we trust in the name of the Lord our God!”

 

It is wise for investors to seek wise counsel from a financial advisor that can help keep emotions at bay.

 

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The topics discussed in this podcast are for general information only and are not intended to provide specific investment advice or recommendations.  Investing and investment strategies involve risk including the potential loss of principal. Past performance is not a guarantee of future results.

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