Tag Archives: risk-taking

How to Be Emotionally Intelligent About Your Finances

Prudent and successful investing is as much about managing attitudes and feelings about money as it is about managing the money itself.  It’s all in how we use it that brings us the greatest satisfaction and success.

If we are self-aware and self-confident, we feel more of a sense of mastery.  We feel we are making the best use of it because we are using it to reflect our core values and our sense of ourselves.

Daniel Goleman has written extensively about the benefits of having and using “emotional intelligence” in our life’s pursuits.  In his book, “Leadership:  The Power of Emotional Intelligence” he posits that the ability to identify and monitor one’s emotions is imperative to being a competent leader.

He has a short list of competencies leaders must possess including self-awareness and self-management.  If you are self-aware, you have realistic self-confidence—you understand your own strengths and limitations. His point is that effective leaders understand how their personal dynamics, principally emotions, make an impact and learn to manage them so that they are used most effectively.

In my work at Financial Psychology Corp., the same principles are applied to money management.   In working with the financial services industry, it became clear early on that understanding feelings and being able to manage them was a key competency in mastering wealth accumulation.  Financial advisors had the greatest influence with their clients if they understood the importance of managing attitudes and feelings as well as finances—both their own and their clients.

Investing by its very nature is an emotional business and being able to understand our feelings and the impact they have on how we are using our money, enables us to make smarter choices and ultimately make the best use of our money.

I have seen too many otherwise highly intelligent investors allow their emotions to cloud their better judgment.  They react impulsively and inappropriately to market swings and use their emotional money minds instead of their more rational money minds.

The skill set is the same whether you want to be a good leader or you want to be a good money manager:  you have to know yourself and how to profit from reinforcing your attitudes and feelings which are assets and shoring up those that may be liabilities.  We can become our greatest financial asset if we learn how to use our personality traits so that we profit from them.  It all starts with knowing ourselves.

The mission of my company, Financial Psychology Corp., is to give people insight into their financial behavior so that they can make the best use of their money.

Just as leaders use their personal attributes to achieve the most powerful influence in their pursuits, investors must be able to use the same skills and competencies to have optimum influence in how their money is being managed:  realistic self-awareness and self-confidence of doing the right thing.

What’s Your Comfort Level with Taking Financial Risk?

If you’re puzzled in how to honestly respond, you’re not alone.  Most people find out their true comfort with risk only after the fact—after they’ve lost money.  Then, and only then, do they really know how much they can financially and emotionally afford to lose.

Your risk tolerance is your ability to make decisions, trading the known for the unknown, and to be comfortable with the decision once it is made.

Before you can begin to understand how to gauge your comfort level in taking risks with your finances and investments, think about how you feel in general about giving up something you know now without being certain of what your return will be in the future.  The possibility exists that what you get will be less than your investment.

There are several reasons that risk is mystifying and elusive:

Tolerance for risk is difficult for most people to accurately gauge because it is a socially desirable trait, at least in the United States.  The USA was founded by brave individuals who risked their lives and ventured into an unknown land for a greater sense of freedom and independence.   Ever since,   entrepreneurial behavior has been revered and rewarded.  So, people like to believe that they’re higher risk takers than they truly are.  They want to believe that they’d step up to the plate if they saw an opportunity for significant financial gain..

The truth is that most people would rather not gamble and take the financial risk because they would regret the potential loss in the process.  They are not certain they will reap a just reward for the risk they’d take.

When you search your minds and hearts for your own sense of what risk means to you and how much risk you can comfortably tolerate, keep in mind that you, too, may be swayed by what you’d like to believe.  Ask yourself how much money you can financially afford to lose.  And then ask an equally important question—how much can you emotionally afford to lose?  How will you weather the financial and emotional loss?

So what’s beneficial?  Should you aspire to be a low, medium or high risk-taker?  There’s no right answer or one-size fits all when risk-taking is involved.

Here are some guidelines that may help you in trying to gauge what’s appropriate for you in achieving your goals and objectives:

–  Impulsive risk-taking usually pays off with buyers or sellers remorse.

–  Calculated risk is always the preferred strategy and surest bet to make.

–  Don’t risk more than you can financially or emotionally afford to lose.

–  Look at what you may lose from risking as well as what you may gain.

–  Experimenting with risk is more costly with age.

You can increase your comfort level with risk slowly and consistently over time—taking small but consistent steps which will eventually lead to bigger gains than a one-time gamble on the risky move paying off.  Your confidence in yourself will also increase in the process if you succeed over time.

Take a look at this brief video with three financial advisers describing how they speak to their clients about risk and how to gauge what it means to them:  http://www.cnbc.com/id/102397145

Stay tuned for Part 2 of “Gauging Risk” by understanding the money personality traits which play a big part in how you relate to risk.