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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.

Know What You Can Emotionally and Financially Afford to Lose

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So often, investors react impulsively to bad news and a volatile market selling shares of perfectly good stocks or changing their asset allocations in anticipation of a significant downturn in the market. Had they held on, history reinforces staying the course if the allocation makes rational and financial sense and the stocks deemed to be good stocks over the longer term.

But many investors, react with their emotional money minds rather than their rational ones.

Why is it that some investors make rational decisions, stick with their choices and strategies while others act out their emotions and make bad investment decisions?

The field of Behavioral Finance has given insight into the mental miscues investors make that sabotage and crimp their returns. One of those miscues or mental mistakes is the fear of losing money.

This is how it works: Psychologically, people give greater weight to a past loss than they do to a future gain. In fact, some investors find losing money so distasteful that they psych themselves out of investing altogether.

Investors don’t make reasonable tradeoffs. The drive to avoid loss really sabotages any future gains or opportunities. Rather, investors rationalize their feelings and walk away from being an involved and active investor in the market. Some work it out and choose a strategy of a more passive approach investing in index funds and stay the course.

From where I sit as a psychologist specializing in money management and investing, I tend to experience investors or would-be investors who are frozen by indecision and the fear of losing their money.

Solution: Determine ahead of time exactly how much you can “emotionally” afford to lose as well as “financially”. They are often very different.

If you feel that a financial loss will be a significant emotional and financial loss, then choose the more conservatively balanced approach of investing. If you feel you can handle the emotional and financial upset of a loss, estimate just how much of a loss that should be for you to continue to feel and be secure.

The point is that investing is by nature an emotional as well as financial business. Your heart and wallet go hand in hand.

With spending some time upfront reflecting and gauging your comfort level, you will be better equipped over the long-term for whatever happens in the market.

Investors Flight from The Market May Indeed Be A Rational Defense

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Some experts are calling the recent mass exodus of small investors from the market an irrational reaction to unfound risk; others are hypothesizing that small investors need cash and their home values no longer support equity loans to survive so they are using their 401k investments to pay bills.

Personally, I feel small investors are feeling a tremendous level of anxiety and are having difficulty managing it. Their high level of anxiety and their inability to tolerate it precludes them from keeping their money in the market for the long-term and continuing to believe that they will be okay. The true definition of a suitable investment strategy is whether investors can maintain it over time – even anxious and volatile times.

Apparently, these investors are incapable of managing the stress of being in what they deem to be a risky strategy. But even sophisticated investors and professional money managers are anxious and unable to predict current and future risk in the market. So why should the small investor be any different. The difference may lie in unrealistic expectations and inappropriate risk taking that led the small investor into the market in the first place that is the real problem. If they weren’t diversified; if they didn’t understand the downside and determine whether they could withstand it, then they are feeling much greater stress and lack of tolerance in coping with their current feelings of anxiety and distrust.

There are a myriad of reasons why investors have reduced their exposure to securities and gravitated to what they perceive to be less risky investments like bonds, cash, and other fixed income vehicles. Perception is a subjective reality that is difficult to alter with objective facts. The problem is compounded by the volatility of today’s market and objectivity being illusive. You just have to listen to CNBC for a while and you’ll hear experts hypothesizing, and disagreeing whether we’re out of a recession or just heading into another. So how is the small investor to feel confidence or a sense of trust that the market will be kind to them if they stay? At least by doing something, they feel they have taken some action in their best interest rather than remaining frozen from fear.

I have empathy for these small investors who fell into the trap of feeling that they would be saved by the boom in house prices, stock market rallies and the optimistic view that kept all of us believing that the good times were here forever. For those who did not save some of the rewards from those flush exuberant times, or diversify to manage the potential downside of such a upside for the market it is a particularly stressful time. It is a time of reflection to learn valuable lessons for the future as well as a time to take an inventory of what can be done to manage personal financial insecurity and stress.

What my work has taught me is that the ability to tolerate anxiety and fear, manage stress and take small and consistent steps to control what can be controlled is often a defining difference between achieving a successful solution and optimistic financial future or sinking further into financial stress and insecurity.

Needed for Our Time: A New American Dream

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Do you find yourself thinking about your expectations for financial well-being and how they’ve changed? We hear about this subject daily and we are all left with that puzzling question of what our future will hold? Americans are known as the eternal optimists always finding hope and feeling like we can fulfill our dreams to have the “good life”. However, in talking to many of our regular community members on www.kathleengurney.com, I’m finding a very different sentiment. Instead of optimism; I hear fear, anxiety, uncertainty, and even pessimism.

How soon might we find a crystal ball? Wouldn’t that be great? We all want reassurance that we’ll be okay. Of course, as adults we know that we can always do something in our own behalf to empower ourselves, but I find that there’s a desperate desire for the road map of how to get there from here.

So, in this state of distress. we can all follow the prudent advice of the rehabilitation programs that advocate day-by-day planning and focusing on what we can control. For me, I know that I can manage my anxiety about the future by having a concrete plan for my priorities. I try to make my goals reasonable, realistic and rewarding. My clients tell me they use those three descriptions and use them to manage their financial behavior and feelings. Clients find that my advice to take small steps consistently and purposefully help them achieve big gains over time.

So, maybe our new dreams will evolve and become clearer as we all start to focus on what’s most reasonable and rewarding for each of our individual situations.

Boomers Willing to Wait to Get What They Want and Say They Need

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The quest for “the good life” continues to drive Baby Boomers to sacrifice today, so that they can enjoy the finer things tomorrow according to a MainStay Investments’ Boomer Retirement Lifestyle Study. A majority (76 percent) of Boomers surveyed say they are willing to spend less now to invest for a more comfortable lifestyle in the future.

When it comes to lifestyle, Baby Boomers are redefining what constitutes a basic need and what they consider a luxury. They have clearly expanded beyond the three traditionally thought-of necessities – clothes, food and shelter.

An interesting pattern that emerged in the research was that as Boomers age, things that were once considered luxuries are more likely to be considered basic needs–thereby reaffirming that Boomers essentially want it all.
The lesson for us, in my opinion, is to be clear about what gives us a sense of peace and safety and pleases us most. We need to understand our priorities and their price. It’s also important to clarify and understand the difference between want and need.

Money for needs can be classified as survival money and safety money while money for wants can be classified as freedom money, gift money and dream money perhaps. Our hierarchy of financial needs and wants can then be ordered so we may plan suitably for our survival and safety first. Only then should we incorporate our wants for a sense of freedom and self-actualization.

Because time can never be regained, it’s vitally important to understand the cost – financial and psychological – of putting off until tomorrow what might satisfy us today in moderation. It’s a difficult call to make whether we’ll be successful in affording our wants and wishes in the future. If we have a moderate and realistic plan understanding our needs and wants with timelines for accomplishment, we will always know where we stand. Then we can be certain that we know what we can afford and when. It’s impossible to get back precious time once it’s gone.

Money Management – What Women Want

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The Boston Consulting Group just conducted a study showing women’s discontent with their money management services. The study’s bottom line was such old news, yet there’s a renewed interest in female wealth because women are growing in numbers and wealth.

As someone who is both a client and consultant working in wealth management most of my work-life, I can say that I totally empathize with women as frustrated consumers of wealth management services. For the most part, wealth managers have not learned how to adequately customize their communication and wealth management services. Their job description is wealth management and that’s their primary responsibility. It becomes complicated when they have to match that wealth management to our complexity of personal dynamics. That’s not their primary competence. So, it takes two to make a satisfactory relationship. We have to educate ourselves as to what we need to have to feel satisfied so we can communicate our needs and expectations. We have to become more assertive wealth management clients and perhaps teach the industry the competencies they need to develop and nurture.

There are a few guidelines which I’ve learned over the years both as a client and consultant in money management communication consulting:

1. Know thyself – be clear about your individual wants, expectations and needs for financial comfort and security;
2. Don’t be judgmental of who you are and what you want – there’s no right or wrong;
3. Don’t expect your money manager to care about your money more than you do – after all, it is your money and not theirs;
4. Be clear and verbalize what it is you expect and check whether your adviser feels that this is reasonable and will deliver; and not least
5. Make sure that you really understand and feel comfortable with both the strategy you’ve chosen and what you can expect in how to keep informed about how you are doing.

In the end, what we want is to feel that we’ll be okay and this comes down to what that means to each and every one of us as individuals. Your wealth manager can only try to empathize with what that may mean second-hand. It’s up to each of us to know what that means financially and how that feels.