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August 6, 2020
Ravee Mehta made a splash in 2012 when he published The Emotionally Intelligent Investor. The premise went against everything you learned about investing in the 20th century, like reason is better than emotion and that a few basic principles should guide all investors.
While you never want to make an emotional decision with regards to your money. And, you especially don’t want to buy or sell assets based on fear. However, you can learn to understand emotions and use them — rationally — to your advantage.
We’ve come a long way since the days when investors and economists thought that markets were infallible and made up of purely “rational actors.”
Now there are different strategies for different types of people — each with unique goals and resources.
Since the late 1970s economists and psychologists have been developing a more complete view of human intelligence. We’re not all made from the same mold, and a person’s strength in one area could become a weakness in a different situation.
In the early 80s Harvard psychologist Howard Gardner developed his theory of multiple intelligences to counter the standard view of intelligence in the old IQ tests. A shortlist of Gardner’s types of intelligence include:
The other kinds of intelligence are musical intelligence, interpersonal intelligence, intra-personal intelligence and naturalistic intelligence.
What kind of intelligence are you? You can take this test to see what kind of Gardner’s intelligence you have.
You might assume that because you have more linguistic-verbal intelligence than logical-mathematical intelligence that you won’t be as good an investor as someone more math-oriented. But as Ravee Mehta points out in his book, that’s not necessarily true.
At the same time we discovered there isn’t one mental disposition that makes you a better investor, we also discovered that all people, no matter what kind of intelligence they have, share some biases that trip them up when they’re making financial decisions.
All of us are liable to value what we have more than what we don’t (the endowment effect), and the disposition effect may cause us to hold onto under performing investments while selling good investments that we should hold onto. For a full list of the cognitive biases that can hurt you in retirement, read our article: Behavioral Finance: 16 Ways to Outsmart Your Brain for More Wealth and a Better Retirement.
You can improve your ability to invest and save for retirement with a simple two-step process.
It not easy. As Benjamin Franklin said in his Poor Richard’s Almanac, “There are three things extremely hard: steel, a diamond and to know one’s self.” But it is possible.
The good news is just engaging with step one will automatically make you a more emotionally intelligent investor.
It’s easier said than done, but it can be done. This is where Dr. Gardner’s emotional intelligence test comes in: find out where your strengths are — and your weaknesses. In a bull market, everyone thinks they’re a genius on par with Warren Buffett, but when the tide goes out (as Buffett says) you find out who’s been swimming naked.
It is one thing to know your emotional strengths and weaknesses. It is quite another to be able to recognize what you are feeling.
Psychology Today says that, “An emotionally intelligent individual is both highly conscious of his or her own emotional states, even negativity—frustration, sadness, or something more subtle—and able to identify and manage them.”
Emotions are designed to make us react — quickly. There is an evolutionary purpose for feelings. Fear can keep you safe. Anger activates flight or fight. Frustration triggers action.
However, reacting to market data and making financial decisions purely on emotion is misguided. The financial markets to do not require an immediate emotional response. They are not a tiger or great white shark in the wild!
Too often we hear someone tell us their investments are through the roof, and we think we need that for ourselves. But following the crowd is a recipe for losses. Make a plan that makes you confront your biases and leverages your strengths.
Use this checklist to help you develop your plan. If you can say all of the following in good conscience, you are on your way to becoming an emotionally intelligent investor.
Or, create a full investment policy statement. And, if you know that you are prone to emotional decisions, you may want to work with a financial advisor who can help keep you on the right track.
Through effective use of technology, NewRetirement advisors are particularly affordable.
Best yet, make sure you have created a comprehensive retirement plan for a secure future. Understanding your plan for long term financial wellness is critical to making smart decisions today!
The NewRetirement Planner is the best tool for helping you visualize your retirement and understand where your strengths and weaknesses lie.
Do it yourself retirement planning: easy, comprehensive, reliable
Take financial wellness into your own hands and do it yourself retirement planning: easy,
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