Financial Choices:
People start with feelings, not math.
Is this a bad thing?

If you Google “emotional investing,” and if your algorithm is like my algorithm, here are the first several links you will see:

“How to Avoid Emotional Investing – Investopedia”

“What is Emotional Investing – How to Avoid Emotional Investing”

“Emotional Investing: What It Costs, and What To Do About It”

“Emotional Investing & How To Prevent It”

“Emotional Investing: How To Separate Emotions from Logic”

Evidently, people are supposed to become stone cold samurai masters every time they peek at their portfolios.

When I started my career in financial services, I was 41 years old. I had been an independent contractor since 2007. I had never had the option of a 401(k) at any job I ever had. At no point did anyone tell me about Solo 401(k)s, or the different kinds of IRAs I could be using as a do-it-yourselfer. I had no interest in financial literature or podcasts. My wife and I knew we had no long term financial plan. We barely had a short term financial plan. We weren’t making terrible mistakes but it felt like we were flying by the seat of our pants.

Over the first couple years of work, I passed every exam I took on the first try. I gobbled up financial books and podcasts. I joined study groups and attended weekly and monthly trainings. I used the same process to learn financial planning that I had used to teach myself visual effects compositing in my previous career, and it was working.

One of the reasons I was so gung-ho was because I wanted to unwind and correct all of the financial mistakes I had made in the first half of my adult life. I entered every possible detail of my family’s financial picture into our firm’s financial planning software.

I wanted the plan to show I was failing and show me how to fix it. It felt like I was failing, and I wanted to prove it.

I couldn’t prove it. The numbers, no matter how I stretched them, were fine. We didn’t need to move. We didn’t need to be hyper-aggressive with either our savings or our investments. We didn’t need to be stockpiling cash. We weren’t in danger of all of the things I was worried about.

I’ll never forget my reaction to seeing this: I didn’t believe it.

All of my expertise, and the engineering expertise of the small squadron of geniuses behind the planning software, and all of the king’s horses and all the king’s men, couldn’t make me feel good about my finances.

The numbers simply failed to do anything to address my emotions. There aren’t many people who have an emotional response to 1+1=2, and I’m one of them.

This was a big wake up call for me. Switching from a SIMPLE IRA to a Solo 401(k), or saving some money on annual taxes, or getting an extra .5% of returns, or lowering fees, may actually mean nothing to someone who just doesn’t feel good about money. And a lot of people don’t feel good right now.

I believe asking someone to separate emotion from financial decisions is like asking someone to see only the color green and ignore the rest of the spectrum. Not only is that not helpful, it’s impossible.

The landscape of human experience includes emotion. Assuming emotions are bad, or will get in the way of sound decision-making, is only one idea. There are other ideas that say emotions, even negative ones, should be embraced rather than resisted or suppressed.

To quote the medically-reviewed article just linked: “Negative emotions are designed to keep us safe and to motivate us to improve our lives, just as positive emotions are.”

So what does that mean for financial decisions like “should I pay off my house?” “Should I work with an advisor?” “Should I use a Roth IRA or a Traditional IRA?” “Should I use annuities or bonds in my defensive portfolio?” Etc.

These are hard questions to answer. You can make a hard problem even harder by adding an impossible task on top of it. If you have an emotion about something, that is good and important data. Throw it in the mix along with the software analysis and the expert advice.

You can do everything exactly by the book and still be anxious and uncertain. You can make mistakes and be happy. The book tells you how to calculate the mathematic benefit of maintaining a mortgage vs. paying that mortgage off early. The book doesn’t tell you how paying off your mortgage will make you feel vs. looking at the balance of a growing investment account. Only you know the answer to that question, and your feelings matter.

If you want help asking the right questions and understanding what tools and strategies might help you feel better about your finances, we’d love to talk to you.