Humans are not rational investors
While strategies like analyzing historical stock trends, technical analysis, and financial ratios help us make more informed decisions, the average investor still underperforms when compared to the market.
According to research conducted by MagnifyMoney, most investors second guess their earlier decisions around investing.
People tend to invest with their emotions, and often fall short because of this.
But the good news is that each one of us can learn to make more intelligent decisions and avoid the common investing pitfalls. The answer lies in Emotional Intelligence.
What is Emotional Intelligence?
Emotional intelligence (EI) represents the ability to understand and manage one’s own feelings and emotions. Emotionally intelligent people excel at managing relationships with others and making favorable decisions under pressure. Prominent psychologist Daniel Goleman further explains EI by breaking it into five core components:
- Self-Awareness– the ability to understand your own moods, and how that affects others around you
- Self-Regulation– the ability to control certain impulses and moods
- Internal-Motivation– the vision to pursue goals with energy and creativity
- Empathy– the ability to understand what others are feeling and thinking, as well as their emotions
- Social Skills– the ability to manage relationships and build rapport
While all five components play a part in intelligent investing, we pay special attention to both self-awareness and self-regulation. Investors who exhibit high self-awareness recognize when their emotions begin to overtake rational decision-making. Likewise, those with self-regulation can keep their emotions in check and avoid rash decisions they’d be likely to regret.
By properly understanding ourselves through our emotions, our behavior, and our natural response to fear, we can begin to invest more intelligently.
For example, if I know that my natural “fight or flight” instinct kicks in every time a stock performs poorly, I can begin to curb my response. Instead of hastily selling the stock, as I may have done in the past, my self-awareness teaches me that I often make impulsive gut decisions. So, I can take a step back, breathe, and rationally remind myself that investing is a long-term process. Then I proceed with my options from there.
EI > IQ
With regards to investing, emotional intelligence remains even more important than IQ. While IQ enables you to analyze complex investment strategies, EI provides you with the qualities of patience, discipline and perspective; three vital skills for responding to the volatility of the stock market.
What made Warren Buffett such a great investor was not just superior intellect, but emotional fortitude to stay true to his strategy during deep drawdowns.
By pairing a phenomenal strategy with the emotional resilience necessary to follow it, Warren Buffet has become one of the most successful investors ever. Period.
So, by pairing even a decent strategy with the emotional resilience to follow it, you will be further ahead of those of us still falling into those tricky behavioral biases.
An important tool for impactful investing
Not only does EI benefit our investments, but it remains important to everyday life by allowing us to better communicate and connect with our fellow human beings. And humans are very emotional creatures, whether we like to admit it or not.
Ultimately, emotional intelligence proves especially relevant to the realm of impact investing, which revolves around investing in socially responsible causes. And we often select these causes, such as #MeTooMovement, Renewable Energy, and Fair and Equal Working Conditions by using rational means tied to how we feel about each cause.
Self-Awareness leads us to understand that impact investing leverages a significant market opportunity. Self-Regulation keeps us on track when the regular market trends affect our holdings. Internal-Motivation helps us fight the good fight by prioritizing innovation over the old ways of doing things. Empathy creates a bond between us and the companies prioritizing impact along with profit. Social skills allow us to spread the word without being preachy.
In summary, it is extremely important to stay in tune with our emotions, and to understand how they will affect our investment decisions. By learning how to cultivate your emotional intelligence skill set, you will follow in the footsteps of the great investors and enhance your skills as an investor.
Ready to start investing? Reach out to us HERE
What takes 5 minutes and will change your financial life? Setting up recurring investments. How can one little thing make such a big difference? Here are the basics of recurring investments and a comparison of investments saving accounts.
What are recurring investments?
Recurring investments are just what they sound like: Investments you make at a regular tempo into your portfolio. When you remove the human factor and make your investing automatic, you set yourself up for success.
How do they work?
It’s not so much how they work as why they work. When you remove the human element of temptation to spend from your saving and investment strategy, you’re bound to be more successful overall. Think of recurring investments as the personal trainer of your finances. Sure, you could do it on your own, but you’ll be in a better place in the long run if you’ve got it on automatic – it’s all taken care of for you. You still have to do a little work, but the gains will be worth it.
How are savings accounts different then investment accounts?
Savings accounts definitely have a time and a place, that’s for sure, but it isn’t planning for your long-term goals. Savings accounts are great for little emergency funds or saving for your vacation next year, but not so much for your far away future. The average savings account pays interest at under 1%, but the stock market has returned around 7% on average for the past few decades. When you’re ready to make big money moves, you invest.
So while the methodology isn’t so different, the results are – and dramatically so. Consider this:
Contributing $100 per month to a savings account will get you to $12,613.20 after ten years.
Investing that same amount in the same decade will get you to $17,409.45.
Yep. By investing rather than saving, you will have earned just under $5,000.
And the question is…how do you get started?
The first step is to start investing. There are a lot of options when it comes to investing, but not all of them are as transparent as you’d like. Choose with your values in mind as well as your financial future.
The next step is simple: Set up a recurring monthly investment that falls within your budget. Need help finding the right portfolio that aligns with your values and goals, and figuring out how much you should be investing? Reach out to us @ https://investedinterests.com/contact/ and we can help you get started!
There’s a fundamental issue with investing in America: Your money might support companies that harm people and the planet, and you probably don’t even realize it.
When we buy products, say for example a smartphone — we’re essentially giving that company a ‘thumbs up’ in approval.
We’re saying, ‘Hey, I like what you’re doing, and here’s more money to keep doing it…’
Well, the same can be true for investing.
When we buy stocks, we’re saying that we approve of that company’s products and policies.
What if I told you the majority of retirement accounts and index funds invest in big oil, coal mining, and tobacco… and the list goes on and on.
Would you give these industries a ‘thumbs up?’
If we look at the state of the world, we can see we’re not always funding what’s best for the planet.
So let’s look at some crazy numbers:
In 2018, over 480,000 people died from tobacco.
We’re actively pumping 96,000 oil and gas wells on public lands for fossil fuels that create 2/3rds of our carbon emissions.
And we dump 1.5 million pounds of trash into our oceans every hour.
So, if we care about climate change, we can stop funding fossil fuels.
And if we want to prevent lung cancer, let’s stop investing in tobacco.
Look, it’s simple. If we want to see change in the world, we don’t have to wait every four years to vote.
We can vote every day by choosing what products we buy, and investing in the things that we care about. It’s called impact investing.
With impact investing, your money supports companies that solve global challenges, instead of causing them.
And if you’re wondering — Yes. Investing with impact also means good business.
Studies show that stocks of companies with high environmental and social impact have actually outperformed the market for 25 years.
So, if we don’t have to compromise our values to build our wealth, then what are we doing?
These days, people leave jobs and move on to new ones all the time. Chances are, you’ve made at least a few jumps yourself. You’re probably quite familiar with the process of getting your new company email, joining their health insurance plan and deciding which employer-sponsored retirement program to contribute to.
But what happened to the 401k you started at your last company?
Don’t worry, it’s still there, doing its thing. But where your hard-earned (and employer-matched) money is invested might not be to your liking.
Finding your old retirement accounts can be tricky.
If you don’t know where your old 401k account is, you’re going to have to do some digging. Usually, you will receive a statement at least quarterly, and this will typically have login information that you can use for your account. You can also check your former company’s website and they may have details about how the employee 401k program works and how to log in to your account. If all else fails, you can also contact the HR department directly.
Once you find your orphaned 401k, it’s not recommended to just leave the money where it is. For starters, some plans charge higher fees for managing the accounts of former employees. In general, the more accounts you have, the more management fees you pay. There’s also the possibility you could forget that you have the account altogether and lose the money (literally).
You will be better off keeping your retirement accounts in one place. It’s just easier to keep track that way. Investors have two options when they leave a company. They can roll their assets into an IRA or they can roll their assets into their next employer’s 401k plan. The benefit to moving into an IRA is that you’re likely to have more investment options than what’s available in your next employer’s 401k plan.
An IRA, or Individual Retirement Account, is best understood as a savings account—but one specifically designed for retirement. Mutual funds, stocks and bonds can easily be held in an IRA. Many, actually most, of our clients have retirement accounts. Many of those accounts are IRAs that were once old 401ks.
Invested Interests can help you gather your orphaned 401k accounts into one IRA that supports social impact companies. Check out our Portfolios HERE and will be in touch.