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- How the Laws of Human Nature Relate to Investing - November 27, 2020
Human nature can work against us when it comes to investing. Fear of the unknown and fear of failure can hold us back. And greed can lead us down some bad paths and entice us to make poor decisions that we’ll pay for later.
How do you avoid letting those pesky human emotions affect your investing strategy? Take it from the great Warren Buffett, who said this: “Be fearful when others are greedy and greedy when others are fearful.”
What the heck does that mean?
When it comes to investing, it means to be contrarian. Do your own thing. Ignore the herd mentality of doing what everyone else is doing. Don’t give in to the FOMO.
You Can’t Always Count on Your Golden Eggs
If you’ve ever heard the story The Goose and the Golden Egg, you know that we’re all supposed to be patient and avoid greed. The fable has a message for all of us: nothing is certain and you can’t always count on your golden eggs to keep coming.
But if we’re supposed to avoid those feelings of fear and greed, how should we feel when investing? You want to strive for some feelings of normalcy and control.
Take the “this is fine” meme of the dog sitting calmly in a room that’s on fire — pretty much the meme of 2020, right?
The dog knows what’s going on around him and accepts it. It’s fine. Everything’s fine. It’s a little extreme (and super funny) but that sense of calm and order is what you should aim for when investing.
What You Need to Fight Fear and Greed
So, how do you achieve calm and fight off those feelings of fear and greed? How do you find the eye in the middle of the storm?
The first thing you need to do is acknowledge those emotions. Know they exist and accept them. You can’t get rid of those emotions and stop them from happening. But you can understand that they’ll pop up and rear their ugly heads once in a while.
If you can’t get rid of ‘em, have a plan to deal with ‘em. Build a solid portfolio or investment strategy that will last you through those times of fear and greed.
Your strategy should last you through the good times, too! We can easily become overconfident when things are going well and make some not-so-great decisions. The point is, your portfolio or financial strategy should be strong enough to weather the good times and the bad. And it should be so strong that you don’t feel the need to obsess or check on your investments every day.
Finally — and we’re not just saying this because we’re in the financial planning biz ourselves — hire a trusted advisor to help you. A good financial advisor will basically act as your babysitter. They’ll hold your hand when things get rough and talk to you down from the ledge.
And those times when things are going a little too well? They’ll keep you grounded and give you a reality check when you need it.
Not ready to hire a financial advisor just yet? Give Wealth by Design™ DIY a try and get your finances in order all on your own.