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Fear, Greed and E=mc2?

How do we control the emotions that affect our financial decisions? Here are a few places to start..

“Three great forces rule the world: stupidity, fear and greed.”  -Albert Einstein

I’m a big fan of Einstein, from his patent clerk beginnings to the crazy hair.   So when I saw this quote from him it grabbed my attention.  One would expect that when proclaiming which great forces rule the world, the father of modern physics to be using terms that we’d need an encyclopedia to interpret.  Instead he references basic human emotions as the driver of our surroundings.

Human emotions, especially fear and greed, have the ability to manipulate our decisions and can create a hampering weight on our search for financial bliss.  In this post we’ll discuss how we get past these inherit limitations and make sound, objective decisions.  As far as the stupidity goes, sorry Dr. Einstein, compared to you we all can’t possess super-genius intellect, in any case it’s all relative-ity.

1. Create a Plan - This is the single most important discussion I have with clients when we first sit down, we refer to it as a Financial Blueprint. A blueprint creates specific goals, establishes tolerance for risk, acknowledges how different parts of your financial universe interact and just as importantly, give you something to reference when emotional forces make you second guess yourself.  If there was a font that flashed like a neon sign with circus animals juggling around the letters to grab attention, I would have used it here.  It is that crucial of a step. 

2. Follow the rules - I admit this is a bit misleading.  There are no rules, as in magic bullets, but there are tried and proven strategies that are known to help reduce risk and volatility over time such as asset allocation, diversification, and periodic rebalancing.  Trying to hit homeruns is a recipe for disaster, not striking out is what counts.

3. Patience is a virtue - One of the biggest contributors to emotional strain is buying into the headline and short terms swings that effect markets, rates, and the economy.   If you have a short term focus, you are sentencing yourself to rollercoaster of emotions.  Markets have a way of frustrating as many investors as possible, remember your time horizon and don’t make rash decisions without prudent analysis.
 
4. Stay in your comfort zone - I don’t use words that I don’t know the definition of, and you shouldn’t be putting money into any investment or financial strategy without a general understanding of what they are and the risks involved.

Emotions affect our choices in all areas of our financial universe. They can’t be turned off but following the above steps will help create a better sense of control and comfort over your situation, and therefore help us make more objective, intelligent decisions.

Noah is a Certified Financial Planner™  and writes on Patch for the promotion of financial literacy and awareness -- a topic in which he believes an informational void exists.  He makes himself available by appointment, telephone, or email to all readers and can be reached at 203-204-6226 or noah@myblueprint.co

Noah Schwartz is a Registered Representative and Investment Advisor Representative of and offers securities and advisory services through WRP Investments, Inc., member FINRA & SIPC.  Blueprint Financial Strategies is not affiliated with WRP Investments, Inc.  Securities and advisory services are supervised by WRP Investments, Inc. at 4407 Belmont Avenue, Youngstown, OH 44505 (330) 759-2023.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Noah Darrow Schwartz CFP August 09, 2012 at 01:51 PM
Thank you for the compliment Susan. I agree, patience can certainly be difficult. Look for my next post shortly, I'll try and get one up every two weeks.
DJ McAneny August 09, 2012 at 01:59 PM
Hey Noah, I thought your blog was pretty awesome. I look forward to having it around Patch. I was wondering if you could show me the blueprint for someone who only has $2 to invest, but would like $1 million. I understand this might take some time to put together, so I'll be patient.
Tina Aronson August 09, 2012 at 02:07 PM
Very interesting article, like the baseball analogy.
Noah Darrow Schwartz CFP August 09, 2012 at 09:04 PM
Thanks DJ, and hang in there. At 5% interest your $2 will be worth $1 million in just under 269 years.
Leslie Yager August 09, 2012 at 11:11 PM
right Noah....and back to tip #3: Patience.

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