Check Your Biases
May 03, 2023 | BY Our Partners at Equinum Wealth Management
Welcome to the world of personal finance – where everyone strives to make it big, and few actually do.
Why is it so hard to build wealth?
Well for starters, we humans are wired to make the wrong decisions when it comes to money. We are an emotional species, and when common sense comes into conflict with that, emotion usually wins.
For example, we have a tendency to buy high and sell low, which is the exact opposite of what we should be doing. As Mark Yusko famously said, “Investing is the only place where, when things go on sale, everyone runs out of the store.” And it’s true. When the stock market takes a dip, most people panic and sell their stocks, which is the worst thing they can do. Instead, they should be buying more stocks at lower prices.
In the race to build lasting wealth, being able to overcome our emotions and remain levelheaded is the single most important component. Morgan Housel, in his book, The Psychology of Money, puts it best: “Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.”
It’s not about how much you know about the economy, the stock market or investing. It’s about your ability to control your emotions and make rational decisions. The road to success begins by checking your biases at the entrance of the investing arena.
And let’s face it, checking our biases when it comes to money is no easy task. Money is tied to our sense of security, self-worth and even happiness. When we see our investments taking a hit, it’s hard not to panic. But this knee-jerk reaction (or lack thereof) is what separates successful investors from those who never make it.
So what’s the key to succeeding in personal finance?
First and foremost, you need to understand your own emotions and how they impact your financial decisions. That means taking the time to reflect on your own biases and tendencies and making a conscious effort to overcome them.
Secondly, you need to have a plan in place. That entails setting financial goals, creating a strategy and investing in a diversified portfolio. Having a plan will help you stay on track and make rational decisions, even when the market takes a dip.
Another reason why you should be working with an advisor. A skilled financial advisor will help you tailor a proper plan – and hold your feet to the fire so you stick to it no matter what. An advisor will reinforce your backbone and help you resist the urge to react in those temporarily comforting ways that may negatively impact your wealth goals. Financial advisors can be the voice of reason to help you steer clear of the latest “hot stock” or get-rich-quick scheme, and encourage your commitment to diversified investments for the long-term.
This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.