The #1 Money Mistake Is A Very Human One

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Andrew Jackson isn’t looking at you when you pull out a $20 bill. Neither is Queen Elizabeth II on the $20 CAD or the £20 note in the UK. None of them are angry, none of them judging you. It’s only money. They’re stoic, calm, and utterly detached. You should return the favor.

Markets have been on a more-or-less uninterrupted run since the start of the 2010s (if not earlier). COVID set major indexes back for only about 6 months. We haven’t seen water-treading or serious corrections in a decade. With that in mind, many who have been participating in the markets may be experiencing prolonged negative emotions for the first time.

Do not let them get in your head. Nor should positive feelings about never-ending rallies or how crypto is going to make you a billionaire cloud your judgment. With one notable exception (which we’ll get into later), emotional investing provides no upside and infinite downside. Investors riding highs or lows have a tendency to resemble chainsmoking blackjack players more than they do studious money managers.

A good investor should know the signs that they’re getting emotionally hijacked and respond accordingly. So get ready to channel your inner sociopath (or, if easier, nihilist) as we look at how to keep a level head in decidedly unlevel markets.

Hide the panic button

I know some people who made some bad moves during that COVID selloff. To be fair, it was an unprecedented time. Some legitimately thought the world was ending. Still, panic didn’t help anyone. It only hurt.

Financially speaking, panic tends to set in when markets have a relatively steep and sudden downturn. The results of that panic are equally predictable. An investor who sells immediately after a massive drop in equities ensures only that they’ll book all of their losses. Once you’re on the sideline, timing the market to re-enter is never an easy task — and is also one of the most foolish ones you can attempt. The result is those who panic and bail out of the market take all of their losses and miss most of the gains on the way back up.

Photo by Tonik on Unsplash

Taking into account the tech bubble pop at the turn of the century, the Great Recession, and a global pandemic, $10,000 invested in the Dow Jones in 2000 would be worth $36,338 today with zero additional investments. Comparatively, if you managed to find a CD paying 2.5% (a difficult task to begin with, outright impossible with only $10,000) you’d have $16,795. Less than half, and that’s through several bad markets.

Panic won’t help you. Neither will sitting it out. If you’re within a stone’s throw of retirement and already have enough money saved to live the lifestyle you want then, sure, cash in your chips. Everyone else? Keep calm and pay it no mind.

Fear of missing out

I’ve written entire articles on this one so I’ll try to contain my usual verbosity. Positive emotions and self-delusion can be equally (if not more) deadly when compared to the panic we discussed above. Both require leaving rationality at the door. As soon as you do that, you can expect trouble.

While markets are not perfect (owing to their human element), they tend to return to something resembling realistic valuations over time. Investors piling in based on hype have only so many resources. Eventually, the last one puts their funds into (insert trendy nonsense here) and the only buyers left are institutional — hedge funds, pension funds, large firms, etc.

Those institutional buyers probably aren’t interested in buying at the overhyped price levels. So suddenly, there are no buyers. The people who invest based on articles that say “I made $486,789,444,112 and you will too by Tuesday” are already in the stock/asset. There’s no one left to support the insanity. Down we go until we reach a reasonable, researched price.

Before you buy something, consider your actual reason for doing so. Make sure it makes sense.

If your reason for purchase is “I’ve heard a lot of good things about this” or “I don’t want to miss another run” — stop. Immediately.

Thinking like this has no foundation in actual facts or even opinions. It’s just pure gambling, hope, and self-delusion. Ignore it. Stay rational. Oftentimes, others’ irrationality or panic will open up real opportunities for the educated investor. Wherever possible, be on that side of the equation. The ceaseless parade of get-rich-quick articles can subtly and slowly alter your thinking. Stay aware and stay level-headed.

Don’t sacrifice your future for ideology

On this particular platform, I see a lot from the left and far left. That’s fine. I don’t have any ideology and don’t really get into politics. To each their own. But for now, we’re all in the same system. Like it or not.

Cogs in the machine. Get it? Photo by Laura Ockel on Unsplash

Saying you’re not investing or concerned with your financial future because you disagree with the system itself is a bit of a self-fulfilling prophecy. I can personally guarantee that you’ll have bad financial results if you intentionally handle your money poorly.

Our system isn’t perfect. It has a lot of flaws. I write about them all the time. But I still invest, because I have a bit of rational self-interest. Play the hand you’re dealt and all that. Nothing is worth sacrificing your future comfort, security, or lifestyle.

Imagine sitting in your bedroom when a Molotov cocktail flies through. It bursts on the floor and instantly catches your drapes aflame. The room is burning instantly. You can say: “I don’t agree with arson. I refuse to participate in this farce. Therefore I shall lie in this bed until I am completely enveloped in flames, thus proving why arson is bad.” But that’s ridiculous. Get out of the house, protect yourself, then do what you can to stop arson now that you’re…you know, alive.

It’s easier to fight for whatever you choose from a position of security and comfort. It doesn’t have to be an and/or scenario, either. You can actively highlight issues in the system and advocate for changes while still being an active investor. There’s a whole strategy behind it, actually. Don’t willfully compromise your future.

The only time emotion may help

There’s an emotion akin to panic that can highlight some useful information. It’s different though. Few people ever feel it, and hopefully, you aren’t one of them. It’s difficult to describe.

The closest I could come is a mixture of dread, self-loathing, and utter despondency after seeing that your portfolio has given up a significant amount of money. It’s the feeling someone has when they wake up in a Las Vegas hotel room and realize that they took a $3,000 cash advance against their credit card last night and it’s all gone.

Why, of all the emotions, is this one useful? It tells us we have money invested that we cannot afford to part with, even temporarily. It is possible to over-save or over-invest, and reactions like this are a sign that we are. Putting yourself in a position that compromises your day-to-day finances and living so that you can meet artificially prescribed savings and investing goals isn’t wise. You’ll end up feeling a need to take out loans or get into a jam when an emergency arises, costing yourself more than you earn in the long run.

Other than this one admittedly rare exception, letting emotions play a role in your finances will lead to ruin more often than wealth. Other examples include sending good money after bad, chasing the highs of the market, or taking on more risk than you are personally comfortable with due to pressure from others.

There are plenty of other opportunities to share and use your emotions — in relationships, as support to a friend, or during mid-2000s Matthew McConaughey movies. As far as your investments and personal finance are concerned? Try to emulate that $20 bill and stay as stoic as possible.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.