I'm a big fan of human emotion. Few entrepreneurs ever succeed without real (and usually unreasonable) passion for their company or product. And as a leader, you can't inspire the people around you to do their best work unless you reach them on a very emotional level.
But when it comes to handling money, emotion is your enemy, according to the personal finance site GOBankingRates. Financial experts have been saying for many years that making emotional decisions about money stops most small investors--and many small business owners--from achieving financial success. Unfortunately for all of us, most people don't realize we're making decisions based on emotions. Instead, we come up with what seem like rational reasons for doing whatever our emotions tell us to.
"An investor's psychology will almost certainly work against them," Curtis Chambers of Chambers Financial Group told GOBankingRates. "When times are good, everyone wants to buy. When things are bad, everyone wants to sell."
To help you see more clearly whether you're listening to your heart or your head, GOBankingRates has supplied some helpful insights into the emotions that lead us to make bad money decisions. These are some of the biggest. You can find the complete list here.
1. Envy makes you chase unrealistic gains.
This has probably happened to you many times: You find out someone you know bought a hot tech stock right after its IPO and watched that investment double. You wonder why you weren't as smart, and you start loading up on that same stock. The stock may do well but not double in price again. Or it may tank, leaving you with a loss.
The lesson here is that once a stock shoots, it up may or may not mean it has more up left in it. A smarter approach, rather than buying whatever your friend bought, is to ask why he or she chose that particular stock. That may give you insight into your friend's investing strategy overall, which is likely a lot more useful than buying a single stock.
2. Fear makes you run when you should stand still.
You gotta know when to hold 'em and know when to fold 'em as the song says, but most people get this wrong when it comes to investing. The single most common mistake small investors make, according to GOBankingRates, is to panic and sell when the market goes down. Even if they could easily wait a few years, in which time their investments would very likely bounce back.
The other way fear keeps you from getting rich is by keeping you from investing in everything from the stock market to real estate to your own company. In both cases, knowledge and planning are the best solutions. Decide how you want to invest for the long term (including when and under what circumstances you will sell your investment). Having a plan you can stick to will help you avoid self-defeating emotional responses to market changes.
3. Hope stops you from seeing the big picture.
Without optimism, no one would ever make an investment. But too much optimism can keep you from making wise choices, such as selling when long-term trends show that an asset is likely to lose value. In particular, hope may make you believe that current or recent conditions will last forever; for instance that a strong market will keep going up indefinitely. Looking at data over decades instead of a few years might give you a better idea of what the future could hold.
4. Stubbornness makes you stay in when you should get out.
If you're an entrepreneur, I guarantee you have a stubborn streak. That stubbornness serves you well in your new business, as you keep on looking for new approaches or keep on making sales pitches when less pigheaded people would have given up.
But that same stick-to-it-iveness can be a real liability when it comes to investments. That's because there are plenty of times when selling and taking a loss is the smart move, even though it means admitting you were wrong. This is another reason it's so important to invest with a plan. Every time you buy an investment, have a clear idea of when and why you plan to sell that investment. Otherwise your stubbornness could wind up costing you.
5. Pride makes you think you're smarter than everyone else.
Maybe it was you who bought the hot tech stock right after its IPO and so you've doubled your investment. Woo hoo! You're a genius, right? Everything you touch will turn to gold.
Maybe, but it's significantly likelier that you got lucky. Maybe you've gotten lucky multiple times. That doesn't mean that your investments will all to gain value indefinitely, or that you'll never make a bad pick. And it definitely doesn't mean you don't need to do research or listen to smart advice from a carefully chosen financial advisor.
Do your homework, get some smart and unbiased advice, and make a plan for how you'll invest over the coming years. Sticking to that plan is the best way to make sure you're following your brains and not your feelings when it comes to making money decisions.