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Risk III: Emotional Risk October 1, 2008

Posted by shaferfinancial in Uncategorized.
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I have had several “financial planners” who have told me in discussion that they don’t suggest certain strategies because their clients wouldn’t be able to sleep at night.  Although I don’t agree with the logic, there are certainly people who forego activities because of the “good night sleep” factor.

Emotional risk is pursuing strategies that so unsettle one as to keep them from behaving rationally. For example, every time the stock market goes down significantly, many people sell their mutual funds/stocks because they fear more loss. Other people fear debt so much as to pay down their mortgages or put large down payments on their houses feeling like there is less risk in this strategy. Or others never consider strategies or self-employment because of an emotional attachment to a weekly paycheck or consistent earned interest.

I argue that emotions can be overcome with rational planning. If you have a specific plan, employ it consistently, and track its progress then one can overcome the negative emotions, fear, with a positive emotion, comfort. But here is the sticky part. If your plan is only to overcome a negative emotion, like getting rid of debt or risk, then you will never get to that comfort part because as soon as you succeed, you will have another fear supplant the current fear and start the cycle over again.

For example, if you eliminated the risk of equities from your life, and had your money in a bank CD or savings account, the current bank failure scare would ratchet up your fear again and cause you to pull your money from banks.  Or if you were using your home as a savings account, paying down your mortgage, the current real estate market would again ratchet up your fear and probably cause you to lose sleep or even worse cause you to sell your home in a poor market.

The alternative is to build a plan that history has proven to work.  Put your emotional energy into the implementation of the plan, and allow for the long term financial winds to push you past the finish line!

  

Of course having a wealth coach to help build your financial plan and walk you through the implementation process might help too. 🙂

www.shaferwealthacademy.com for your wealth plan!

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Comments»

1. investmentblogger - October 1, 2008

Great series of articles on risk so far Dave. Please continue with more, as I find so many people (95% IMHO) cannot grasp these concepts and truly understand risk. However, your articles articulate these ideas very well and with good simple examples!

2. shaferfinancial - October 1, 2008

Thanks, I have meaning to do this for a while, but only just jolted my memory while posting on the Bawld Guy Real Estate Forum. Got a lot of people talking to me about their mutual fund issues lately, so it is an opportunity to redirect conversations to risk.


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