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Feb 09

How Emotional is Your Portfolio?

How Emotional is Your Portfolio is a recent post by Carl Richards at Behavior Gap.  Carl shares insight into a problem that is easy to overlook yet causes so many mistakes.  From individuals holding onto portfolios comprising of 100% Enron stock to, more recently, holding onto concentrations of British Petroleum only to watch a rig explode and instantly lose significant portfolio value only to have to sell the shares because of retirement cash flow needs.  Emotional attachment and disconnect drove those decisions and ultimately harmed those people.  Working with a trusted advisor can help  you take the emotions out of your portfolio and focus directly on your goals rather than that stock your dad’s dad owned because he thought it sounded good.

Enjoy!

-Paul

 

How Emotional is Your Portfolio?

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It’s not unusual to make investing decisions based on emotion. Why not own a big chunk of your company’s stock? Why not keep that random stock you inherited from your parents? Why not keep that stock that’s dropped in price because you’re sure it will return to its former highs?

In each of these situations, the odds are high that emotion is playing a role in your decision making. And while I can’t claim that emotion hurts every investing decision, it’s something we tend to underestimate. So the next time you’re relying on feelings to drive your investing I want you to think of Bill Gates. Yes, that Bill Gates.

Josh Brown at The Reformed Broker highlighted this story a few days ago. Since leaving Microsoft, Bill Gates has steadily reduced his holdings in the company down to 20 percent. Think about that for a minute. He’s the company’s founder and led it for many years.

Now, I’m not sure you could feel more attached to something than if you built it. Why does he do it? As Josh indicated, there’s a moral to the story that applies to us, too:

…the second richest man in the world shows us the value of knowing when to walk away, no matter how sentimental or close to you an investment once was. To say nothing of the value of spreading out the chips just in case a once-great investment turns into a mess on someone else’s watch.

Emotions are a great thing, but I’m not sure they have a place in our portfolios. So knowing that emotions can trip us up, what are you prepared to do to counter the emotion?

What if we build a plan that puts some guardrails in place? What if we take the time to ask the question, “Why am I making this decision?”

Look, I’m the first to admit that it’s not easy to behave and make smart money decisions. But we’re making it even harder on ourselves if we fail to acknowledge that emotion plays a role in our investing and that we need to figure out a strategy to counter it.

Carl


The information in this article is not intended to be tax and/or legal advice and should not be treated as such. You should consult with your tax advisor and/or attorney to discuss your personal situation before making any decisions.

Additionally, If you are looking for additional help, seek help from a CERTIFIED FINANCIAL PLANNER™ Professional that can look at your individual situation holistically