Ravi Mehta created a sensation when she published it in 2012. emotionally intelligent investor. That assumption went against everything we learned about investing in the 20th century, including the superiority of reason over emotion and that all investors should be guided by a few basic principles.
However, you never want to make emotional decisions regarding money. And you especially don’t want to buy or sell assets based on fear. However, you can learn to understand emotions and use them rationally to your advantage.
We’ve come a long way since the days when investors and economists thought markets were infallible and made up purely of “rational actors.”
There are now different strategies for different types of people, each with their own goals and resources.
different types of intelligence
Since the late 1970s, economists and psychologists have developed a more complete view of human intelligence. We are not all made from the same mold, and our strengths in one area can be our weaknesses in another situation.
In the early ’80s, Harvard psychologist Howard Gardner developed the theory of multiple intelligences to counter the standard view of intelligence in older IQ tests. Gardner’s shortlist of types of intelligence includes:
- Visual-spatial intelligence. Visual artists and architects are great because of their great visual-spatial intelligence.
- Linguistic intelligence. Writers, teachers, and lawyers have this kind of intelligence.
- Logical-mathematical intelligence. Although people often associate this with the type of intelligence called financial intelligence, this is not always the case.
- Bodily Kinesthetic Intelligence. Architects and people who are good with their hands have this kind of intelligence.
Other types of intelligence include musical intelligence, interpersonal intelligence, intrapersonal intelligence, and naturalistic intelligence.
What kind of intelligence do you have?
please this test Find out what kind of Gardner intelligence you have.
You may think that because you have more verbal-linguistic intelligence than logical-mathematical intelligence, you might not be as good an investor as a math-oriented person. But as Ravi Mehta points out in his book, that’s not necessarily true.
A breakthrough in behavioral economics
As we discover that there is no single mental disposition that makes us great investors, we share the biases that stumble everyone when making financial decisions, regardless of their intelligence. I also understand that you are doing it.
For example, we all tend to value what we have more highly than what we don’t have (endowment effect). And, due to disposition effects, you may sell investments that are good to hold while holding investments that are underperforming.
For a complete list of cognitive biases that can harm you in retirement, see the article Behavioral Finance: 16 Ways to Outsmart Your Brain for More Wealth and a Better Retirement .
Become an Emotionally Smart Investor
Improve your investing and retirement saving abilities with a simple two-step process.
It’s not easy. As Benjamin Franklin said in his book Poor Richard’s Almanac, “There are three things he finds very difficult: iron, diamond, and knowing oneself.” But it is possible. .
The good news is that you can automatically become an emotionally smart investor by just working on step one.
1. First step: Know yourself
It’s easier said than done, but it can be done. This is where Dr. Gardner’s emotional intelligence test comes in handy. Find out where your strengths and weaknesses are. In a bull market, everyone thinks they’re a genius on par with Warren Buffett, but when the tide goes out (as Buffett would say), you find out who was swimming naked.
- Admit your own biases. Have you ever held on to an unprofitable investment, even though you knew it was a mistake, because you couldn’t see the right time to sell? Admit your bias. Then you will be able to overcome it.
- Gauge your own investment temperature. Investors get burned when they think they can handle a lot of risk and then lose money. While 20% annual returns may make you hungry, accept the fact that if you’re saving for retirement, you need to prepare for a downturn.
- Focus on your strengths. Don’t let the many things you do well get in the way of what you do best. If you have a side hustle that’s more fun than your day job, maybe it’s time to make a switch?
and learn to recognize emotions
Knowing your emotional strengths and weaknesses is another thing. Being able to recognize what you’re feeling is something else entirely.
psychology today “Emotionally intelligent people are highly aware of their own emotional states, even negative states such as irritation, sadness, or more subtle ones, and are able to identify and manage them. I can.”
Emotions are designed to make us react quickly. Emotions have an evolutionary purpose. Fear can keep you safe. Anger activates flight or fight. Frustration leads to action.
However, it is wrong to react to market data and make financial decisions based purely on emotion. Financial markets do not require immediate emotional reactions. They are not wild tigers or great white sharks.
2. Step 2: Create an investment plan and stick to it
We often hear someone say that their investments are through the roof, and we believe that’s what we need too. But following the crowd leads to losses. Confront your biases and make a plan to leverage your strengths.
This checklist will help you develop your plan. If you can conscientiously say yes to all of the following, you’re on your way to becoming an emotionally intelligent investor.
- Are you confident about why you are investing and what your long-term goals are?
- I’m investing in my future
- I don’t invest for short-term profits.
- I don’t discontinue investments to avoid short-term losses.
- I aim to diversify my investments so that my future is not dependent on a single source.
- I have a plan and investment schedule and I have no intention of deviating from it.
- If I decide to change my plans, I will seek advice from as many sources as possible before making any changes.
Or create a complete investment policy statement. Also, if you know you tend to make emotional decisions, you may want to work with a financial advisor who can help keep you on the right track.
Work with a certified financial planner
The experts at NewRetirement Advisors will help you identify and achieve your goals. Book your free discovery session.
3. Finally, plan for long-term financial well-being
If possible, make sure you have already created one. Comprehensive retirement plan For a secure future. Understanding your plan for long-term financial health is critical to making smart decisions today.
of new retirement planner is a great tool for visualizing your retirement and understanding where your strengths and weaknesses lie.
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