Emotional investments. (tips for understanding and managing emotionalresponses to financial planning)(includes related article); Schott, John W.; Arbeiter, Jean S.
Psychology Today   01-11-1998



For many of us, charting our financial future is fraught with fear, insecurity, impulsivity--feelings that can capsize a savings or retirement plan, or even discourage us from investing in the first place.

Here, A psychiatrist who is also an investment adviser reveals how to manage both your money and your emotions about financial planning.

Investing is a sim-ple Mater: buy good stocks and hold on to them, and time will make you rich. This is the most common bit of advice given to beginning investors. But if it's true that investing is so sim-ple, then why do people wind up losing money on stocks, view the market as a major gamble, or feel too intimidated to invest in the first place? Because every emotional drive associated with money gets payed out in investing: the longing for security, the guilt engendered by greed, the quest for power and self-esteem, the fear of being abandoned, the search for love, the dream of omnipotence. And when these constellations of emotions intersect with the churning, manic-depressive mood gyrations of the market itself, the result can be financially dangerous.

In recent years, more people have jumped into the stock market than at any other period in history. Eighty-seven percent of the money ever invested in the U.S. stock market has come in since late 1990. Company-sponsored pension plans have been rapidly replaced by 401(k) plans, IRAs, and other self-directed arrangements. We have entered the age of financial autonomy, an eXciting period, but one fraught with anxiety as well as promise.

In order to become more confident in this environment, ordinary investors must be self-aware as well as self-directed. And we need to recognize that the emotions mentioned above can cause us trouble. Fortunately, there is a host of things we can do to distance ourselves from counter productive feelings when mak-ing investment decisions. When we know that we are able to control our own self-defeating behaviors, we approach the market with a sense of comfort--and we increase our success.

SEEKING CERTAINTY

Many people find the stock market a scary place; they search for certainty--which doesn't exist--and they are averse to any risk. Yet they know that over time, investing is the best way to make money. Often, certainty-seeking investors have experienced losses or trauma early in life, or suffered recent losses, such as the unexpected death of a spouse. They want to avoid loss now, since they have already experienced so much pain. But these investors may be . unaware of the other side of the picture. If you invest in quality stocks, losses take on less significance in the long term because they are greatly outnumbered by gains.

To deal with this aversion to risk, an investor needs to remember that it is not necessary to be infallible in order to succeed in the market. The famous child psychiatrist D. W. Winnicott, M.D., coined the phrase "the good enough mother," meaning a mother who is capable and caring but does not have to be perfect in order to raise a child successfully. There is also the "good enough investor," who is generally competent but not in need of total safety, because he or she isn't always looking to be perfect or to "beat out" everyone else's results.

Instead of thinking "safety," certainty-seeking investors need to think about "spreading out the risk"--investing in a variety of stocks, funds, or bonds, so that if any single investment does poorly, the rest of the portfolio will shoulder the burden of financial growth. It is also important for these investors to learn to act as independently as possible.

Many risk-averse investors think they need a great deal of hand-holding from their broker or investment adviser, and even their friends. While this helps up to a point, it is best for certainty-seekers to make the basic choices for their stock portfolio independently, in order to foster independence and to convince themselves that their choices are "good enough."

Extremely risk-averse investors are often advised to put their money mainly in U.S. Treasury bonds, the safest of bonds. But a totally risk-averse route can freeze you forever into an overly-cautious attitude that will prevent investment success. It's fine to start out with all of your assets in Treasury bonds, if you work toward having 40 to 60 percent in bonds and the rest in stocks.

THE ANXIOUS INVESTOR

Some people are avid and hard-working investors, yet they make themselves miserable because they are always anxious. They worry when their stocks and mutual funds go up, they castigate themselves when stocks go down, and they feel that every market decision they make has to be the "right" one. But worrying can sink a stock portfolio; its obsessive nature can cause investors to sell when it is against their best financial interest.

A worrier needs to develop a system that involves mak-ing major decisions once, and only minor adjustments from then on--a system that will minimize investment anxiety. The best way to do this is to create a written plan for each investment that relies heavily on "stop/loss" orders--orders to sell if the price drops below a certain level. Using stop/losses is important because of the worrier's impulse to sell irrationally when the stock goes up and to hold on irrationally when it goes down (in the hope that it will rebound dramatically). The plan involves writing down the reason for purchasing each stock, the stop/loss levels, and then entering them with a broker. The plan takes decision-mak-ing out of the person's hands and worry is curtailed. Similarly, write down what you expect your mutual funds to achieve. Evaluate the funds every three months--but no more than that.

Another way to reduce anxiety about investing is not to listen to too much market information. Limiting market reading, television viewing, and stock-table consulting can help. And stay away from TV programs where panels of Wall Street experts offer opposing opinions' the divergence of opinion can produce further anxiety.

Finally, it's important to let the pleasure in. Investing is meant to be an emotionally as well as financially rewarding experience. Once worry is contained, it can lead to the winning financial results that a conscientious investor deserves.

INVESTING ON IMPULSE

Impulsive investors tend to buy a stock because they have an intuition about it. They are particularly attracted to companies that appear glamorous or are in the news. The danger of this "love at first sight" approach to stock picking is that one can fall out of love just as quickly, and sell in a way that is certain to lose money.

An impulsive investor must allow for a period of investigation and reflection before acting on feelings. The rule is that you can fall in love at first sight--but you can't buy at first sight, ever. Information to help you investigate companies is readily available. Many libraries carry the Value Line Investment Survey, a weekly report which ranks stocks and comments on them from a business point of view. Additional information can be obtained by getting a company's annual report.

After doing this research, if the investor still wants to invest in a company, he or she should write down expectations for its performance over the next year and his or her standards for selling. Reviewing those standards every month or so will counter feelings that can lead to a decision to sell precipitously if the stock declines temporarily or doesn't produce positive results quickly.

A money manager can be extremely helpful to an impulsive investor, provided that the relationship is kept objective, and that the investor does not idealize the manager as a financial Prince or Princess Charming. A money manager can help such an investor set up and stick to a long-range investing plan and keep him or her on track--and off impulse.

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