Emotional Investing: Another View

The “rational” choice in investing is the one that produces the best financial gain. However, the author says your emotions play a valid role in the process.

FedSmith.com ran a very good article written by Carol Schmidlin and titled Don’t Let Your Emotions Take Control of Sound Financial Planning.

Over the decades, I have seen many such articles. If you Google the phrase “emotional investing” you will see similar discussions with titles like “The Pitfalls of Emotional Investing,” “How to Avoid Emotional Investing,” “Don’t Let Emotions Influence Your Investing Decisions,” etc.

They all tell the same story:

  • The stock market is currently up (or down).
  • Don’t react emotionally.
  • Don’t make quick decisions to buy (or sell).
  • Get professional help (sometimes from the “me” who is the author of the article).

In investing, the “rational” choice is the one that maximizes your financial return. Anything else has the negative connotation of being irrational. That is too narrow a path for investors.

While there is nothing wrong with professional investment advice, it is your money and your emotions do and should play a role even if you are receiving advice from others.

The Role of Behavioral Finance

The evolving field of behavioral finance recognizes that people make decisions for many reasons, only some of which are totally rational. There are emotional benefits beyond utilitarian gains.

In an article on investing, Meir Statman (Professor of Finance at the Leavey School of Business, Santa Clara University), writes:

In the current second generation of behavioral finance, we are exploring people’s nonfinancial desires and acknowledging that they have a legitimate place in our money matters. These wants can include the desire to invest in things that we are comfortable with and that are in line with our principles of social responsibility. We may also want to impress other people or have fun picking stocks. A portfolio that satisfies such desires can look very different from one constructed solely to deliver the highest expected return for the ups and downs we are willing to stomach.

If you have a portfolio of stocks and/or have a TSP account, it probably looks different than mine, and that is as it should be because my financial picture reflects me and my goals.

The TSP is a great starting point for investors because not only is it a cost-efficient way to invest, you get to move between the various investment funds of stocks, bonds, and an asset guaranteed not to lose money (the G Fund). You may also want to have an IRA or Roth IRA account which gives you access to individual stocks and bonds.

Federal Employees as Investors

I am not an investment professional, but I know lots of well-educated Federal employees who enjoy investing, and they enjoy making their own financial decisions even if it involves some non-rational decision-making. Some of them beat the market, some do not.

All Federal employees have a boss. Someone who sets priorities and expectations, has deadlines, and requires that the employee follow certain procedures and processes in their day-to-day work. That is intrinsic in a bureaucracy.

When you invest your money, you get to make those decisions, set those priorities, and set expectations. You have the opportunity to profit and grow your money and even have the right to make mistakes, lose money, and learn.

Ethics Considerations

One area of special concern to Federal employees is the that they must abide by ethics rules when investing. The U.S. Office of Government Ethics (OGE) says:

A criminal conflict of interest statute, 18 U.S.C. § 208, prohibits an employee from participating personally and substantially, in an official capacity, in any “particular matter” that would have a direct and predictable effect on the employee’s own financial interests or on the financial interests of:

the employee’s spouse or minor child; a general partner of a partnership in which the employee is a limited or general partner; an organization in which the employee serves as an officer, director, trustee, general partner, or employee; or a person with whom the employee is negotiating for or has an arrangement concerning prospective employment.

Federal employees should consider both the spirit and the letter of the law when making investing decisions that relate to their jobs.

The Bottom Line Isn’t Always the Bottom Line

For some people, turning their money over to an unemotional financial advisor is most comforting for them, and that is good. There are lots of people who find investing either intimidating or boring. For both of those groups, using a trusted advisor may be desirable.

But whether you take professional advice or make your own decisions, the money remains yours and you cannot escape that responsibility.

Don’t automatically feel you have to abrogate that responsibility to someone else.

Meir Statman concludes his article by saying: “In making financial choices, we need to begin by knowing our wants and the tradeoffs among them. We also must watch out for common behavioral errors and look for ways to balance financial and nonfinancial desires.”

Emotions are part of us and that is a good thing.

About the Author

Michael Wald is a public affairs consultant and writer based in the Atlanta area. He specializes in topics related to government and labor issues. Prior to his retirement from the U.S. Department of Labor, he served as the agency’s Southeast Regional Director of Public Affairs and Southeast Regional Economist.