Who’s Guiding the Boat in your Financial Decisions? Your Head or Your Heart?

The coxswain on a crew team has three primary responsibilities:

  1. Guide the team on the water and keep them safe by scanning for hazards, sensing imbalances in the boat and manning the rudder.
  2. Set the pace; sense when the team can stroke a little harder, or should pull back to preserve energy.
  3. Provide energy and encouragement to the team when they need it most. From the perch at the top of the stern, the coxswain is the heart of the crew.

In many instances, the coxswain must make split-second decisions based solely on intuition and a deep understanding of the team. The coxswain is under constant pressure to process and react to a  mosaic of stimuli. That person’s decisions are often the difference between success and failure.

The coxswain is a metaphor for the role your heart plays in financial decision making. When forced to make split-second choices, you may rely heavily on your heart, which tends to conclusions based on memory and perception.

But let’s say you do have time to think. Is there still a place for your heart in decision making?

Not that there’s anything wrong with that

Actually, the heart plays an important role and shouldn’t be ignored:

  • It raises a red flag in response to a perceived threat
  • It reminds us of the emotions and feelings we experienced from similar situations
  • It helps form our values and principles

Maybe the heart has a bad rep in decision making because it sometimes trumps the head—our rational side. For example, people who study the psychology of financial decision-making warn that the heart can harbor certain biases like these:

  • Regret – To avoid admitting we made a bad choice, we might hold onto a losing investment longer than we otherwise would.
  • Confirmation – Rather than looking for information that challenges a potential decision, we seek out information that supports it.

It’s finding the proper balance between your heart and your head that gives us the best chance for success.

You can turn it around

Just as the coxswain must balance their instincts with logic when setting the pace of a race, so should you in balancing the emotional and practical aspects of financial decision making. In our next post, we’ll look at a practical way to get your head and heart working together to make better decisions.

*Photo Credit  Texas A&M University

Market Minute on Finance Friday

Video

It was a wild ride in the equity markets as bad news out of Europe resulted in multiple days of heavy losses. The Dow Jones Industrials Average, for example, saw a series of triple-digit declines. Reassuring words from the European Central Bank and a better-than-expected employment report in the U.S. helped the market regain some lost ground later in the week.

All of the volatility in the equity markets drove investors to seek the safety of sovereign debt. In the U.S., the activity pushed prices on Treasury securities higher and yields lower as investors sought a stable place to park their money. The desire to find shelter from uncertainty has even made investors willing to pay for bonds that have a negative yield, as we have seen recently in Germany, the Netherlands and Switzerland. The logic behind these purchases is the belief that governments will repay their debt even if other investments fail.

In fear-driven environments like this one, we believe most investors are best served by creating a diversified portfolio designed to achieve their goals and then sticking with that asset allocation rather than chasing risky assets one day and safe asset the next.

Look for our next Market Minute on Friday, August 4.

Market Minute on Finance Friday

Video

We’re in the middle of earnings season and, outside of the Banking sector, the news has been good. Over half of the companies reporting earnings so far have beaten the analyst estimates. Given current economic conditions, this is an encouraging sign and one that a trend that which is good news for investors, bodes well for both long- and short-term investors.

Earnings season offers insight into how financial markets work. Earnings announcements come out in early-to-mid January, April, July and October. Over the course of about six weeks, most major firms release details on the prior quarter and their outlooks for the future.

An earnings announcement from a single firm tells us how that particular company is performing. Announcements from all companies in a certain line of business give us insight into the health of that particular industry. And taking all company reports into account provides insight into the overall state of the economy and the future direction of financial markets.

Active investment managers use this information to adjust their expectations and portfolio positions.

Market Minute on Finance Friday

Video

We’re in the middle of earnings season and, outside of the Banking sector, the news has been good. Over half of the companies reporting earnings so far have beaten the analyst estimates. Given current economic conditions, this is an encouraging sign and one that a trend that which is good news for investors, bodes well for both long- and short-term investors.

Earnings season offers insight into how financial markets work. Earnings announcements come out in early-to-mid January, April, July and October. Over the course of about six weeks, most major firms release details on the prior quarter and their outlooks for the future.

An earnings announcement from a single firm tells us how that particular company is performing. Announcements from all companies in a certain line of business give us insight into the health of that particular industry. And taking all company reports into account provides insight into the overall state of the economy and the future direction of financial markets.

Active investment managers use this information to adjust their expectations and portfolio positions.

Market Minute on Finance Friday

Video

Allegations of fraud at Peregrine Financial Group, a commodity futures brokerage firm, made news on Wednesday. Coming on the heels of last week’s LIBOR interest-rate scandal and with Bernie Madoff’s antics not yet faded from investor’s memories, it can sometimes seem like the world is awash in scandal.

While impropriety and large sums of money often go hand in hand, the world’s capital markets have an impressive long-term track record of providing wealth-building opportunities. Don’t let a few bad apples deter you taking advantage of this fact. A diversified portfolio overseen by reputable investment professionals is still one of the most prudent paths to financial security for long-term investors.

So turn of the television and put down the newspaper. It’s time to set your goals, implement your plan and let the short-term issues fall by the wayside as you focus on your future.