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104: How the Laws of Human Nature Relate to Investing

Wealth by Design

Release Date: 02/18/2020

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Hello, loyal listeners! We wanted to let you know that we have a quick update on the podcast and a few things that are happening over at Toujours Planning right now. As you may know, we are a Lake Charles-based business and family, and our community, homes, and offices were devastated by Hurricane Laura in August.

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More Episodes

What do children’s fables, dog memes, human nature, and investing have to do with each other? Well, you just might have to listen to the full episode to understand. In a nutshell, though, Episode 104 is all about human nature and how it can work against us when it comes to investing. Fear of the unknown and fear of failure can hold us back. And greed can lead us down some bad paths and entice us to make poor decisions that we’ll pay for later. 

WHAT YOU’LL LEARN

  • [00:50] The enemy of investing
  • [02:10] A famous quote on investing from Warren Buffett
  • [04:22] How financial advisors temper your expectations
  • [07:13] The roles fear and greed play in your finances
  • [08:21] A case study on fear during the 2008 financial crisis
  • [12:15] A quick detour into fables and fairy tales
  • [17:24] Herd mentality and normalcy bias
  • [20:35] How to fight fear and greed

You Can’t Always Count on Your Golden Eggs

We kicked off this episode with a famous quote from Warren Buffett: “Be fearful when others are greedy and greedy when others are fearful.” What the heck does that mean? When it comes to investing, it means to be contrarian: Do your own thing. Ignore the herd mentality of doing what everyone else is doing. Don’t give in to the FOMO. 

To be clear, yes, Warren Buffett is telling us to be fearful and greedy when others are not. As an investment strategy, it works. But when we talk about actual fear and greed, it’s important to be strong and not give in to those feelings. If you’ve ever heard the story, The Goose and the Golden Egg, you know that we’re all supposed to be patient and avoid greed (but also, Danielle believes this story exists to scare adults). The fable has a message for all of us: nothing is certain and you can’t always count on your golden eggs to keep coming.

But if we’re supposed to avoid those feelings of fear and greed, how should we feel when investing? You want to strive for some feelings of normalcy and control, as Dustin put it. Take the “this is fine” meme of the dog sitting calmly in a room that’s on fire — “the meme of our times” as we talk about it in the episode.

https://gph.is/2h8wI3B 

The dog knows what’s going on around him and accepts it. It’s fine. Everything’s fine. It’s a little extreme (and super funny) but that sense of calm and order is what you should aim for when investing.

 

What You Need to Fight Fear and Greed

So, how do you achieve calm and fight off those feelings of fear and greed? How do you find the eye in the middle of the storm? The first thing you need to do is acknowledge those emotions. Know they exist and accept them. You can’t get rid of those emotions and stop them from happening. But you can understand that they’ll pop up and rear their ugly heads once in awhile. 

If you can’t get rid of ‘em, have a plan to deal with ‘em. Build a solid portfolio or investment strategy that will last you through those times of fear and greed. They should also last you through the good times, too! We can easily become overconfident when things are going well and make some not-so-great decisions. The point is, your portfolio or financial strategy should be strong enough to weather the good times and the bad. And it should be so strong that you don’t feel the need to obsess or check on your investments every day.

Finally — and we’re not just saying this because we’re in the financial planning biz ourselves — hire a trusted advisor to help you. A good financial advisor will basically act as your babysitter. They’ll hold your hand when things get rough and talk to you down from the ledge. And those times when things are going a little too well? They’ll keep you grounded and give you a reality check when you need it. 

This material is for general information only and is not intended to provide specific advice or recommendations for any individual.

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