Fear. Anger. Joy. Emotions color your views on investing. In fact, all investing is emotional, says Chris White, CFA, a wealth manager of 25 years and a senior portfolio manager at Hemenway Trust Company LLC, a wealth management firm in Salem, N.H. In Working With the Emotional Investor: Financial Psychology for Wealth Managers, published by Praeger in 2016, White and co-author Richard Koonce explain how emotional triggers can influence investment decisions.
Book cover: “Working with the Emotional Investor: Financial Psychology for Wealth Managers” by Chris White and Richard Koonce (Praeger)
“Do you get nervous when the market has rollercoaster days or do you tend to take periodic volatility and market corrections in stride?” White said. “Knowing how you respond emotionally to changes in the market can keep you grounded and prevent you from making rash decisions — like selling all of your stocks off in a volatile or bear market.”
Your investments strategy has to take into account your temperament and risk tolerance. It will determine whether you should stick with long-term or short-term investments. Your childhood experiences — love, joy, loss, etc. — and family dynamics can both consciously and unconsciously influence your investing behavior as an adult and remain throughout your life.
“A person who experiences deep personal or emotional pain as a child may, as an adult, distrust other people, have a deep-seated need for control, or be very risk-averse when it comes to investing,” White explains. “He or she may develop ‘survivor’ or ‘protector’ tendencies that influence their views about money, loss/gain, and risk tolerance. In other cases, people develop ‘fixer’ personality traits, which drive them to try and ‘beat the market’ at any cost.”
Chris White is the co-author of “Working with the Emotional Investor: Financial Psychology for Wealth Managers.” (Praeger, August 8, 2016) (Praeger)
White offers wealth advisors different strategies for working with “survivors,” “protectors” and “fixers.” Advisors can better manage their client relationships by having a better understanding of their clients’ emotional makeup.
Working With the Emotional Investor covers understanding your “emotional template,” the psychology of money and the emotions of investing. It explains how your unique psychological “system” is key to assessing your tolerance and acceptance of risk.
“A person who experiences deep or traumatic loss of love as a child, for example, may grow up to be fearful or wary about the world around them,” said White. “Rather than seeing investing as a way to generate wealth, they may instead view any kind of risk taking as being inherently dangerous.”
“In contrast, a person who grows up surmounting childhood experiences of significant pain or loss, may, as an adult, find satisfaction and excitement in risk-taking or thrill-seeking activities,” White added. “In fact, he or she may develop an extremely high risk-taking tolerance when it comes to investing. It’s because every individual is unique, and is driven by different life experiences and emotions as an adult.”
Read an excerpt of Working With the Emotional Investor here.