Ask the Institute - How Do Emotions Influence Financial Decisions?

Psychology and emotions. There’s a role they play in your finances.
It’s just human nature.
So, how do emotions influence financial decisions?

Let’s take the late 1990’s.
The dot.com boom.
Venture capital was flowing. IPOs were exploding. And stock prices soared - fueled in part by unreasonable exuberance.
Investors speculated on which companies would be winners.
And losers. Often not considering business fundamentals. That’s the influence of human emotion.

So what may be a better approach?

Goals-based investing is a method of behavioral investing – and can help to minimize personal emotions.

Here’s how it works. 

At the base level, it’s about Preserving Wealth.
Putting aside cash savings and insurance for protection.

As you move up the levels, risk increases.
Naturally, the tolerance for risk varies by person.
A goals-based investing strategy can help keep risk in check.

The next level is Savings.
Decisions are focused on accumulating money to save for college, a new home.
And, saving for the long term – your retirement. 

The next level targets Growth and diversification.
Here, begin to consider Large/Small cap stocks with domestic and international exposure. Investment-grade bonds. Mutual funds and exchange traded funds can also be good vehicles for adding diversification to a portfolio.

By establishing your own financial goals now, these investment decisions can become more measured. More purposeful.

The final level is Speculation.
Speculative investments offer the potential for high return, but they are also highly risky and are not suitable for all investors.

We believe keeping your emotions in check and your focus on reaching goals is a smarter way to approach investing.

Along the way – as you move toward reaching your goals, remember this. Whenever you feel uneasy or unsure about an investment decision, we recommend you discuss your options with a financial professional who has your interest in mind. 

If you would like more help, you’ll find informed opinions, guidance and resources on our website.

If you have a question, or something you don’t understand, please reach out and talk to a Wells Fargo financial professional.