How are decisions influenced by emotional baggage?
Emotional baggage can be defined as the stories we tell ourselves about the experience we've had. For example, if I invest in a friend's business venture and the business fails, the story I might tell myself is, "I can't be trusted to make good financial decisions." Yet, another option is, "Well, that didn't work out, but I'm glad I supported my friend and didn't invest more than I was willing to lose." I might have emotional baggage from growing up with an impulsive father who jeopardized the family's security by playing the lottery or investing in risky stocks. It's common for women to listen more strongly to authority (fathers, male advisors, brothers, husbands) then to their own intuition. I'm an advocate for identifying the stories that have shaped our current relationship with money, because then we can begin to transform our stories and investing behavior to be in alignment with our values and goals.
How can we understand our emotional response?
If I asked you to describe your current relationship to money you might say, "Oh, it's good I invest monthly in my 401k, have a small savings account, I'm doing pretty well." However, if I asked you to create an image of your relationship with money, you would have to rely on metaphor rather than words to describe it. What's juicy about this is that imagery accesses our unconscious and opens the door to deeply held beliefs about ourselves and the world. So you might draw an image of yourself holding one balloon, with others floating above you just out of reach and then realize that indeed this is how your relationship with money feels. In other words, this image gives you more to work with as you try to understand your emotional response to money and you can change the image. I often ask clients to redraw their image, changing only one thing the results are powerful! Once a person sees this new image that they created, the transformation begins and awareness grows.
How can we stay in our comfort zones for risk?
It's a common practice in the financial industry to assess a client's risk tolerance yet I've found that people rarely understand the questions. I prefer to talk about comfort zones because it gives me a clearer picture of the person I'm dealing with. Rather than asking how long you are willing to wait for the market to recover, I ask whether you are a person that drives below, at or above the speed limit. I want to know whether you are willing to take a risk for the chance of gain or prefer predictability. Once we have a clear understanding of your comfort zone, we can create an investment portfolio that reflects this level of risk. In times of great market volatility or exuberance you can refer back to your comfort zone to remind yourself of why you chose this portfolio, which helps you to stick with your long term plan. Luna Jaffe, author