Hulk Angry: 4 Reasons Bruce Banner Needs to Understand His Emotional Risk Tolerance
When it comes to investing, many try to insist that you leave emotional behind you. However, no matter how hard you try to avoid letting your emotions run away with you, it can be difficult to keep it under control — especially when the stock market is doing really well, or really poorly.
The most difficult emotions to control, though, are fear and anger. When you are afraid and angry about what’s next for your finances, it’s easy to do a Dr. Bruce Banner and transform into the Incredible Hulk. Unfortunately, letting the angry monster out can wreak havoc on your finances. The Hulk destroys nearly everything in his path, and you can destroy your finances if you aren’t careful.
Before you invest, it helps to know your risk tolerance so that you can avoid panic — and so that you make the right decisions for your portfolio.
What is Emotional Risk Tolerance?
Your financial risk tolerance is fairly straightforward. It’s all about how much money you can afford to invest — and possibly lose. You look at how much money you can afford to have locked away in investments, as well as what you can afford to lose. If you can’t afford to lose that $500, don’t invest it.
Financial risk tolerance takes into account your other obligations, and is pretty objective. You either have the money to invest, or you don’t. (If you don’t, though, it might be worth to figure out how to get the money to invest, since it’s one of the most effective ways to save up for retirement.)
Emotional risk tolerance, on the other hand, is a little different. It’s more about what you can handle, emotionally, when it comes to your investments. Can you deal with the ups and downs of the market? Are do you become too stressed? In some cases, you might have the financial risk tolerance for some of the riskier investments, but you may not be able to stomach the volatility involved. If that is the case, sticking to more conservative investments might be the best option for you. Here are 4 reasons that you should pay attention to your emotional risk tolerance:
- Panic can lead you to make poor decisions: One of the biggest reasons to pay attention to your emotional risk tolerance is that panic can lead you into making poor decisions. If you turn into the Incredible Hulk and become angry and terrified at a stock market drop, you might sell your investment — turning paper losses into solid, real-life losses. And, if the investment was a fundamentally sound one, likely to recover along with the market, you have just missed out on the chance to buy at a real bargain. You have real losses, and you have a missed opportunity. Once you understand that you have this tendency, it’s important to put safeguards in place to help you avoid knee-jerk reactions to market news.
- Anxiety isn’t good for your health: Regularly transforming into an over-muscled mass can’t be good for Bruce Banner’s heart. Indeed, all the changing is likely to put strain on his heart, and lead to premature death. However, a great deal of anxiety on your part isn’t good, either. If you have a low emotional risk tolerance, don’t invest in assets that fluctuate a great deal, and come with the potential for regular (and possibly large) losses. If you are constantly worried about your performance, the stress and anxiety can weigh on your health and cause long-term problems. If you know you will worry, consider less stress-inducing investments like index funds, dividend aristocrats, and carefully chosen bonds. You can still get a reasonable return, but you will have better peace of mind.
- Your relationships can suffer from the anxiety: Once again, if you have a low risk tolerance, you need to be aware of the effect it can have on your relationships. Bruce Banner is constantly getting into trouble over his tendency to turn into the Hulk. It really puts strain on relationships. If you turn into a monster every time you are worried about what’s happening with the stock market, you need to step back. You don’t want to put strain on your relationships, you want to avoid situations that cause problems with your friends and family.
- High risk tolerance has problems, too: Realize, too, that high emotional risk tolerance can cause its own problems. Overconfidence in your investing abilities, and a propensity to take a lot of high risks can lead to financial problems when you’re wrong. If you are interested in taking risks, and enjoy the thrill, it’s important that you have checks on your investing. While you could see big payouts, you also have to be careful to avoid big losses. Make sure your financial risk tolerance matches your desire to enjoy investing, and find ways to offset what might be your irrational exuberance.
When you recognize your emotional risk tolerance, you can take steps to offset your tendencies. This will make you a better investor, and help you avoid financial problems associated with letting your emotional issues related to investing. You can’t completely keep emotion out of investing, but, by recognizing your emotional risk tolerance, you can offset some of the tendencies that come with emotion.