EQ Beats IQ When Investing

by | Aug 17, 2021

The ups and downs of investing can cause some investors to experience “market fatigue.” It’s not always our balances that get beat down, but our emotions, which is why a high level of EQ (or emotional intelligence) can be more beneficial than a high IQ.

The ups and downs of investing can cause some investors to experience “market fatigue.” It’s not always our balances that get beat down, but our emotions, which is why a high level of EQ (or emotional intelligence) can be more beneficial than a high IQ.

Roller coasters can be fun, right? There is something about that high level of excitement in a short period of time. But, while a short ride on a roller coaster can be fun, the thought of the roller coaster never stopping can seem a bit like a nightmare.

For some, there is similar feeling that can occur after years of investing in the market. The ups and the downs over years and years can lead to “market fatigue,” which is the feeling that you just can’t take any more ups and downs, even if people like me say it is logical to “stay on the ride. “

In fact, investing well often has much more to do with our emotions and how we manage them (EQ) than our intelligence (IQ). You may have even heard statistics like how the average equity investor has earned approximately 4.25% over the last 20 years while the S&P 500 index has earned approximately 6.06% over that same time period.

The difference ultimately comes down to our decisions, and our decisions are often driven by our emotions. So, to improve your outcomes, you must improve your decisions. To improve your decisions, you must raise your EQ (or emotional intelligence). Here are four key skills to increase your EQ.

1.       Increasing Self-Awareness

In ancient Greece, the philosopher Socrates famously used the phrase “Know Thyself” as his way to sum up what all philosophical commandments could be reduced to. To me, “know thyself” means to know how your emotions are likely to affect your behavior. Know your strengths. Know your weaknesses.

Just recently, we ordered a swing set for our two young children. The swing set arrived in boxes and the plan was for my wife and I to put it together ourselves. Before I walked outside to embark on that adventure, I had a complete sense of dread come over me. I sat inside, knowing that these sorts of tasks are not my strong suit. I delayed as long as possible until I finally mustered up the courage to face the boxes.

Step 1 was to download an app that provided instructions for installation. The more I read through the app and the more I learned about the process, the more stress I felt. Without getting a single item out of the box, I sat down to reflect. This was a divergence from my usual course of action with home projects, which is to jump in and find out a few hours, days, or weeks later, that I’m not qualified to do the task.

This time was different. I was able to easily acknowledge that this task was not made for me and would likely lead to a poor outcome. I chose to distance myself from it and let my wife assemble the whole thing…just kidding! We both agreed to hire a professional to assemble the playset and enjoyed a low-stress Sunday afternoon.

Having self-awareness is not only a key life skill, but is an incredibly important investing skill as well. Do you know how you’re likely to react to the next wave of bad news in the media? Are you likely to make a knee-jerk decision that you could regret? Do the volatile times in the market cause you stress? Is that stress accompanied by physical symptoms that affect your health?

Do you believe that making your own investment decisions is a strength of yours? If it is, is it something you want to be actively involved in? The answers to these questions will likely provide a strong argument to either hire a licensed financial professional to invest for you or to do it on your own.

Also, don’t stop at knowing yourself. Know how your portfolio will react as well. Be sure you understand how much your investments are likely to fluctuate in a bear market. Understanding your downside risk will help you better prepare for when those times occur.

Being aware of your emotions is an important first step to helping you manage them.

2.       Improving Self-Management

Once you know how you are likely to react, you can begin to build a mental framework or plan for different scenarios. You may even have opportunities to build positive habits with smaller stressful events that happen from day to day. Developing a game plan in advance is key.

In 2014, I agreed to participate in a 12-hour, overnight, military-style team building event with a friend (not my idea). The event took place in Indianapolis and began at 9:00pm. For the entirety of the challenge, we had to tote a backpack that was filled with 50lbs of bricks (literally). I’m still not quite sure why I agreed to participate. I wish I could say I was blindsided by all of this, but unfortunately I knew exactly what I was getting into.

The reason I bring this event up is that it imparted in me a phrase that was so powerful and I’ve remembered to this day; “Embrace the suck.”

During that 12 hours of physical and mental anguish, I had many thoughts of quitting and many moments of being completely overwhelmed. However, with a little encouragement from my peers and a few attitude adjustments, I was able to embrace and endure the circumstances and I completed the challenge.

Investing can be fun in the good times, but in the bad times, it can really be…overwhelming. Down markets are inevitable. Experiencing a down market is not a question of “if” but a question of when? What will you do when you are in the middle of it? How will you handle your emotions? How will you adapt? Are you able to acknowledge your emotions, but still make a rational decision?

As many of you know, this is much easier said than done. In 2020, many of us experienced massive stress, fear, and moments of being overwhelmed. In the investing world, the impulse is always to try and escape the bad times, stop the bleeding, and exit the market when things are going poorly. However, history tells us that it’s those that can manage those emotions, keep them in check, and stay the course that come out ahead in the long run.

Perhaps the best way for you to manage your emotions during a market downturn is to turn off the news and check on your portfolio less. If you have an advisor that you’ve hired to monitor your portfolio, consider not checking your accounts every day. By implementing strategies to manage your emotions better, you’ll smooth out your investment ride and decrease your chances of “market fatigue.“

3.       Building Social Awareness

When discussing emotional intelligence, building social awareness has everything to do with understanding what is happening around you. How well can you understand the emotions of others and pick up certain non-verbal cues?

With investing, how well can you pick up on the investment behavior of others, both positive and negative? If someone is exhibiting poor investment behavior, are you able to recognize that and not allow yourself to be influenced by it?

You can rest assured that in the next down market, there will be people who sell their stocks in a panic. You will have co-workers, neighbors, and friends who will tell you that the market is going to drop another 20-30%, or that this time is going to be worse than The Great Depression, etc. How well can you tune out those sources and tune in to the sources you trust most?

Also, being aware of the motives behind your sources is a big part of building your social awareness. If you get your information from the financial news, what are the motives of those organizations? In almost all cases, regardless of the news outlet, the goal of a news organization is to drive their ratings. That’s it.

Their goal is not to increase the value of your portfolio. So, just understand that the people providing your information have an incentive to inflate situations, speculate, and stir up the most powerful ratings driver of all time: fear.

4.       Improving Your Relationships

If you work with an advisor, it’s so important to build trust and communicate in the good times so that you’re on the same page in the bad times. Hopefully, your advisor is facilitating that communication for you. But, don’t ever be afraid to ask questions. You’ll likely feel much better about asking when the waters are calm than to try and sort things out in the middle of a market correction.

As you get questions to your answers, be sure and communicate your expectations as well. A good advisor will listen, assess, and respond to your concerns. In some cases, the advisor may feel it is necessary to stretch your thinking a bit to encourage better outcomes. Sometimes, we need to retrain our mind about components of investing. But, at the end of the day, it’s important that you’re on the same page.

Bottom Line

Our emotions are extremely intertwined with our money and our financial decisions often have more to do with our EQ (emotional intelligence) than our IQ or book smarts. To experience better outcomes, we need to make better decisions. To make better decisions, it’s crucial to better manage our emotions and raise our emotional intelligence.

For help with your own financial plan or questions about your investments, contact us at 618-288-9505 or schedule a call below.

Joe Allaria, CFP®

Joe Allaria, CFP®

Wealth Advisor | Partner

As featured in The Wall Street Journal, USAToday.com, CNBC.com, Nasdaq.com, and Yahoo Finance.

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