In business school, we all learn that investors tend to be driven by fear or greed.
“The President twisted his ankle… we look weak! China will attack soon. Quick! Sell everything.”
“This penny-stock is about to blow up! We’re going to be rich. Quick! Sell the house & buy every share you can with the proceeds.”
While these might be simplistic and exaggerated examples of most investors, it gets the point across.
Everyone has a mix of both represented, however, some of us lean towards one aspect more than the other. Either way, both attitudes will cost us in the long run. Either through safe investments eroded by inflation or aggressive investments decimated by risky practices. The key is to recognize which trait is dominant in you (and your spouse if applicable) and reign it in to maximize your potential.
For me, it has always been, and likely always will be fear. Fear of losing the principal I worked so hard for made me a CD/Money Market investor for everything but my retirement funds. However, as my family’s income and with it, financial security increases, I’m learning to take calculated risks that should, if executed properly, move me forward much quicker than I would through savings alone.
Note that I didn’t say anything about allowing the pendulum to swing completely in the other direction. I would never allow myself or my husband to put our future in jeopardy with thoughtless financial moves. In fact, we remain conservative in our strategy, keeping our emergency funds split between CDs & Money Market accounts for easy access and insurance on our principal. However, I am coming to terms with the fact that it’s ok to only have 6 months of living expenses in the bank. 2 years might be a taaad bit excessive when there are 2 working adults with no known health problems, in relatively secure, good-paying jobs and 3 additional sources of income. Maybe, just maybe, we can take most or all of the savings above the 6-month emergency cushion to invest into assets that will further increase our cash flow.
Think of your flaw as an investor and how you can overcome it to improve your wealth. It will change your life.