Greed and fear are human emotions and with them can come human mistakes.
Fear: an unpleasant emotion caused by the belief that there is a threat that could harm you.
Greed: An intense and selfish desire for something, especially wealth.
While these words are, by definition, very different, they relate to each other in the context of building secure wealth. Fear can cause you to be too safe with your money to the point that you never make investments that could bring reasonable returns. Fear can cause you to hide cash in a safe concealed inside a mattress, in other words, in an investment that pays very low interest.
Greed could put your money at risk because you shoot for too much. Greed could alter your judgement and lead to you making ‘pie in the sky’ investments.
Of course, greed and fear are natural human emotions/behaviors. They have their place and can provide benefits when considered in certain situations. Fear can keep you from psychical danger. And there are times that being greedy has its own rewards… like grabbing that last piece of cake.
However, consider eliminating both greed and fear from your financial decision making. Let’s replace these emotions and instead attempt to rely on intellect and rationality.
More specifically, cognitive intelligence.
Cognitive intelligence: Cognitive intelligence is the ability to plan, reason, and use logical deduction to solve problems, but also the capability to apply abstract thinking while learning from and responding to the environment.
Examples of cognitive thinking:
- “I probably won’t lose all my money.”
- “I probably won’t make a billion dollars.”
- You probably will have enough money to retire well with the ability to pay all your expenses and still have enough money left over to fund a great lifestyle.
So how? Well, first, you must save money, of course. But there is no need to fear not enjoying present life and still planning for the future.
Most importantly, during the accumulation period of your life, consider a diversified portfolio, but how you define the word diversify will depend on your age and unique circumstances. People in their twenties and thirties can afford to have more money in the riskier column simply because their time horizon for needed retirement funds is still years away. They probably have time to recover from a market downturn.
As we get closer to our retirement, a more conservative philosophy might be a smarter move. Such as relocating a greater percentage of riskier investments to safer investments such as US Treasuries, bank certificates of deposit and fixed annuities.
At the actual time of retirement, considering income that will provide for you the balance of your life becomes a paramount need. Of your choices for no market risk, income for life and outsourcing of management decisions, consider an annuity. An annuity can provide an income for any time period and you can include your spouse, safe and secure income.
It’s hard to practice rationality when it comes to money, but it’s so important that you do. The people who are the best investors don’t rely on emotions to power them. They understand the nuts and bolts of investments and make sound, rational decisions and are aware the ultimate goal of a retirement account is income.
Be one of those.