Emotions Are A Key Reason Why People Do Not Make Rational Choices

As members of the human species, we are subject to cognitive biases that enter into our decision making processes that might test the boundaries of what some might consider to be logical. 

I have a 5 hour (plus) flight coming up on Thursday, my RBC Avion visa rewards got me a flight for $0.00 (43,671 points). That is one way, economy. When I went to book my seats yesterday, Air Canada, in their kindest and gentlest sales manner, offered me a Business Class seat for an additional $700. Visions of leg room, bigger seats, no hassle luggage,  free beverages, easy exit, etc. (creature comforts) dangled in my conscious thoughts, tempting me to be completely irrational, defeating the whole purpose of accumulating those points.

Behavioural economics: those that wish to sell to us know exactly how to get us (most of us).

As humans we are vulnerable to pain: physical and emotional. The minute we have an ache we are off to the doctor, the drug store or the massage therapist or the psychotherapist.

But lurking in behind all the logical remedies to pain, or perceived pain, are the folks that have something to sell you and it is not necessarily medical.  Some will certainly be legitimate, real solutions to your challenges. However, there will be others wishing to exploit your pain or anxiety or need for something that they think that you will want (but not necessarily something that you need). 

Now bring that to the world of financial advice.

What is your pain?

For many, it would be the ability to ensure that they had enough money to live in the desired level of comfort that they wished for until the end of their days (i.e. not running out of money). Others might have generational and charitable goals for their legacies. 

But what is enough?

It is personal and specific. Everybody's needs and challenges are going to have different variations. So you have to determine what it is that you want and how you are going to best achieve it. It requires planning. If I let Air Canada convince me that my end goals and plans will be benefited by paying an additional $700 for some additional creature comforts in the short-term (that were not in my original plan) then I have taken a detour which will require something additional (sacrifice) to get me back on track sometime in the future.

If I let a financial advisor convince me to alter my long-term plan with something more exciting for some short-term, immediate gratification (risk be damned approach), I am going to leave myself more vulnerable to not reaching my goals. We  have to be very careful of what is motivating them. I can tell you from experience, if they are proposing a "one size fits all" type of portfolio, they are not looking out for your best interest, only theirs (because it is easier to manage and build scale and commissions). Beware of their conflicts of interest.

The fundamentals tell us that stocks are expensive. If 2019 GDP growth of about 2% was only able to generate 0.2% in 2019 S&P earnings growth. What kind of GDP growth will be needed to generate the analysts expected 9.5% of earnings growth required to justify that which is already built-in to stock prices for 2020. The International Monetary Fund is calling for 2020 U.S. GDP growth of just 2%. So the (rational) math does not quite seem to work.

If stocks are expensive, in time, they will return to being governed by fundamentals. That is rational. Jumping on the "you have got to own stocks because they keep going up" bandwagon is emotional.

Choose wisely.