The legendary Magellan mutual fund manager, Peter Lynch, once said, “Everyone has the brain power to make money in stocks. Not everyone has the stomach.” When it boils down to it, successful investing is both personal and emotional.

A friend’s investment success does not affect your portfolio value one dollar, but psychologically it can have a huge effect. One example? Fear of missing out on big returns can lead you to stray from your risk tolerance. You need to keep in mind that emotions and investing cannot be separated, just like a professional athlete will have nerves at critical game moments.

Money and Emotions

The more we can be aware of our emotions related to money, the greater our chances of investment success. But it is easier to not react to market swings when you still have income coming in to pay your bills.

When people stop working, their relationship with their money often changes. Since they no longer have income coming in, they view their retirement savings from a scarcity mindset.

The investing mindset that got you to retirement is not the same mindset that will get you through retirement.

Managing your money in retirement means managing your emotions and knowing the real purpose behind your money. Complex emotional dynamics related to scarcity, fear and greed can come at a great cost when it relates to your retirement, both monetarily and health wise.

Case Studies to Consider

Many people will correctly point out that over the long-term (10 plus years), the market historically has gone up, so ‘just ignore’ daily fluctuations. That is great advice on paper, but people’s time horizon and risk tolerance are not simple things. Let’s look at examples of how this can play out:

Jane and the Shrinking Portfolio

Jane retires at 65 and wants to plan for a 25-year retirement. She knows her $1,000,000 portfolio has to last her for 25 years, so her natural inclination is to want to protect her money from losing value. She looks around at the world and sees problems: a pandemic, a hugely indebted government, and geopolitical tensions.

Not feeling any comfort, she decides to invest very conservatively. The problem for Jane is that conservative investments like CDs and savings accounts are paying less than 1%, while inflation is more than that.

So, in an effort to preserve her precious retirement savings, she takes little risk and receives little return. As the years tick by, Jane’s portfolio gradually becomes less valuable because it is not outpacing inflation, and her spending is eating into principal. This creates a vicious cycle where she feels she has to protect her smaller and smaller portfolio, perpetuating its shrinking.

Robin and the Fear of Missing Out

Robin retires at 62 and is very social and active in her community. She loves to travel and while on a trip with friends, she overhears them talking about several stocks where they made 50% in a year, some even higher.

She checks her portfolio later that night and sees that she is up a fraction of her friends’ returns. Feeling disappointed and left out, she starts taking stock tips from those friends. At first, she does well and sees her portfolio going up, so she adds more.

This goes on for a while until the business cycle changes, and her stocks plummet and she loses 50% in a 2-week period. In a panic, she sells out for a slight loss.

Countering These Two Scenarios

These two examples represent common pitfalls that you will not read about in personal finance books. They are psychological phenomena that drive people to make decisions that are not in their long-term best interest.

The most effective antidote is to have a financial plan which clearly identifies your required rate of return and risk tolerance.

Jane might have identified (before retiring!) that her target rate of return in retirement is 4% per year. Based on low interest rates and her risk tolerance, it might have meant that she needed a larger percentage allocation in stocks than she was comfortable with, making her realize that she had to work one or two more years.

Robin’s decision was a result of fear of missing out on spectacular returns. It highlights the importance of having a plan and knowing what rate of return you need to live your retirement lifestyle. Knowing your neighbor’s return has nothing to do with your goals.

Being aware of the emotional biases at play with your money gives you an advantage to make smart decisions that align with your long-term goals.

Do you like the look of your financial portfolio? Was it easy to get there? How do you see your investments now that you’re retired (or close to retirement)? Has your money mindset changed? What about your emotions? Have you felt the fear of mission out when it comes to investments? Please share how you counter it!