Libby Palomeque is a Managing Director and Portfolio Manager at First Republic Investment Management. In addition, she is a Certified Financial Life Planner, a Certified Divorce Financial Analyst, a Certified Grief Recovery Specialist, and a Level II Degriefing Practitioner. In this article, she looks at circumstances where investments and emotions collide, the effects of this and some useful techniques to protect yourself in these instances.
There are some times in life where it’s appropriate to let your heart play a big part in decision making: choosing your mate, raising your children, or caring for an ill parent. All of these require as much heart as head to get the job done right. But there are other parts of life where it’s pretty clear that the brain is the better choice for primacy. Common wisdom has it that investment decisions belong firmly in the latter camp.
With that said, there are few who can manage to entirely keep our emotions out of our portfolios. We are human after all, and the idea of money is both complex and complicated in our culture. Our emotions, as a result, sneak in to our decision-making, and generally make a nuisance of themselves at inopportune moments.
In this article, I will explore a variety of specific circumstances where investments and emotions collide. We’ll look at why this happens, what the ramifications can be, and what techniques you can use to protect yourself when your heart might lead you down the wrong financial path.
Inheriting Money from Someone You Loved (Or Didn’t!)
If you asked the average person on the street how they’d feel if they suddenly inherited money, they’d probably answer jubilantly.
But it’s not that simple.
Inheritance occurs when someone dies, and death is not a rite of passage with which we as a culture are comfortable. We don’t envision it. We don’t talk about it. And we rarely prepare adequately for it. Here are three ways that emotions can impact our investment decisions when we inherit:
1. General Grief Craziness: When someone close to us dies, most of us are not our best selves. I know in my two journeys through deep grief, I was initially what might be best described as a crazy lady…and my rational functioning was somewhat impacted for many months thereover. I remember very little about the decisions I made during those times, despite the fact that at the time I considered myself to be rational, and in control.
Thankfully, I had surrounded myself with professionals who were rational. My CPA ensured that I made no terrible tax decisions and my attorney kept an eye out to make sure that legally I was fulfilling my obligations in a way that would protect my interests. As for investment decisions, my years of professional experience were ingrained enough that I was able to make sound choices even when I wasn’t at my best. Nonetheless, at the time I did ask my colleagues to check my thought processes.
If you believe that you may inherit assets, be sure that you have a financial team assembled upon which you can count. Make sure they know about each other, and are willing to work collegially should that become necessary to support your needs. And above all else, use them when you need them. There is no time in life when good advice is so valuable as when you are adjusting to an inheritance.
2. Loyalty Issues: A second way that emotions and investments get tangled with inheritances is with loyalty issues. I cannot tell you how many times I’ve heard the following sentiment expressed:
“My wife/husband/mother/father built this portfolio. She/He/They did so well with it. I would feel disloyal if we changed anything about it. It worked for them as it is. It will work for me.”
This is a tough emotional hurdle to get over. Often, the strategy that built the portfolio is either obsolete, no longer reflective of the world, or not appropriate for the inheritor. Sometimes, the portfolio contains a huge amount of inherent risk. It may have done well up to this point, but as we all know, luck is an unreliable ally. Sometimes the inheritor has a hard time recognizing the validity of the issues above. Sometimes, he or she may recognize that changes need to be made, but be utterly stymied by the sense of disloyalty that such thoughts stir inside them.
The key to overcoming this emotional hurdle is to honor the principals that the loved one used to build the portfolio. Once those are identified, you can slowly, gradually, make the changes that meet your needs. Did the creator of the portfolio believe in choosing solid, dividend paying stocks? Then keep that viewpoint, but adjust to changes in the world and changes in your circumstance. Did the creator believe in exclusively American companies at a time when the world was “larger” than it is now? Then keep a significant domestic allocation, but allow for other asset classes with the remainder.
Whatever the guiding principal, a skilled investment professional can help you figure out a way to honor your beloved’s legacy, while making the portfolio fit your needs. This is your portfolio now. It needs to fit you, and the world that you live in.
3. Survivor’s Guilt: Sometimes, particularly when inheritance comes as a result of a wrongful death, inheritors can feel guilty that they have this money, while the loved one is dead. People with this reaction largely fall into two camps: those who refuse to use the money, and those who are determined to use it up.
If you find yourself in the first camp, recognize that this is a normal reaction in the initial stages of grief. But as time passes, do your best to recognize that enriching your life in a way that is financially sustainable can be considered a lasting final gift to you from the departed. It may take a while to get around to being able to spend those funds with a light heart, but if you determine in your head that doing so makes rational sense, eventually your emotions are likely to follow.
If, on the other hand, you find that you are overindulging in spending, turn to your professional advisors. Have them illustrate the impact of your current burn rate for you. If, together, you determine that your spending is unsustainable, come up with a plan.
Rather than attempt to shut off the faucet all at once, I find it’s often helpful to create a “spending step-down” schedule. Make changes gradually over time. Often, the simple act of attempting to follow that schedule will re-engage your rational mind and in doing so lessen some of the emotion. Over time, the guilt that seems to be attached to every dollar should recede.
If, on the other hand, your emotions in any of these categories appear to get worse, rather than better, do not be afraid to consult a professional counselor or therapist. Grief can be one of life’s most intense emotional experiences. If you are struggling, there is no shame in hiring help to get through it. I certainly did, and consider it one of the best investment decisions I ever made.
First Republic Private Wealth Management encompasses First Republic Investment Management (“FRIM”), First Republic Trust Company (“FRTC”), First Republic Trust Company of Delaware LLC, and First Republic Securities Company, LLC (“FRSC”), Member FINRA/SIPC. FRIM is a SEC Registered Investment Advisor. This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. This document may not be reproduced or circulated without our written authority. Products and/or services offered by First Republic Securities Company, LLC, and First Republic Investment Management are not deposits or obligations of, or insured, guaranteed or endorsed by any bank, Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency, entity or person. The purchase of securities involves investment risks including the possible loss of principal.
The views of the authors of these articles do not necessarily represent the views of First Republic Bank.