Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Sarah Newcomb, she's Director of Behavioural Science at Morningstar. Hello.
Sarah Newcomb: Hi, Holly. It's great to be here.
Black: So, Sarah some people out there think investing is just about money and numbers in a spreadsheet. But actually you think our behaviours and our emotions have a lot to do with it. So can you talk to us a bit about what you look at?
Newcomb: Absolutely. Right, we can tend to think that financial management should be just about numbers because it involves numbers, and we think that numbers are purely logical. And numbers themselves are. But think about every major financial decision in our lives, things like marriage, jobs, career moves, college, birth, deaths, retirement, buying a home, starting or ending a family. All of these things have major emotional elements to them. And to simply look at the numbers and ignore the emotional information actually does a disservice to the decision-making process. Because our emotional well-being and the emotional trade-offs of different financial decisions, that's legitimate information that we should be weighing in our decision making. The trick is not to over weigh your emotions and not to use pure emotional reasoning. So what we're looking for is that middle ground the combination of both emotional trade-offs and financial trade-offs to find the best possible decision for you overall.
Black: So, how do you think about emotional reasoning. How do we strike that balance?
Newcomb: Well, it can be hard because many times our emotions get in the way of our financial decisions in knee jerk kind of responses that we don't catch until later. And so understanding our emotional reasoning, understanding our biases can be helpful. In my talk, I talk about how to listen for emotional information in your own words, and in other people's words, because we give ourselves and others clues about the emotions that are in play, through the words that we use and the stories that we tell ourselves about financial trade-offs. So understanding the emotional trade-offs is a good start, understanding biases and emotions so that you can bring a little bit more consciousness to your decision making.
Black: So I think one emotion that a lot of investors will have had to grapple with this year is FOMO, or fear of missing out, because we've seen some asset classes or meme stocks go absolutely crazy. So what would your tips be to someone managing that emotion?
Newcomb: Well, it's very enticing to get in on the fervour of speculative investments. And speculation is not necessarily unwise. What's unwise is, if you don't understand the difference between speculation and fundamental value investing. Fundamental value investing looks at the fundamentals of a company or a fund. And it looks at the long-term performance projections for an investment. Speculation is a completely different game. And it's played by different rules. And it's not based on the fundamental value of a company, it's based more on the whims of the herd or the news cycles. And so when you speculate, what you want to do is make sure that you don't speculate with money that you can't afford to lose. So speculation is fun and legal, and you know, if you are wanting to get involved in that, it can be very rewarding. It can also be extremely disappointing. And so you want to make sure that you don't speculate with your life savings, you speculate with a responsible percentage of your money that you can afford to lose if things don't go the way you think they will.
Black: Fantastic. Sarah, thank you so much for your time. For Morningstar I'm Holly Black.
