The great American pastime isn't baseball, it's money. -- Andy Rooney
Dr. Hendlin, sometimes memories of past losses come up while I'm trading. I suspect that my thoughts and feelings about what money means to me are getting in the way of being more effective. Could you help me pinpoint how my associations with money and past experiences with it may be affecting my trading?
Money signifies a number of psychological and emotional needs for us that go beyond its use as a medium of valuable exchange. Take a moment to think about your own personal associations to money. How might these meanings affect your trading? When you read the list below, pay particular attention to the meanings of money with which you identify.
Why does it matter to know which meanings are most important to you? Because it will affect how much risk you are willing to take when trading and investing. And it will help you see why you may refuse to take certain actions, such as selling a position, when the meaning of money that is most important to you is being threatened if you sell the stock. Here are some of the common meanings we attach to money:
Financial security: Money providing the security to not only survive economically in the world but to afford the lifestyle one chooses, given one's skills, ability, education, social status, affiliations, motivation and good fortune; the desire to gracefully meet and exceed material needs without continual worry about the cost of living, taxes, the price of oil and gas, etc.
Sense of identity: Money as helping to define one's sense of who one is; how it builds and fortifies ego strength, contributing to a mental and emotional stability in daily life that helps us weather difficulties; the "safety net" function it may serve in stabilizing assaults to the ego.
Success: Money as one yardstick of success, having "made it" in the world, feeling competent, enhancing self-worth; enjoying respect from others, being recognized for one's contribution and being perceived as a desirable "catch" in the social world; displaying one's success through the accumulation of the various valuable material objects that indicate one's financial success.
Freedom: Money as the means to create personal and financial independence, to have time to spend the way one wishes rather than being tied to a rigid work schedule; to break away from the crowd and enjoy life through hobbies, family, interests, travel and possessions.
Power: Money as a means to exert influence over others; to get one's way in the world; to have the clout to get things done; to attain position and influence in the business world, social and political organizations, to be able to join clubs that one wishes; to be accorded special favor and be recognized by others; to distinguish oneself from the crowd; to be respected by associates.
Retirement and leisure: To be able to retire when one wishes rather than work for a lifetime; to afford a leisure lifestyle to the degree one wishes, to spend time with hobbies, interests and sports rather than feel financially compelled to work full time; to have discretionary income or savings so as not to have to worry about old age, medical or life insurance; to have something to look forward to.
The Real Cost of Losing Money
Listing the above associations to money helps us realize that our activities of earning, accumulating, spending and investing money all carry with them the particular values and meanings that we have developed through our lives.
When money means some or all of these things to us, we can see how both fear and greed may be magnified -- we have more riding than just earning a little profit. We can also begin to glimpse how all of these associations are on the line with us unconsciously when we are trading.
Because we are attaching personal meanings to money, it follows that when we lose money on a short-term trade or longer-term investment, we are losing more than just our capital.
We are also losing part of the meaning we associate to the money.
Psychologically, we are losing a sense of whatever value we have equated to money.
This insight helps us more easily understand the common behavior of letting losses mount up. Logically, it doesn't make sense to hold a losing position until it buries us. But if we can preserve our own value associated to money, we are willing to allow it.
As long as we don't sell, we have preserved the associated value.
The next time you find yourself stubbornly resisting selling a losing position, ask yourself which value may be compromised if you sell. Sometimes, simply by bringing to awareness what we are really risking, we are freed to go ahead and take the necessary action.
And just because we don't consciously think about these meanings of money doesn't mean they aren't affecting us unconsciously when we're trading. To the degree we make them conscious, we may take them into consideration as part of our personality makeup when we formulate an approach and style of trading. And we may then free ourselves to execute trades more decisively.
Stay tuned for Part 2 of this article next week, in which I'll discuss how past experiences can shape our attitudes towards money.
Steven J. Hendlin Ph.D. is a clinical psychologist in Irvine, Calif. He has been in private practice for the last 25 years, investing for the last 20 years, and actively trading online as a swing trader and long-term investor since 1996. He is the author of
The Disciplined Online Investor
recently translated into Spanish. He is pleased to receive your comments and questions for publication in his public forum columns at
email@example.com, but please remember that he is unable to provide personal counseling or psychotherapy through the mail.
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