Single, committed or complicated, we're all in relationships with our money. And what better time to evaluate the status of that relationship than Valentine’s Day?
Like in romantic relationships, the hallmarks of a good relationship with your finances include emotional maturity, commitment and trust. Consider the signs of a healthy relationship below. How does the future look for you and your money?
You Don’t Let Your Emotions Get the Best of You.
We’ve all been in an argument with a significant other where it's clear the conversation isn't going anywhere. At that point, it’s a battle of wills.
In a healthy relationship, though, both parties are self-aware enough to recognize their own potential shortcomings. Your feelings may be valid, but that doesn’t make you right—or give you a reason to act brashly.
Financial Corollary: Stay the Course.
When the market fluctuates and doom-and-gloom headlines have you reeling, it’s perfectly reasonable to feel anxious. However, letting your emotions get the best of you is never a good thing—and the same principle applies here. This is a key value a financial advisor can provide: helping you stay the course, even when your fight-or-flight instinct is telling you to make a run for it.
To make the market work for you, you have to be able to separate your emotions from the equation. You wouldn’t run out of your favorite store when it announced a major sale—so why run from the market when you have a chance to bargain shop?
You’re in It for the Long Haul.
No matter how solid your romantic relationship, there will always be a few things you just find maddening about each other. Maybe it’s her choice in Netflix series or the way he “folds” the laundry.
Eventually, you learn to look past these quirks, embracing them as idiosyncrasies of the person you love. Compared to the lifetime you plan to spend together, what’s one more boring episode, or one more wrinkled shirt?
Financial Corollary: Myopic Loss Aversion
Similarly, it’s important to keep the long-term view in mind with your investments. Just like you have to overlook your partner’s unsightly laundry, you can’t fixate too closely on the day-to-day performance of your portfolio.
Nobel Laureate Richard Thaler and behavioral economist Shlomo Benartzi call this idea “myopic loss aversion.” Because we feel losses twice as strongly as we feel gains, we’re wired to avoid the losses at all costs. We’re so terrified of losing money that we’re tempted to check our portfolios too frequently, which ends up being a slippery slope. The more you check, the more likely you are to see a short-term loss and make a bad decision because of it. That’s why it’s so imperative to employ an investment philosophy that matches your goals with an appropriate long-term strategy.
Your Relationship Is Rooted in Trust.
Trust is often viewed as the No. 1 factor in whether a relationship works out or not. Without trust, other aspects of the relationship quickly lose their value. What good is communication if you fear your partner is lying? How much does quality time together mean, if his or her mind is elsewhere?
Financial Corollary: Put Trust and Transparency First.
One sure-fire way to know you can trust an advisor is to ask if he or she is CEFEX-certified. CEFEX, the Centre for Fiduciary Excellence, only certifies firms who have proven themselves to adhere to the highest levels of fiduciary care. Any firm acting as a fiduciary is already legally bound to act in its clients’ best interests at all times, and a CEFEX designation takes that commitment one step further by examining the way a firm does business. In 2007, Plancorp actually became the first CEFEX-certified firm in Missouri and has earned the designation every year since.
A hallmark of any trusting relationship is transparency. An advisor should start by discussing your goals, and then develop a holistic roadmap—including income tax, estate, insurance, education and philanthropy planning—to help you reach them in a tax-smart way. It’s a red flag if your advisor can’t easily explain exactly how you’re paying him or her, or where your fees are going. (For more on this and other questions, download our “12 Questions to Ask Your Advisor” white paper.)
Love is in the air this month—so take advantage of the time to evaluate your relationship with money. It’s not one we talk about often, but it may be one of the most important relationships you have.