How To Account For Emotions In Your Financial Plan

Most people like to think that they always make decisions based on logic and facts, but the truth is that emotions usually play a role for all of us in the decision-making process...

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Transcript Of Today's Show:

Speaker 1:
Hey, everybody. Thanks for tuning in to this edition of Plan With the Tax Man with Tony Mauro. As always, we appreciate your time here on our podcast while we talk about investing, finance, and retirement. What's up, Tony? How are you, bud?

Tony Mauro: I'm good. Cold here in the Midwest, and we're bracing for colder.

Speaker 1: Well, yeah, big fun. As February is winding down, it's about that time of the year. But you're also heating up because you got more and more going on with the tax side of things, right?

Tony Mauro:We do. Yeah. We're just getting into the throes of it, and everybody's starting to receive all of their info and are calling in for their appointments and asking a lot of questions. Yeah, so February, March, very busy for us on the tax prep/compliance side. Yeah.

Speaker 1: There's a big Wells Fargo component out there, so I wanted to ask you about this. Obviously, this deal with the CEO, John Stumpf, I guess... if I'm saying that right... where he's been barred from the banking industry and has to pay back almost $18 million in fines, due to some issues that had been going on. I wanted to get your take on that.

Tony Mauro: Yeah. And I get asked that a lot from our tax clients who are our clients who happen to be Wells Fargo employees. And, of course, they're hearing it on the front lines. It was hard to miss it over the last couple of years. Everybody knows kind of what happened there with...

Speaker 1: Creating fake bank accounts.

Tony Mauro: They created some fake accounts at the retail banking level to make things look better than they were...

Speaker 1: Like sales quotas or something.

Tony Mauro: ... because they were under a lot of pressure.

Speaker 1: Yeah.

Tony Mauro: And I've heard from employees there that, besides him basically being barred and getting out, a number of others as well. Of course, I feel for the employees because they take a lot of heat. But their clients, the public, are very upset about it...

Speaker 1: Sure. [crosstalk 00:01:50].

Tony Mauro: ... obviously. It gives them a black eye, so to speak. Taking a lot of bad press because of it, just because of that whole trust issue. [crosstalk 00:01:59]

Speaker 1: Right. Right.

Tony Mauro: ... down to. And I don't know. We tend to laugh about it, but it's a serious matter. But it does go on at these big companies, more than some things. And, unfortunately, this one kind of reared its head. And I'm not justifying it by any means. Managers in the branches probably thought they were doing what they needed to do. It sounds to me like there just was a breakdown in supervision and some things like that. Some checks and balances.

Speaker 1: Yeah, possibly. Yeah. Sometimes in these companies you just get directives from higher above, and you just kind of are doing what you're told or whatever the case is. And sometimes it's just not a matter of taking a minute to think it through and think, "Well, does this make any sense?" or whatever. And emotions can factor into those things because you want to keep your job, so you want to do the things that you're being asked to do, and...

Tony Mauro: Exactly.

Speaker 1: ... and so on, and so forth. So I thought we would spend a little time today talking about how to account for emotions in our financial plan. Not solely just this type of situation, but just kind of leading us into it. Because they do factor into everything we do, whether it's at our work, whether it's at home, whether it's in our financial decisions. Obviously, in this situation, for this gentleman, greed got in there, but what, typically, do you find are the most common emotions when you're sitting down to work with clients, or prospective clients, that drive their financial decisions? Is it usually the big two, which is fear and greed?

Tony Mauro: I think it's both of those, and I think we have too much news coming at us 24/7, and people get fixated on the latest and greatest. And I think that drives a lot of it, too. 20 years ago, 25 years ago, all of those channels that run 24/7 weren't really around.

Speaker 1: I know.

Tony Mauro: We have a lot of information at our fingertips, but I think people make their decisions based on how the market does in one day, and then they listen to CNN or somebody else giving their opinion.

Speaker 1: Right.

Tony Mauro: And they want to change everything they're doing. And we try to advise them. That's not the best way to... obviously... to invest for the long term. But generally, I think, it's more fear. Lately, I think, it's more greed because everybody thinks that this market that we've had... for the last few years, especially... is going to always continue. And we're trying to temper it a little bit. It's just, "Let's stay the course here."

Speaker 1: Right. Well, is that the most common mistake? I was going to ask you. What are the big ones that you typically see? I use my brother a lot as an example, on shows that I'm hosting, because he's 61, and he is forever very skittish about, "Oh, is this the thing that's going to cause the market to finally fall?" Right now, obviously, it's the coronavirus thing, and he's like, "Oh, yeah, production is going to come to a halt and yada yada yada." So he's forever hopping back and forth. What are some other things you see people do?

Tony Mauro: I see a lot of people basically jumping into things that they don't know anything about, especially on some information they've gotten and... Not so much the retirees, but this would be the younger people.

Speaker 1: Okay.

Tony Mauro: Instead of just sticking with their goals and systematically investing, I see a lot of them, right now, wanting to... They're point-blank asking me, "Well, what do you think I should invest in because everything's going up?" And I tell them, "Well, if I knew that, I wouldn't be still working here. I would have already done it and I'd been gone." So I think they take a real chance by doing that. And I think that's a mistake unless that's truly part of their goals.

Tony Mauro: Now, on the retirees, a little different. Retirees are constantly on that fence of, "Boy, I don't want to take any risk, but I'm not getting enough return. So maybe I'll dump a bunch of money into a high-yielding dividend-paying stock." And that may not be the best, either, so...

Speaker 1: Right, right. Okay, so, if we're definitely looking at our listening audience, which is typically pre-retirees and retirees, are there some times when it's appropriate to factor in the emotions into the decision making, knowing that it's probably going to happen anyway? Is there some that maybe make more sense than others, I guess?

Tony Mauro: I think so. I think fear... It would be the big one. I think you always have to understand that these markets go up and down, depending on what you're in. And it's got to be sensible for you, and you've got to be willing to accept the return based on the risk that you want to take, not what just the S&P 500 is doing. Because sometimes, I think, people think a little bit irrationally. And I try to tell them, "If you're basing our relationship on return, and return only, you're going to be sorely disappointed. But not only with me, I think. With any adviser." Because if you want the return of the S&P 500, for example, I can do that. We'll just go out and get you an index fund, but you're going to have to stomach what happens in that index fund over time.

Speaker 1: Right.

Tony Mauro: So we try to talk to them a little bit about some of that and the fact that maybe you don't need the best return. Maybe the risk you want to take, it's X. And I think that's the one that I would lean towards.

Speaker 1: I was also thinking... And tell me what you think on this. Sometimes, if we're thinking emotions and financial decision, the first thing that pops in my mind for a lot of retirees is the homestead. Maybe it makes logical or financial sense to downsize the home, but obviously an emotional factor goes into it if it's the home where you raised the kids. Right?

Tony Mauro: Right. Exactly.

Speaker 1: So sometimes you have to work people through those. So what do you do in those situations? Do you present the data and say, "Okay, here's what the math says, and now let's figure out a happy ground"? Because let's say one part of the family, maybe the wife, wants to stay in the house, and the husband wants to move. You've got to help them through that, too, right?

Tony Mauro: Yes, that's correct. Yeah. And a lot of times we'll work, especially with retirees, drawing up different plans and offering advice. And I do like to be visual, but I don't like to get real technical because most people aren't into the numbers like most finance people are.

Speaker 1: Sure. Right.

Tony Mauro: But-

Speaker 1: That's why we come to you guys.

Tony Mauro: I try to show them mathematically, and in simple terms, "Here's what, based on what you said you need and what you said you want... This can work, but you need to do it this way. And here's the pluses and minuses of doing it that way. And if you can live with that, then this is a great way to go. If not, then we have to change some things up a little bit so that you're comfortable on the emotional side." Because the last thing you want, especially in retirement, is to be worried about, "Oh, my gosh, I just saw the news today that something happened." The coronavirus.

Speaker 1: Right, right, yeah.

Tony Mauro: Whatever it might be. "And I'm all panicked about my future." That's not what we're about at all. So, it's definitely worth constructing a plan based on, I think, your emotional needs as well as... The math's got to work, at the end of the day, for-

Speaker 1: Right, right.

Tony Mauro: For everybody.

Speaker 1: Yeah. And that's kind of how I was going to finish this podcast off. I was going to say, "At the end of the day, I guess, you really do have to balance both sides of this coin," right?

Tony Mauro: You do.

Speaker 1: Of this equation. You've got to say, "Okay, what are the concerns you have emotionally?" And then, "Here's what the math says, and where can we strike that balance?" So I imagine the outcome of every plan has to take both of those things into account.

Tony Mauro: It does. Absolutely.

Speaker 1: All right, well, there you go. So we got to account for emotions in our financial planning because we're emotional creatures, right? It's just something we do, in all aspects and walks of life, and we can try to let something like math be kind of cold, hard data, but it's still going to creep in there. So we want to make sure that we're balancing both of those, being smart about the decisions we're trying to make, obviously, from a mathematical and from an emotional standpoint. And working with an adviser can certainly help you do that because they're going to be able to take some of that emotional component out. Because they're not, obviously, emotionally invested like we are. Right? So that's a way...

Tony Mauro: That's right.

Speaker 1: ... to look at that. Yeah. All right, well, so, if you've got questions or concerns, you want to get on the calendar with Tony, give him a call. Come in, have a conversation with him. It's going to be getting busy, so definitely reach out and let him know if you've get some tax questions. If you want to spend some time with the team at Tax Doctor Inc, let them know at (844) 707-7381. You may have gotten this a podcast through their email blast or a newsletter. Reach out. Let them know you want to come in and have a chat, maybe get on the calendar.

Speaker 1:
You can also go to yourplanningpros.com. That is yourplanningpros.com. Tony's an EA and a CFP with 23 plus years in the experience... or experience in the industry. Excuse me. And, of course, you can always subscribe to our podcast to catch future episodes as well at that website, yourplanningpros.com or at various different outlets, like Apple, Google, Spotify, and so on.

Speaker 1:
This has been Plan With the Tax Man with Tony Mauro. Tony, my friend, thanks so much. I'll let you get back to your busy day, and we'll talk soon.

Tony Mauro: All right, sounds good. Take care.

Speaker 1: All right, folks. We'll see you next time, right here on Plan With the Tax Man.