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Behavioral Finance: What Really Drives Your Money Decisions?

By August 5, 2016Investing

Wise investing involves an alignment between who you are and the traits you exhibit in building and conveying wealth.

No two investors are the same, but their financial decisions – both good and bad – are often guided by certain principles and based on a unifying investor profile. Understanding why people make irrational or imprudent investment decisions is a major challenge, particularly when those decisions appear to be inconsistent with the personal values that have served the investor well.

The concept of behavioral finance takes on real importance when emotion and psychology start influencing individual money decisions. As Albert Phung, a writer and analyst for Investopedia.com, explains, behavioral finance “seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.” Too often, ill-conceived or destructive ways push the investor down a conflicted path that threatens to undermine every objective they seek to achieve through structured investing.

At Rowland Carmichael, we help our clients develop and maintain a structured framework for themselves and their families which takes into account their unique personal and financial profile. We recommend that investors work with a team of independent advisors for legal, accounting and financial management to gain an understanding of their investor profile, as well as the education platforms necessary to make them the best investor they can be.

If there is substantial wealth passing to multiple generations, we highly recommend that the grantors engage the younger generations to teach them not only about the governance and stewardship of wealth, but also about the character and values of the people who created the wealth and how they chose to pass it down. We also believe that grantors should weigh the consequences of passing wealth to individuals or institutions that don’t share their values, and to attach appropriate “strings” to the wealth to help ensure that it not only benefits the recipients, but perpetuates the grantor’s values.

If you have questions regarding building and conveying wealth, we invite you to contact your Wealth Manager to discuss your particular situation.