“The brain needs the heart and the heart needs the brain.”
Although this quote may evoke the wisdom of Nelson Mandela or Mahatma Gandhi, it derives from Tina Belcher, a fictional character in animated series Bob’s Burgers.
The timeless debate of head versus heart, logic versus emotion, resonates across many aspects of life. But does this dichotomy have relevance in the realm of investment? When deciding where to place their money, should investors prioritise return on investment or allow their emotional response to guide their choice?
Since investing is a long-term challenge, it’s crucial to make decisions with your head before your heart
Two financial giants that appear to hold different views on this topic are St James’s Place (SJP) and Vanguard. The latter has previously stated that emotion and investing go “hand in hand”, and noted that about 40% of the value that a financial adviser provides to a client is emotional.
Vanguard says: “After all, emotions often motivate us to save. Love for our families, a need for security and our hopes for the future are all powerful drivers.”
The largest provider of mutual funds acknowledges that emotions greatly influence our behaviour and comfort level when investing, deeming this influence “valuable”.
SJP disagrees, however, stating: “Emotions and rational decision making rarely go hand in hand. So, recognising your own emotional response to investing will mean better decisions and choices in the long run.”
‘Passion for what you do is powerful, but you invest with your head,’ says Liontrust’s James Dowey
Supporting this view, a survey conducted in 2017 by Hennick Wealth Management found 69% of men with a high income had regretted making an investment decision based on emotion or gut instinct.
Technical analysis
In the realm of investment strategy, technical analysis is clearly based on logic. This discipline serves as a compass for investors, guiding them through the financial markets by meticulously dissecting statistical trends culled from trading activity.
By scrutinising factors such as price movement and volume, technical analysis unveils hidden opportunities and empowers traders to make informed decisions amid the ever-evolving landscape of investment.
Still, certain investments align more naturally with either emotional or logical motivations. Environmental, social and governance investments are often seen as inherently emotional, encompassing both broad societal concerns and personal values.
So, should investors follow their head or their heart? And what should advisers keep in mind while speaking to clients?
Liontrust co-head of global innovation and lead fund manager James Dowey emphasises that emotions can play a part but ultimately one’s investments are driven by logic.
“Passion for what you do is powerful, but you invest with your head,” he says, cautioning against letting emotions guide investment decisions.
Two financial giants appear to hold different views on this topic: SJP and Vanguard
Dowey thinks passion is one of the most powerful attributes a person can possess. But, he says, passion and emotion do not guide an investor — rather, they push them.
James O’Connor, also a Liontrust fund manager, believes emotional investing can even be dangerous from a financial viewpoint.
“We are all human, so we need to make sure we do not get emotionally attached to companies, especially when they are performing badly.”
O’Connor acknowledges, however, that investing in something in which you truly believe often helps.
As Dragons’ Den star Deborah Meaden said at a recent adviser event: “We are living in quite a troubled world and I think we feel, as human beings, more fulfilled if we can feel like we are part of the solution rather than part of the problem.
Should investors prioritise return on investment or allow their emotional response to guide their choice?
“You can’t drop the ethical stuff because it will leave you feeling empty… I want to know, when I buy something, I bought it from people who are making the world better, not making the world worse.”
It’s an important point that goes beyond giving an investor a warm feeling. But we shouldn’t forget that, since investing is a long-term challenge, it’s crucial to make decisions with your head before your heart.
Darius McQuaid is reporter at Money Marketing
This article featured in the June 2024 edition of Money Marketing.
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Of course you should invest with your head. Emotion has no place in investing. The object is to make profits. This is where the Regulator. Government and other agencies are so wrong in force feeding ESG, SDR and other such extraneous impositions.