Ep 123 - The Damage That Emotions Have On Investing

Hey, everybody. Flip and Danny here, founders of the Freedom Real Estate Group family of companies. And welcome to another episode of our.

Podcast called Freedom through Passive Income.

That's right. And today's episode is called the Damage that Emotions have on Investing.

Yes. And we referred to this in a previous episode. And I said, if you're listening to this one, you better go watch the emotion 1.

Better go watch that one.

So we're going to start off with the 4040 story that we've referred to and talked about probably three or four times in the series of this podcast episode. And it was Dan Fleshman at one of our Mastermind events. And he was talking about how he came up with the 40, 40, 20. And it was because he was throwing money into what he would call the 20% shot at glory type investment. And he even. There was an article, I think, written about it, and it started to tank and he got emotional and pulled his money out right before and it skyrocketed. And he just thought, man, why did I do that? Why did I? You know, And. And he tells the story better. And I don't even know if it's 100% accurate, just the summary that I just did. But it was the story that brought him to, I should have just left my money alone. And it brought him to describing this 40, 40, 20 of saying, I want my 40% here, 40% here, and 20%, I'm just gonna light it on fire. And that's not his words, but we use it all the time. We light it on fire, and that is our shot at glory money. But we're gonna leave it alone. And now I feel good about leaving it alone because I took the time to define what that was and what I felt comfortable with instead, where he didn't have. He hadn't defined that yet for himself. And he got nervous and emotional and pulled it out. And if he would not have pulled it out, he would have made a lot of money from it. So that's what this episode is really about. And that's the story that I wanted to introduce it because we've told it already. And this is a guy who, man, he's very, very successful. So we tend to listen to very, very successful people. So I'll let you share the two studies that we read about yesterday.

Right? And so. And real quick, about the 40, 40, 20. I keep getting 20. I've been talking amongst myself and I think I need to get more than 20.

No, no.

Any day now, it's going to skyrocket. And it's going to go back to what I put in. So the two case studies done over a 20 year period, the S&P 500 index averaged 6 to 7.7%. So 6 to 7.7. Right. The average investor returns was 4.25 to 4.79.

So there's something really important about what he just said. There were two separate case studies. They were done over different periods of time. Different 20. Both of them were 20 year studies, but different years. Right. And so what was the S&P 500 average?

6 to 7.7.

Okay. So that's the return that it got over. The 1 was 6, 1 was 7.7. And then the average investor, what did.

They make for four and a quarter or 4.79.

Okay, so the question everybody should be asking right now is why? Why did the average investor make less in that period of time than the actual S&P 500? What was it? Flippy Flip.

Because they were emotional.

Yes. Because they invest when things are going up and they pull their money out when things are going down. Exactly the story that Dan told us when he explained the 40, 4020 rule.

Yeah. And so our emotions, well, they do a lot of things, but they do cause us to overreact during times of uncertainty. Like, oh, it's going up, it's going to go down, it's going to go down. I got to take it out now before I lose any money. And then it just keeps going up. And, and this is definitely affects us, especially the older we get.

Yes.

And it's one thing that, plus once we started doing real estate investing, the first couple of properties we. I know I got a little emotional like that's a sweet looking house. I want to get that one. Not. It made a lot of money. It looked, it looked nice. Yeah, I wanted it because it looked nice. I was emotional about this property. Now I didn't care about what, you know, what the numbers were.

Right. Yeah. So reality is, if you are investing for the long term, that is your goals and the bucket of money that you're investing into whatever opportunity it is, if it's meant to be long term, then it's important that your mindset sits that way. Because this example was meant to show you everybody who did not get emotional about those investments would have made a higher return if they would have just left it there. If it was, if it was meant to be long term anyway, just leave it. Because if you look at the history, we all know it goes like this. So just be okay with it and we Talked about boring. And consistency equals wealth on one of our episodes. And it was meant to say, you've got a budget. You know, these are the boring things. Just $100, $100, $100,000, $100,000. Be consistent and ride the waves. Who cares? Leave it alone. If that was the goal. A portion of your money can be put in different things if you need it for liquidity or anything like that, of course. But just cool jets.

Cool your jets.

Cool your jets.

Yeah. So it's better to put your money in a illiquid investment, which I also.

Illiquid.

I like to call those solid. We're solid. Yeah, we're solid investments. Because you can't pull out that money.

Yes.

You know, it's. And therefore, it prevents you from making emotional decisions that can eventually hurt you long term.

Yeah.

You know, so you can't touch your money for five years or whatever it is, and therefore you can't do anything about it.

Yeah. It's almost your backstop. Right. Because you just said, I know I'm an emotional person. I know that. I'm just gonna do exactly what they just said. I'm pull it out and I'm going to reinvest and I'm going to get all emotional. I'll be looking at my phone all the time and trying to see where my. But if I just put it in this investment opportunity over here that says it's making X, that has the potential to make X, and it's for five years and I'm not allowed to touch it. Well, now it's out of mind. Right. Set it and forget it. I did it. I don't have the option to pull it out. And you're going to get a higher return as a result. Right. Because you force yourself into cooling your jets.

Yep. And when we first started in real estate in 2008, after we got through that, that eight or nine months of us trying to be realtors, we learned our lesson. But when we went into real estate investing, a very good friend of ours came into our town and was doing auctions on some apartments, and he asked us if we wanted to help. And I said, absolutely, of course. And over the period of the two weeks of getting ready for everything, he looked at me and he said this quote, which I don't even think you knew this, but he said this quote. He goes, you need to be greedy when others are fearful and fearful when others are greedy. And I'm like, wow, that's brilliant. He goes, some other guy said that but, you know, you'll have to look that up. Which, of course, later on, I found out it was that Buffet fella.

Yeah.

But anytime you can walk around and quote Warren Buffett.

That's right.

But when he said it, I thought, well, I mean, first of all, this man was. He's a genius. So I just thought it was something he just, you know, pulled out of his. You know what. But anyway, and that's still true. It's true every day. Be greedy when others are fearful, and fearful when others are greedy.

Yeah, it's a good line to live by.

Yep. Well, we hope you enjoyed this episode. Make sure you're heading on down to freedomcapitalinvestments.com to join our investor club. We also have our groups over on Facebook and LinkedIn. Make sure you're hanging out with the gang and those social media platforms. Yeah, but make sure you hit the subscribe button if you're watching on YouTube. But we hope you enjoyed this episode. And we like to end all of our episodes with invest Smart, Live Happy.

Bye, everybody.

Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice. Opinions and information on this show are not guaranteed. All investment strategies have the potential for profit or loss, y'.

All.

Sam.