Heart and piggy bank

Matters of the Heart

“For where your treasure is, there your heart will be also.”

Luke 12:34

The keynote address of every graduation ceremony that I have ever attended can be generally summarized as “Follow your heart!”. This message is certainly wise and insightful council for the young graduates as well as for their family and friends in attendance. For example, when considering a vocational path, “follow your heart” makes good sense as you don’t want to be stuck in an unfulfilling career path. Likewise, when making decisions about educational, geographical, avocational, relational, and many other questions, it seems reasonable to follow one’s heart. However, when it comes to financial matters, “follow your heart” may not be the most prudent course. In fact, when it comes to things financial, a good rule might be to “listen to your heart” and then do the opposite!

The Bible contains hundreds of references to the heart. Interestingly, however, rather than being a source of direction, the Bible often times speaks of the heart itself needing to be directed and turned. Matthew 6:21 and Luke 12:34 both describe how the heart goes to where one’s treasure is kept. 2 Thessalonians 3:5 asks that the Lord may “direct your hearts to the love of God and to the steadfastness of Christ.” Further, Luke 1:17 describes “the spirit and power of Elijah to turn the hearts of the fathers to the children, and the disobedient to the wisdom of the just”. While there is no question of the importance the Bible places on matters of the heart, the heart itself might not be the best source of direction as it is in need of its own guidance. In fact, Jeremiah 17:9 cautions that “The heart is deceitful above all things, and desperately sick; who can understand it?”. Therefore, simply choosing to “follow your heart” might not be the wisest path.

Investors often rely on their heart as a source of direction for their decisions. They have a good “feeling” about the market or a specific stock. Or their “gut” may make them wary about the investment environment. Investors often panic when the stock market falls and become euphoric when stocks soar. However, historical evidence shows that investors’ sentiment is a very poor indicator of future market performance. In fact, many have come to view investor sentiment as a contrarian indicator for the market. The longest running (since 1987), most frequent (weekly) measure of investor sentiment comes from the American Association of Individual Investors (AAII). A 2013 report by AAII about its own sentiment survey concluded that “extraordinarily low levels of optimism have consistently preceded larger-than-average six- and 12-month gains in the S&P 500”. In the study of Behavioral Finance, this is a classic investor decision-making error as following one’s heart is a recipe for disaster when it comes to investing.

So, in summary, purposely direct your heart to the love of God and to the steadfastness of Christ. Follow it in those areas of life where it makes sense to do so. However, when it comes to investing . . . don’t listen to your heart!


 
Dr. Erik Davidson, CFA

Dr. Erik Davidson, CFA

Dr. Erik Davidson, CFA, is the Chief Economic Advisor for Inspire Investing. Previously, Dr. Davidson served as the Chief Investment Officer for Wells Fargo Private Bank, overseeing more than $200B in assets. Dr. Davidson holds a doctorate degree from the DePaul University’s Kellstadt Graduate School of Business with his research focus in Behavioral Finance.

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*Advisory Services are offered through CWM Advisors, LLC dba Inspire, a Registered Investment Adviser with the SEC. All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

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  1. […] know the right thing to do, but to do otherwise manifests itself when investing as well. Our piece, Matters of the Heart, discusses the pitfalls of emotion-based investing. The relatively new field of Behavioral Finance […]

  2. […] know the right thing to do, but to do otherwise manifests itself when investing as well. Our piece, Matters of the Heart, discusses the pitfalls of emotion-based investing. The relatively new field of Behavioral Finance […]

  3. […] know the right thing to do, but to do otherwise manifests itself when investing as well. Our piece, Matters of the Heart, discusses the pitfalls of emotion-based investing. The relatively new field of Behavioral Finance […]

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