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By Julie Cazzin with John De Goey

Q: What is emotional intelligence and how does it affect retirement planning and investing returns? — Mirella

FP Answers: Ever since Daniel Goleman’s Emotional Intelligence book was released in 2005, people have been talking about the term as a previously overlooked approach to human perception. Often shortened to EI, and sometimes called emotional quotient (EQ), it argues that some people are just better at reading the room and being empathetic.

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We all know people who are generally more inclined toward situational awareness. That’s EQ. Some observers have gone so far as to suggest that EQ is more important than IQ as a determinant of success in life. The book’s promotional notes suggest the concept may “redefine what it means to be smart.”

Everyone knows that the ability to control emotions in finance is essential. What is now coming to the fore is that the ability to understand, interpret and respond to your emotions — and those of others — is a critical component of investing success.

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The burgeoning field of behavioural economics is where the rubber hits the road. Depending on how you keep score, there are at least three Nobel laureates (Daniel Kahneman, Robert Shiller and Richard Thaler) who owe much of their reputations to their work in helping people understand the impacts and consequences of how we behave. Their research and insights are also forms of emotional intelligence.

It has often been suggested that good investing is simple, but not easy. What that means is that the concept is intellectually simple. All you really have to do is buy a broadly diversified, low-cost basket of securities that meets your risk tolerance and capacity and hold it for a long time, remembering to rebalance from time to time as markets move and new money becomes available.

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The problem, despite the intellectual simplicity, is the emotional challenge that accompanies it. It’s not easy.

As you apply the EQ concepts to retirement planning and investment returns, examples abound where your focus and discipline will be challenged, even if you know perfectly well what the industry would prescribe.

The most obvious examples revolve around how you might react if there is a severe and/or prolonged market downturn. In that scenario, considerations include: an awareness of your personal limitations and tendencies; the degree of self-confidence and self-assurance you have; your ability to let go of mistakes; and your ability to accept and embrace change.

It should be obvious that your ability to manage emotions in difficult situations is paramount. One thing that I have personally been concerned about is something I call ‘bullshift’ — that is, the financial services industry’s tendency to shift your attention to make you feel bullish.

Bullshift can magnify the harm done by a lapse of emotional intelligence if you’re not careful. I fear that the industry has failed to do enough to prepare ordinary investors for a prolonged and protracted bear market.

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Sure, the industry tells people to take a long-term view, but how many people are aware that, for example, the Nikkei 225 index in Tokyo finally hit a new all-time high in 2024 and that the previous high was set at the end of 1989? Just how long is long term, anyway?

I fear that people are unduly prone to optimism bias, the viewpoint that while bad things happen all the time, people become complacent and act as though those bad things won’t happen to them personally.

Without becoming an outright pessimist, it would likely serve people well to take an inventory of how long they could honestly hold out if markets were to drop by, say, 50 per cent, thereby causing a balanced portfolio to drop by, say, 30 per cent.

Many Canadians who insist they have the emotional intelligence and steely resolve that go with a long-term mindset might lose their nerve and succumb to making a rash decision if they encounter such a turn of events.

In some instances, that’s because they don’t have the emotional constitution to hold out. In others, it’s because they simply miscalculated how much they would need (and for how long) before things normalized.

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This is especially critical for retirees, because they are no longer able to add savings to their portfolios and buy the dip the way they might have when they were younger and still in the workforce. The Greeks had a saying: “Know thyself.” While centuries old, the advice remains valuable to this day. That kind of self-awareness is often more emotional than it is intellectual.

John De Goey is a portfolio manager at Designed Securities Ltd. (DSL). The views expressed are not necessarily shared by DSL.

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