For the final blog of the year, I was going to attempt to write about the highs, lows and humbling lessons learned from the last 12 months.
But to be honest, I wouldn’t know where to start. And who wants to dwell on the events of 2020 right now anyway??
Instead, we’ll focus on the future and, in particular, one thing that might help you freshen up your financial plans in the new year.
At some point in the construction of your financial masterplan, you’ll most likely need to make decisions about the financial products that will best serve your long-term plan. These might typically be pensions, ISAs, investment funds, bonds and platforms.
If you’ve been pretty diligent in the past, you may already have squirrelled money away in such products. Whilst saving is generally a good thing, it’s also where financial planning can begin to get a bit sticky.
Stick or twist?
I should start by saying there is no such thing as “best pension plan” or “best ISA account”. To some degree, these things are much of a muchness but there can often be very good reasons for transferring your money from one financial product to another (more on that later).
But it’s unerringly common for people to resist making changes to their financial arrangements – even when it’s clearly in their best interests to do so.
Behavioural studies have shown that we often place a higher value on something we already own than the value we would place on that same thing if we did not own it.
This is known as the Endowment Effect.
Many of us experience this when it comes to moving home. Your initial valuation of your property is almost always higher than other properties of an equal standard.
Why? Because it’s not just a property, it’s your home. It means and represents a lot more to you than it does anyone else and so you value it higher.
But there’s much more than just the ownership of something that can skew our thinking:
Loss aversion: we’re programmed to avoid the painful feelings of regret that occur when we experience a loss. So when making decisions that might involve change, the fear of making a bad decision and the subsequent remorseful feelings can easily outweigh any obvious benefit.
Familiarity bias: Apple products are nice and shiny but they’re expensive and tire out very quickly.
In my mind, I know there are more reliable and cost-effective alternatives but I continue to buy Apple products because I’m familiar with them and feel safe with them. Of course, this makes no rational sense but the perceived sense of safety I feel is very powerful.
I see this quite a lot with people who have frozen pensions with previous employers. Though moving these to a personal pension can offer someone more control, people sometimes feel compelled to stay with the employer scheme. It feels like the safer option when in fact the opposite is often true.
Status Quo Bias: choosing to change your current affairs in some way requires mental investment, potential stress and loss, so our emotions can convince us that the best (easiest) thing to do is to simply leave things as they are.
This partly explains why people stay in miserable jobs or relationships longer than they should!
Utility, not luxury
Financial products aren’t luxury items – they simply need to do a job efficiently.
At the very least, they need to be transparent, offer reasonable features/options at fair cost and have the maximum level regulatory protection (good administration support is also high on my wish list).
Anything more is a bonus (or just good marketing).
What’s more, it’s easy to be seduced into believing your old pension or investment fund has done well for you simply because it’s grown in value over time.
But when you compare performance against objective benchmarks (your adviser should be doing this for you), it’s not uncommon to find that your fund may have under-performed.
A combination of high charges and a limited range of investment options are the common culprits, and so are as good a reason as any to consider transferring to another product provider.
And with pensions in particular, older plans often don’t always provide a full range of ways to draw from your pension fund as you approach retirement. This means you might not be able to access your money as flexibly as you’d like.
One caveat to all of this is that some older products contain unique and valuable guarantees. These are becoming increasingly rare but it’s still best to check before transferring existing products elsewhere.
Out with the old, in with the new?
It’s not easy to recognise when your biases are dominating rational thinking when looking at what to do with pensions, investments or shares you’ve cherished for many years (yes, these things can carry sentimental value for people).
But it’s important that you try.
Restructuring your plans can help your money grow faster and more importantly help you achieve your goals sooner.
If you make only one financial resolution for 2021, it should be to get in touch with us for an objective view on whether your financial plans are doing their job as efficiently as possible.
Wishing you all the very best for the coming year. Things can only get better from here.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.