People and money are odd bedfellows. I’ve advised investors for over 15 years but remain fascinated by the often curious relationship we have with our finances.
My wife and I recently made the short trip from Wimbledon, South West London to Surrey for a friend’s wedding and we both felt it was one of the best we’d been to in a long time. We had a fantastic day (probably too good judging by next day’s heavy head) and met some really lovely people but one in particular stood out in my mind.
Here was a man in his early 60’s; friendly, intelligent, very astute and he spoke eloquently about the world and current affairs. He explained he was ready for retirement and was in the process of handing over the reigns of his business to his children, giving him and his wife more opportunity to travel and improve his golf handicap. I mentioned I was an Independent Financial Adviser – which seemed to interest him – and he went on to explain he had some upcoming financial decisions to make. He then hit me with a question I‘ve heard many times:
“The problem is: how are you meant to invest your money these days?”
I was somewhat taken aback by this. It’s the sort of question I usually hear from those less experienced or less confident dealing with money – this chap had struck me as someone who’d have all his financial ducks in a row. As he spoke about a world full of risk, I began to realise he’d fallen into a trap many people find themselves in.
He explained how he’d kept much of his money in savings accounts over the last ten or so years but sometimes dabbled in residential and commercial property. When asked if this had been a successful strategy, he shrugged his shoulders and candidly admitted he wasn’t really sure. Some of the property portfolio had done reasonably well but had been expensive and a bit of a hassle, while his savings accounts had earned very little interest.
When asked about diversifying into stocks and shares or bond markets, the colour in his face visibly began to drain! From what he’d read and heard, stock markets had been in a terrible state for many years and he’d consciously avoided them – aside from the investment funds that made up his private pension (which had according to him had made a reasonably healthy return over the previous five years).
At this point, he took a big gulp of champagne and braced himself for the inevitable lecture on annual stock market returns since 1923. Noticing my wife itching for that dance I’d promised her and it being a social occasion and all, I kept my response light and brief:
“I’m a big believer in putting eggs in different baskets and taking a long-term view”.
Not life changing I’ll admit, but he nodded in mild agreement, we swapped business cards and off I went to do my best John Travolta impression.
What this brief encounter illustrated to me most is how our perception of risk – even the most learned, successful and cerebral – is so heavily influenced by all the noise and hearsay that surrounds us.
Yes, markets can be volatile but does that mean you shouldn’t dip your toe in the water? And pensions aren’t perfect but surely they’ve been around for so long they must have some worthwhile advantages? Property has been a great long-term investment but should you tie up most of what you have in one market?
The rational mind knows the right answers to these questions. Emotionally, however, the story is very different, but why is this?
We all know that contemporary “news” is a carefully crafted form of entertainment and, like any other show, it needs to attract viewers, readership, advertising and Facebook ‘likes’. The content and the way it’s packaged can be incredibly powerful. Much of it’s designed to induce an emotional response (rarely joy) and it’s very difficult for us to process this in a rational manner.
As far as possible, financial decisions need to be made dispassionately but this is easier said than done. As much as we might not like to admit it, the reality is that many of our decisions are emotionally driven. Our emotions are shaped by an endless barrage of information, images and opinion. With so much supposedly wrong in the world, it’s no wonder many people procrastinate and do nothing.
Begin at the End
Next time you’re making investment decisions, try to start with the end in mind – work out what’s important and precisely what you’re trying to achieve. By doing this, you can broadly determine the level of return you need, which in turn should help identify an investment approach most likely to do the job.
It doesn’t end there though. To manage your feelings, expectations and reduce the risk of knee-jerk reactions in future, you need to identify your emotional capacity for loss i.e. the threshold at which you would become so distraught about losses that you’d feel compelled to sell your investment.
These are typical conversations I have with clients during the financial planning and advice process – it helps put matters into context and separates investment feelings from investment fact.
Advice for a Happy Life
Back to the happy day, it dawned on me that managing money is a lot like being married. It’s important to:
1. Try to Switch Off
Communication and staying informed is important. But to make good decisions, it’s sometimes best to make sense of things in a quiet place without all the noise.
2. Avoid Playing the Field
Jumping in and out of safe and risky assets and trying to time markets is a fool’s game. It increases your chances of losing money.
3. Freshen Things Up
Try to identify where inertia, laziness or fear might be stopping you from achieving your goals. Review your strategy and holdings on a regular basis and if they’re not working, do something different!
4. Forgive & Forget
There’s no such thing as perfection and you can’t realistically expect everything to go your way the whole time. Your misjudgments and losses are in the past – draw a line, decide how best to repair the damage and move forward.
Thanks for reading.