The Way We Behave Around Money Is A Funny Old Thing

In an ideal world, when we invest money it would grow steadily at the same rate each year and at the end there would be a nice pot of money to do what we wanted with. This would look like the nice straight-line A in the picture below. No stress, no hassle, no worrying about “Will it be enough? What about Brexit/the Banking Crisis/Terrorism/Inflation or any other black hole?”

In an ideal world, when we invest money it would grow steadily at the same rate each year and at the end there would be a nice pot of money to do what we wanted with. This would look like the nice straight-line A in the picture below. No stress, no hassle, no worrying about “Will it be enough? What about Brexit/the Banking Crisis/Terrorism/Inflation or any other black hole?”

The reality is always different and the path most usually followed is the more wobbly journey B around that nice straight line. What governs the actual long-term return, however, is our behaviour.

The long-term average return of the stock market is generally considered to be 5% + inflation, but once we interfere and our behaviour gets involved and we try to “beat the market” a person’s average return over the long term is more like 2% + inflation.

We have this in-built fear that drives us to sell when everything has fallen in case we lose more – which means we make that loss a reality rather than just a blip on the way past. We then tend to gain in confidence when the economy and the stock market are going well and buy more on a rise.

As some of you may know, I got into Financial Planning via stockbroking and I have an abiding memory of a lady coming into our rather lovely offices in the West End of London in July 1999 with a large handbag full of money, the notes kind of cash rather than the cheque book kind of cash. She wanted to buy some shares in a technology company she had been looking at for the last few weeks because the price had gone up by 12% that morning and she didn’t want to miss out.

Fortunately for her, due to money laundering regulations, we couldn’t accept her bank notes and it meant she couldn’t buy the shares and the price dropped by nearly 30% two months later.

In no other shop would we behave like this. Imagine thinking “I know, I’ll pop into the Audi garage and see if they have put the prices up on that new Q7 this morning by 30% and I can buy one. In fact if they have, I’ll buy two.” We can apply the correct logic to this scenario, but our emotion gets in the way with investments.

We are far more anxious about losing money than anything else. If we see a pension or investment statement that shows a loss since the previous year we immediately want to sell the fund it’s invested in. Again, who would go into their favourite shop and see the perfect shoes/ sports car/handbag/motorbike (insert item of your dreams) hugely discounted and say no thank you I want to sell you the one I already own, or I will wait until the price increases again before I buy?

Facetious examples I know, but for some reason it is how we behave around investments. For me, the best thing I can do for my clients is to remind them of these flippant examples when there is a crisis because quite frankly the hardest thing is to do is to “throw good money after bad” when your pension or investments drop in value. It’s like buying in the sale though, it’s usually a good move.

Try and remember this blog when you next look at your pension statement and the value isn’t what you expect. If you would like to chat about investing or any other financial topics please feel free to contact me, Jessamy Walker at Brown Dog Financial Planning Ltd on 01488 682890.

We all know however that investments do go up and down and you may not get back what you put in in the first place and that you should buy an investment that you understand and suits you and what you personally are prepared to risk.

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