Thinking cash is king? Having no spare funds? Or misunderstanding risk? What’s your excuse for not investing in your future? Asks Jason Witcombe
People who make bad money and investment decisions can often rationalise them. Here are the most common excuses but there are plenty more. These arguments are often elaborate short-term excuses that we use to justify behaviour that often contradicts our own long-term interests.
1. “I just want to wait until things become clearer.”
It’s understandable to feel nervous about volatile markets but waiting for stockmarkets to become more “stable” before investing often results in missing the return that goes with the risk.
Investors are often guilty of “anchoring”, focusing too heavily on arbitrary targets such as the FTSE 100 breaking through 6,000 points or falling under 5,000 points, but this is an illogical thing to do.
“Many people think cash is risk free, but that simply is not true. After tax and inflation the real value of most cash savings is diminishing each year.”
The FTSE 100 figure today is the correct figure. It is the correct figure based on all the buying and selling decisions of all the millions of market participants around the world. If something unpredictable happens at the weekend, it will affect the stockmarket value on Monday but none of us can foresee that.
2. “I just can’t take the risk anymore.”
By focusing exclusively on the risk of losing money and paying a premium for safety, we can end up with insufficient funds to retire on. Avoiding risk also means missing the upside.
You need to be happy with the ups and downs that a portfolio will give you. Some people would be distraught with a 10 per cent loss and would pull the money out, never to invest again. Yet others are comfortable seeing investments go up or down 50 per cent in a year. Risk is a very personal thing and a lot depends on what the money is actually for and the timescales involved. If you are 25 and the money is going into a pension, you won’t be able to touch it for 30 years anyway. Even if you are quite a cautious person you will probably be happy to accept some ups and downs. Perhaps this risk with pensions is balanced by taking a cautious approach with other aspects of their finances – overpaying a mortgage for example.
Many people think cash is risk free, but that simply is not true. After tax and inflation the real value of most cash savings is diminishing each year. Over one year that’s not really a problem, but over a number a decades it can be a big risk to your financial security.
“If you don’t get into the discipline of saving early on, you will find it very difficult to later in life.”
3. “I want to live today. Tomorrow can look after itself.”
Unless you have very wealthy parents or win the lottery, tomorrow probably won’t look after itself. If you spend all of your income when you earn £50,000 p.a. you’ll probably find a way of spending it all when you get a pay rise to £75,000. That’s not meant as a criticism, it’s simply the way things generally work. If you don’t get into the discipline of saving early on, you will find it very difficult to later in life.
The state pension is very modest and the age at which you can draw it keeps increasing. The days of a job for life and a final salary pension at the end of it have long disappeared in the private sector and are being diluted in the public sector too. It is therefore up to us as individuals to plan for our own futures. We all need to be realistic about what our retirement might look like and we all should have a personalised plan to try to get there. Retirement doesn’t just need to be about pensions.
Most people can live for today and put money aside for the future. You just need to keep within your budget and accept that you can’t have everything.
4. “I don’t care about capital gain. I just need the income.”
Retired clients will often focus on what income their investments are likely to produce. Yield is an important part of total return and a high yield clearly sounds more attractive than a low one. However, by its nature this has to mean that something else is being sacrificed. For stocks, logically speaking this has to be the stock’s growth prospects given that more profit is being paid out instead of being reinvested into the business. For bonds, the higher the income the more at risk your capital is. Just because Greek government bonds pay a high yield doesn’t necessarily make them a good investment! Looking at total return, in the context of your personal financial goals, is a much more logical way of viewing portfolio construction. It can also be more tax-efficient too as it allows you to focus on both income tax and capital gains tax planning opportunities.
“Psychologists suggest that we blame external factors outside of our control. This is a dangerous approach.”
5. “I want to get some of those losses back.” or “But this stock/fund/strategy has been good to me.”
It’s human nature to be emotionally attached to past bets, even the losing ones. It’s important to make the distinction between a bet/punt and a sensible long-term investment strategy. Many of us will have a punt on a stock or an exotic investment idea from time to time – it may double and it may halve – but we need to recognise that it is a punt and treat any losses or gains accordingly. We shouldn’t become emotionally attached yet if a punt goes in our favour we will often take personal credit for this but if it goes wrong, psychologists suggest that we blame external factors outside of our control. This can be a dangerous approach.
Final thoughts
When it comes to personal finance, perhaps the most common excuse of all is “I’m too busy to think about this” and the reason might really be due to another common excuse which is “it’s too complicated”. Personal finance can be as simple or as complicated as you want it to be. The role of a good financial adviser is to make it be as simple as possible. Many aspects of personal finance can be put on “auto-pilot”, saving monthly into an ISA for example, which leaves more time and mental energy for areas where a bit of focused time and effort could make a big difference to your financial well-being.
Stop making excuses, find a financial adviser in your area today.
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