Andrew North CA ANZ | Financial Advisors | Chartered Accountants | Registered Tax Agents

The Emotion of Money

Human attitude towards wealth, savings and investment

For those that have never had money or have not been used to holding significant quantities of money it’s possible there may be something in the subconscious holding us back from making more. It’s almost as if money is a bad thing and getting more of it will be a really bad thing. It’s possible that these negative thoughts might be holding you back from getting more of it.

Traditional economic models always assume that people are rational decision makers who fully analyse data and act logically before they reach conscious decisions. However, behavioural economics disputes this and in some ways this relates to real people in the real world.

These differences are displayed acutely in people’s attitude towards wealth, savings and investment.

Why do humans pursue money?

The fundamental reason is because of what you can do with it. Money can’t buy you love or happiness or good health but they can buy you plenty of other things.

Here are 10 things most people seem to want to spend their money on.

Security. A home of your own with enough money in the bank to support you in the way you want to live, perhaps funds for an emergency and enough for you to live in retirement in a comfortable manner.

Comfort. Everybody wants a nice warm spacious house, a nice car, maybe some help with cleaning or maintenance, send children to a good school, afford quality medical care when you need it.

Luxuries. If you can afford it why not have an exotic holiday, enjoy fine wines, a decent meal in a restaurant, nice clothes and entertainment.

Mobility. Travel overseas in business class, have a nice car and tour around the country.

Status. Attend prestigious events and invite your friends, Access people and exclusive facilities and clubs, perhaps expanding your network of social activity.

Influence. The gift of giving creates a lot of attention from all sorts of people and this gives you the feeling of being wanted and appreciated and increases your influence on others.

Freedom. Being independent of employers, bosses, creditors, clients and customers. Not worrying about the bank, mortgage repayments, the calendar and the schedule of others. Knowing that you won’t have to be a burden on your children.

Leisure. You will have time to do the things that you want to do, when you want to do them and where you want to do them. This is your chance to meet who you want when you want.

Popularity. Being able to entertain friends and invite people over regularly and provide them with a pleasant atmosphere and entertainment. Being the recipient of reciprocal invitations invitations is always pleasant.

Philanthropy. To be able to make regular and substantial donations increases your self-satisfaction and a feeling of helping people, supporting organisations and further in a worthy cause.

Whether it’s some or all of these things that you’d like more of, everybody needs to learn how to go about generating greater wealth and this may mean studying the attributes of wealthy people and see what differentiates them from the not so wealthy.

What are the principles and behaviours of those with money and wealth?

Identifying what these are and copying them may not be everything you desire and may not even guarantee a happy life. All we can say is that it’s a good start to building on your happiness.

A foundation theory of the psychology of money is prospect theory. Academics have conducted multiple research projects and real-life examples of studies to show that investors dislike losses about twice as much as they like gains of the same magnitude. Traditional economic theory would suggest this should not happen. Engaging a professional for wealth management through a Financial Adviser or Financial Planner can play a vital role. Consider carefully Your Options at Retirement.

There is no doubt you need to put more effort into making money than you do spending it. It’s just like a sport where a champion sportsman needs to work harder and longer and get better to beat the competition, or it would be impossible to reach the desired goal.

The theory of behavioural finance maintains that our wealth, emotions and attitudes have a big influence on our investment behaviour. Too often when faced with a big decision on whether to buy or sell an investment many people ignore fundamental analysis and allow their emotions to take over and they end up making poor financial decisions as a result.

Overcoming the heart with the head

A good investment strategy often means following your head rather than your heart. It is important to understand and recognise the impact of emotions on financial decisions and avoid making the wrong choices, for the wrong reasons. This is where a good Financial Adviser or Financial Planner can play a vital role in Building Your Retirement Funds.

Loss aversion

For do-it-yourself investors the most common mistake arises from loss aversion. Nobody wants to accept having made a loss on an investment, not only is this financially painful but also indicates that we got it wrong. But what we expected to happen didn’t happen. In fact it went the other way. The temptation therein is to hold on to the bad investment in the hope of being proven correct in the long run. It could still pay off if you wait long enough. But this can also expose you to more losses if the hoped-for recovery never happens. Without understanding your tolerance to risk, which a qualified Financial Planner can assist with, the investor has no concept of whether the situation is abnormal or in fact a normal market variance based on a measure of volatility. Refer to Investment Strategies in Retirement.

Risk aversion

Another related financial behaviour is risk aversion. This is an unwillingness to take risks. This can also have a detrimental effect to your investment portfolio as it means investors keep too much of their wealth in under performing investments, for example cash.

While this may appear to represent risk-free returns, cash generally fails to keep up with inflation. It could also mean that long-term investors fail to take advantage of superior long-term returns of higher risk investments.

Failing to keep an eye on your investments

A key finding here is failing to keep an eye on your investments and not realising that something has changed and the investment is no longer as good as it once was. This is where a good Financial Adviser or Financial Planner can play a vital role in providing ongoing investment advice.For those thinking of Changing Your Financial Planner we have a useful guide.

Panic selling

Another classic problem for the risk averse investor is panic selling. Financial markets can be volatile and selling on every small correction can incur transaction costs and many investors risk missing out on a market recovery. Taking a longer-term view is often a better outcome than reacting to every short-term movement.

Overconfidence

Finally, investors should be aware of overconfidence and placing too much faith in their own abilities as an investor. A diversified portfolio spread across a range of investments in various classes should provide more protection against volatility smooth long term returns. Refer to Investment Strategies in Retirement.

Of course you need to know very well exactly what you want, why you want it, how you are going to get it, and what you’re going to do with it once you get it.

Anybody can be wealthy, you just need to apply yourself

Money doesn’t discriminate on the basis of sex, colour or race. It doesn’t matter what class you are or what you parents did or even what you think you are. Every single day is a new day and no matter what you did yesterday today begins a new and you have the same rights and opportunities everywhere else has to make as much money as you want. The only thing that can hold you back is yourself and your money myths.

By | 2017-11-18T11:30:31+00:00 November 7th, 2017|Uncategorized|