Money. Love it or hate it — it’s an integral part of our lives. It can help feed & clothe us, pay our taxes, allow us to explore the world…and buy overpriced coffee. It really is quite a medium of exchange and truly does make the world go round, economically speaking. As impactful as it may be, it can also have hugely devastating effects on people’s lives.
In my job, I do my best to help people manage their wealth for the long term and steer them away from fear and greed, seeing as money can easily cast an overwhelming grip on someone’s mentality and spending habits.
Many people turn their savings towards the financial markets and hope their investments can help generate wealth for future needs. At the same time, it is far too common I see people wrapped up in market noise and enticed by short-term gains; in these areas, the psychological effects and decisions made with regards to wealth can produce detrimental effects in the long run.
Morgan Housel tackles this very issue when it comes to investing in his aptly named paper “The Psychology of Money“; it is a thorough and in-depth exploration of the way people behave, notably “bad” behaviour when it comes to managing wealth.
Allow me here to highlight some major points and key takeaways for you to digest and ponder when it comes to managing your money — but please do check out the entire article above for an insightful read!
So, without further ado, here are 7 thoughts to consider when approaching your investments:
1) There’s No Crystal Ball
You cannot predict the future, especially in finance; an overreliance on past data can set unrealistic expectations.
They say “there is no crystal ball” when it comes to your investments, and this is very much true. Yes, it is enticing and important to look at history, but unfortunately, finance is not one area where the study of the past alone can clearly help determine the best route for the future.
As Housel puts it, “kidneys operate the same way in 2018 as they did in 1018“, but that’s not the same for the financial markets — it’s constantly evolving and what has worked for investors in the past might not work going forward.
When it comes to your wealth, we should consider more “general” trends that work, especially when investing for the long term.
For me, that’s the understanding that starting your savings earlier and putting it away in the financial markets over time (10 years plus) should deliver you ample returns from your investments. Adages like time in the market, not market timing ring ever more true in this case.
Investor Takeaway: For your long-term goals, simply get started now and lock it away over the years for when you need it most — retirement is often the dominant goal.
2) Staying Invested Is Key
Pessimism in the financial markets sparks urgency and scares investors into taking action, often having a negative impact on their investments.
Long-term investing is literally sticking to it for the long haul. That said, it is very easy to be scared by market news or threats of “recession” in the short term, enticing investors to cash out or make rash decisions. Really, it was never going to be a completely smooth ride.
For reference, the markets are generally up for 3 out of every 4 years, meaning sometimes you may have a negative year of returns. It is vital to remember that if we are invested over the long term it is wise to remain invested, even when things are down, to reap the benefits and not miss out on the upswings.
As humans, “we’ve evolved to treat threats as more urgent than opportunities“, yet carrying this mindset in the investment sphere leads to people cashing out too early out of fear. Instead, it is prudent to take a more optimistic stance to stay the course and enjoy the ride, even with its bumps.
Investor Takeaway: Stay the course, remain optimistic but realistic — it can’t always be good in the short term, so do not allow complacency to hurt your long-term goals.
3) Compound is King
Understanding the effect of compounding will help you save consistently and remain invested.
Compound interest can be described as “interest on interest” and it a hugely powerful tool for your savings, especially over the long run. Starting early and giving time allows compounding to generate vast returns from your consistent savings — check out more here about the benefits of saving early.
Investor Takeaway: Start early, save consistently and allow compounding to make your total returns soar over the long term — never interrupt it unnecessarily.
4) Allow Room For Error
No plan is foolproof, nor perfect — understanding this will keep you physically and mentally invested in the way that fits you best.
Enduring hardships when times in the markets aren’t looking so great is important for the success of your overall plan. At the same time, it is crucial that you are physically and mentally able to handle losses—can you physically afford to absorb losses along the way and remain invested? Can you mentally handle the decisions you have made if they don’t go as planned?
Investor Takeaway: Be prepared to lose, physically and mentally, but understand it is a very natural part of the long-term gain.
5) Don’t Follow The Crowd
Everyone has their own financial game that they are playing—don’t be a sheep and follow what others are doing because it’s a “hot topic”.
Your goals and actions should reflect your own needs and desires. Learning from others is important, but understanding that others’ intentions may be completely different to yours will keep you from getting caught in the wrong “game” and ending up lost.
Understanding your own personal risk and time is paramount from the very beginning of your savings & investments journey. Every individual has different personal needs and attitude to risk, thus your plan should be tailored to fulfil you.
Yes, another investor may tell you about their huge return on a recent investment, but they may be able to handle losing just as much with the risks involved to have achieved that gain, or simply got in at the right time.
Don’t blindly follow what’s “hot” at the moment, as likely you’re too late anyway and the associated risks are higher than normal. Long-term strategies are often nothing spectacular to look at!
Investor Takeaway: Stick to your guns and make your plan truly your own, without the influence of what anyone else is doing — everyone’s needs are different, even if our goals are similar.
6) Don’t Let Emotions Interfere
Money is emotional and sensitive, therefore it can easily threat your wellbeing if you allow it to.
Financial “entertainment” has the ability to spark intense reaction and news of little importance can overwhelm investors into making rash decisions; it can dangerously affect you on an emotional and direct level.
Often, this is where an automated regular savings plan and having an adviser can help take the emotional side of investing away from you. Fear and Greed are two destructive forces when it comes to investments, so being able to control them won’t harm your wealth.
Yes, I get it — high risk and reward are exciting! But, be sure to ask yourself — can you afford or handle losing it? Do you need to take the extra risk? Try and keep passionate emotions out of your investments and stay focused.
Again, remember to understand that losses along the way are a very natural part of investing over the long term.
Investor Takeaway: Set your strategy and stick to it—don’t let emotions overwhelm you and realise that modest, successful investing can look boring, which is perfectly fine!
7) Remember Your Long-Term View, Always!
Short-term plunges, either wins or losses, will rarely impact your overall long-term gain.
Seems we love to expect that after a heavy win or loss it will continue to happen again; we like to believe what just happened is going to continue, as we tend to like patterns and have shorter-term memories. But, most of the time, that is rarely the case.
When it comes to managing your money, these events can throw you off your game and make you forget your long-term goals, owing to “recency bias”.
It is tormenting when our minds stress about how we will be affected by recent happenings, but in those times it is ever more crucial to remember the long-term plan and allow your investments to grow without unnecessary interruption.
This is where understanding the foundation of your financial plan and consistently keeping a focus on the long-term goal is imperative, helping you remain calm and avoid making detrimental rash decisions:
Investor Takeaway: Don’t allow short-term market events to drastically change your solid long-term strategy, ensuring you keep your focus where it should be.
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Humans are fascinating creatures who make weird and wonderful decisions, and it is no different to how emotional we can get about our money. However, for long-term investors, it is important to keep grounded and remember not to let these emotions make drastic and often negatively impacting decisions.
To sum up his own findings, Housel concludes:
The earlier we understand how savings & investments work over the long-term, not only the easier we can sleep at night but also the greater returns we may yield for when we need it most.
So, what do you think?
Are you able to keep your emotions at bay when it comes to your savings & investments?
If you think you might need a little help, drop me an email at thomas@absolutefsl.com and we can figure it out together
