By Jeanette Marais, CEO of Momentum Investments
None of us could have ever expected 2020 to go the way it did. It was an intense ride of emotions ranging from fear and anger, to confusion to sadness.
To make matters worse, and even more emotional, the COVID-19 pandemic left many industries in tatters and people scrambled to keep their families’ financial heads above water.
Studies by Momentum Investments reveal that emotions like fear and greed influence the decision-making of even the most astute investors.
Our research found that the effects of fear and greed on investment decisions and investor portfolio returns are often reflected in the form of a ‘behaviour tax’. A behaviour tax is a lower investment return as a result of an investor’s behaviour, like hastily switching funds because markets are falling, compared to portfolios which are bought and held. This explains why following our gut instincts when investing often does not serve us well.
I often see how this behaviour also impacts our personal finances. In fact, even more so, because emotions become amplified when the survival of your family, the happiness of your loved ones and your personal future become part of the decision-making process.
As creatures ruled by emotions, we all need to accept the fact that our finances are tied to our emotions.
For instance, fear and greed both represent strong emotions that people link to perceptions of danger and opportunity. These emotions – backed by the powerful reward and stress chemicals of dopamine and cortisol – are ever-present in today’s modern society. They challenge the normal representation of rationality in decision-making, even when it comes to investing.
Studies by Momentum Investments reveal that emotions like fear and greed influence the decision-making of even the most astute investors.
Let’s take, for instance, the most significant investment that any family will make in their lifetime: buying a house. Just think about the range of emotions involved in this critical financial decision. You may be filled with nostalgia about the house that you grew up in, fuelling the expectation that this is the life you want for your family – regardless of the financial impact this may have down the line or in today’s volatile economy.
Your emotions will convince you that a big house will make you happy. You could then end up with more house than you can afford because your emotions convinced you that this is the best decision. But the truth is, if you really think about it, you could probably be happy in a much smaller house.
That’s nostalgia, but what about worry? Where you cash out your investments because you lost your job.
What about jealousy? Where your neighbours’ fancy new car makes you believe you deserve the same.
How about regret? Where you are too busy living in the fear of your past mistakes, causing you to be scared of overcoming challenges and changing your situation.
What about just plain old feeling of being overwhelmed? This may resonate with many people given the impact 2020 has had on us and the uncertain and unpredictable future that is the rest of 2021 and beyond. This can lead to all sorts of emotional decisions that may or may not be in the best interest of your client’s personal financial goals.
The good news is that we can control our emotions. When it comes to emotions, it is the support of our families and partners that keep us tethered to reason. We need to rely on each other to help us realise when we are letting our emotions get the best of us.
We believe in the value of financial advice and the importance of professional guidance to provide an objective analysis of a clients’ financial situation and introduce them to views and facts that aren’t based on emotions. By using machine-learning techniques, we have identified client behavioural patterns during market cycles. From the ‘avoiders’, who don’t take enough investment risk over time, to the ‘assertives’, who take too much risk and can be overconfident, we can give personal insights to you about your clients’ financial personalities and likely investment behaviour along their journey.
We believe in the value of financial advice and the importance of professional guidance to provide an objective analysis of a clients’ financial situation and introduce them to views and facts that aren’t based on emotions.
In the end, greed, fear, jealousy, pride and overwhelming stress will always be a part of us. The trick is not to let these emotions lead us to financial ruin.
You play a key role as financial coaches to your clients. In this role, you help your clients reduce the effect of their own potentially destructive financial decisions or ways and teach them about biases present in decision making.
We can provide you with the investment management services and solutions so you can focus on what is important to you and your clients – providing them with informed and thoughtful advice to keep them on track to achieving their personal financial goals.
