There are plenty of reasons why your investments could become entangled with your emotions. Stock market highs and lows can unearth hardwired biases, while the economic pressures of the cost of living crisis and rising bills might put a strain on your relationships.
In February 2022, figures published in the Independent suggested that 62% of people who admit to disagreements with their partner argue about money.
Recent research from Aviva, meanwhile, finds that 38% of people in a relationship admit to “financial infidelity” – having secret accounts or “money stashed away” and kept hidden from their partner.
Money is an emotive subject but keeping emotion out of your investments is key to achieving your long-term goals.
Keep reading to find out how you can master the art of unemotional investing.
1. Focus on your long-term goal and avoid tracking the stock market daily
Despite the war in Ukraine, soaring energy bills at home, and a rising cost of borrowing, the FTSE 100 has been making headlines for all the right reasons so far in 2023.
On 31 January, the International Monetary Fund (IMF) forecast that the UK would be the only major world economy to shrink in 2023. Less than a month later, the FTSE 100 topped 8,000 points for the first time in its history.
This highlights a simple investing fact: the stock market is not the economy.
While the economy looks at long-term prospects – through unemployment rates and consumer spending, for example – the stock market rises and falls daily in line with investor confidence.
Your investments are a long-term proposition, so be sure to focus on your goals. Ignore the noise and avoid the trend-chasing that can occur if you keep too close an eye on your investments.
2. Be wary of trend-chasing and other emotional financial biases
It’s all too easy to keep a daily watch on your investments but this can be dangerous. It can lead to a herd mentality – or trend-chasing bias – that causes you to follow the crowd in search of quick returns. It’s just one of several potential biases that could affect your investments.
Herd mentality
There is safety in numbers, so if you begin to worry about your investments, it’s only natural to see what other investors are doing. But remember that chasing trends is never the right option.
Your investment strategy is based on your timescales, attitudes to risk, and personal goals.
Adopting the strategies of fellow investors with different goals and risk profiles could severely hurt your fund, so stay focused on yourself.
Familiarity bias
You’ll have often read that past performance is no indicator of future success.
You might favour a certain asset class, sector, or geographical region that you are familiar with – and that has performed well previously. But there is no guarantee that this investment will continue to perform.
Not only that, but you could be missing out on better opportunities elsewhere.
Loss aversion
As we have already said, money is emotive. That’s especially the case where a loss of money is concerned.
Loss aversion is based on the human preference for avoiding losses over making equivalent gains. To put it another way, the loss of £1,000 hurts much more – and stays with us longer – than the positive feeling attached to gaining £1,000.
Becoming emotional about perceived losses could make you too risk-averse, or mean you avoid selling falling stock in the hope that doing so will prevent the loss from becoming real.
3. Communicate honestly and openly about money to banish the taboo
Recent research has found that 26% of couples argue about money at least once a week. For 5% of couples, arguments are daily. More worryingly, the frequency of disagreements has risen since the onset of the cost of living crisis for 12% of couples.
The key to staying unemotional and avoiding arguments is to communicate. We all have different views about money and individual spending and borrowing habits. Many of them are formed when we are young.
But honest discussions about difficult financial issues – including secret debt or hidden nest eggs – could help you break the taboo around money talk. You don’t necessarily have to be on the same page as your partner, as long as you both know which pages you are on.
From there, you can start to think about how you can organise your finances as a couple, in an open and unemotional way, linked to your shared goals.
Get in touch
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
