October 23, 2019

knowing your financial self

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With the progress of technology we have got used to instant gratification. We use the internet to research whatever grabs our immediate attention and we use social media to pass this information on. Similarly Reality TV has become a staple in many people’s everyday activity – they watch it, they talk about it and they share commentary through social media. Whether we like it or not short term focus is the order of the day. And maybe it shouldn’t be. Longer term perspectives and rational thinking to focus on what is really important is becoming harder to do, especially if you a trend follower of one sort or another. Nowhere is this more obvious than in the area of personal financial matters. Yet, there is little emphasis on knowing your financial self.

Every so often, stock markets crash. Technically this should always start with economic reassessment but more often than not such falls get exaggerated by investor overreaction to the information at hand. Sometimes investors think that “If everyone is selling the market then I should as well” Such following of the herd, so to speak, is quite common and is fed primarily by the financial media. Nothing sells like a bad story – “Markets have fallen by xx%….investors fleeing the market” and so on. Once markets bounce back, you will rarely see anything similar in media coverage terms to the upswing. It isn’t traumatic or sensational enough to grab our attention. This herd mentality to aversion is usually fed by instinctive reactions of investors where especially in adversity we tend to make decisions quickly and emotionally. But not rationally.

But of course once shares are sold, the financial position is crystallised. Then, as it is wont to be, the market creep back up happens almost anonymously in dribs and drabs. A quarter of percent here, half a percent there and before you realise the market occasionally jumps by one or two percent in a day. The losses have been reversed and so a wealth accumulation opportunity has been lost out on. Blink and you’ve missed it.

The financial media can also appear to provide expertise. In the US there are no shortages of financial pundits who will expound the virtues of particular stocks or investment strategy, so much so that they are almost entertainment in their own right so outrageous are some commentators’ statements. This can lead viewers to become over confident, thinking that they can be more successful at investing than they really can. Hand in hand with this is an optimism bias and an exhilaration got by investing in a certain way even if they know it is difficult to be successful.

Over the years I have got plenty of client phone calls in times of market turbulence but thankfully these numbers have become less and less as time moves on. This reducing number isn’t due to a reducing client bank – we have tripled the amount under advisement in the last five years – it is due to our emphasis on making clients understand themselves first and then the markets second. Client behavioural education is a keystone of our approach in advising clients. If people appreciate themselves and their deep rooted financial preferences they can then make informed choices about the issues that they can control rather than those they can’t, namely the reactions of others to stock markets.

By focussing on their own needs which are usually long term rather than the short term noise of financial media real benefits accrue. Market rises aren’t missed out and additional trading expenses aren’t incurred. Patience and calmness are real virtues that are often overlooked and undervalued. knowing your financial self should be a priority.

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