By: Marilize Lansdell, CEO, PSG Wealth
Market volatility often causes people to delay saving for fear of losing money. But the primary reason that people don’t have enough money saved, is simply because they don’t save enough! Therefore, you should rather focus on the factors under your control, instead of getting caught up in short-term noise and making emotional decisions.
Emotional decision-making is recognised as a wealth destroyer. The irony is that both action and inaction driven by emotional responses can end up costing you dearly. Making better investment decisions starts with being attuned to the emotions we experience, and acknowledging them for what they are.
Emotional action means we buy and sell at the wrong times
Those who make emotional decisions are likely to buy and sell at the wrong times. They are likely to be sitting in cash when the market rebounds, having sold out at a low point. But markets often rally sharply and suddenly after periods of poor performance and negative returns, and you are very likely going to miss your chance to participate in the upside when sitting on the sidelines. This phenomenon may be part of the reason why investor returns tend to lag compared to those of the market.
Emotional inaction means we miss out on compounding returns
On the other hand, those who are so paralysed by fear that they never start investing run the risk of missing out on compounding returns. These really only become effective in the long run. The longer you delay saving due to fear of losing money in the wrong investment, the more you lose out on this phenomenon, which has been dubbed ‘the eighth wonder of the world’.
Four simple behavioural remedies to minimise emotion in your savings decisions
Structuring your investments to minimise the impact of emotional decision-making is one of the best ways to set yourself up for achieving your financial goals.
- Start saving early and make it a habit rather than a conscious decision. Regular debit orders are a great way of doing this, because the money ‘disappears’ from your account each month without you having to give it any conscious thought, and the results soon stack up.
- Keep on investing through the ups and downs. Your money will be able to buy assets more cheaply in down markets, and the money you have already invested will be part of the recovery when it happens. Most importantly, you will avoid the wealth-destroying impact of buying high and selling low.
- Schedule when you check your portfolio performance. Being informed is important, but you are far more likely to make poor decisions when checking in daily than when checking in at set intervals as part of a disciplined process that aligns with the objectives of your portfolio.
- Do your homework up front, then stick with your plan unless there is a good reason to change. Invest time in selecting the right funds and products up front. Once the plan is in place and you’re confident in your choice, avoid making changes unless there are good (non-emotional) reasons to do so. A skilled and qualified financial adviser can help you with selecting appropriate funds and products, and hold you accountable for sticking to your plan.