How understanding your approach to money improves investment outcomes

How you think about your money and the approach you take when getting investment advice can impact your investment outcomes.

Let’s look at the two main ways people think about their money and how that impacts investment decisions and outcomes.

People think differently about portions of our wealth

It is very rare for someone to exhibit the same attitude towards all parts of their wealth management. We naturally place our money in different ‘buckets’ in terms of risk, accessibility, income and growth that we expect to experience.

For example, the money that we set aside for day-to-day living expenses and emergencies is viewed very differently from the money we have set aside for long-term retirement needs.

The money received from an inheritance may be treated very differently from the proceeds of selling shares.

This is called ‘mental accounting’ and it forms an important basis for the way we allocate your wealth into various investment solutions.

Some investors prefer professional fund managers to act on their behalf for certain portions of their wealth for the potential for higher returns while other investors prefer to pay to capture only the market return. Some investors want to fully protect part of their portfolio from market falls while desiring a more sophisticated sharemarket investment to another part of their portfolio.

People feel financial losses more than gains  

Investors feel the pain of financial losses much more than the joy of making money. Known as ‘loss aversion’, research suggests that the emotional pain from the loss of a dollar is about three times greater than the thrill of a gain. Whilst we know share market prices will move around a lot, in developing your advice and investment strategy we help you manage your money to reduce the likelihood of experiencing the pain of having to crystallise losses during market downturns, and by putting in strategies to help protect the portion of wealth set aside for your immediate needs.

By managing these attitudes towards money, and by creating ‘build for purpose’ portfolios, it helps you to create resilience to stay the investment course. That’s important because history shows that investors who take a long-term view do better.

If you would like to receive investment advice and know more about how understanding your money can impact your investment outcome then please talk to me marshall@evalesco.com.au

It’s my job to work as my client’s financial ‘lifesaver’ to ensure that they swim between the flags and that they don’t get in over their heads.