This year has thrown its fair share of challenges at anyone trying to maintain a sense of control over their lives and personal finances. Credit is more expensive, living costs are rising, and savings and investments have had a volatile ride.
Given the extent of the turmoil, it’s understandable that many of us react in different ways. Some panic, some get confused, and others bury their heads in the sand. And of course, instability in financial markets can compound some people’s fears and phobias when it comes to their money.
“The most common thing we have seen is an inertia, a state of paralysis,” says Emma Foden-Pattinson, an investment manager at Charles Stanley, a UK financial and investment management firm. “Some people are so worried about making the wrong decision that they would prefer to do nothing.”
The types of challenges people are experiencing vary wildly – from struggling to pay rent, to anguishing about the performance of a long-invested pension pot. But irrespective of wealth or situation, the traits people can exhibit during difficult times are often very similar, according to Greg Davies, head of behavioural finance at Oxford Risk, a risk profiling business. He notes that many people experience an anxiety spiral that causes a focus on the short term. “We can think of it as tunnelling. As [we] get stressed, our vision narrows. We tend to think in much shorter time horizons – next week or next month, rather than keeping an eye on the long-term horizon.”
Short-term thinking
When it comes to savings and investments, Davies says this short-term thinking can mean retreating to what feels like a “safe space”. “The good aspect of this is I will probably focus more on my savings if I’m feeling stressed – I might reduce my discretionary spending, and spend with more caution,” he says.
The bad side is the tendency some people have to retreat from investing. “Probably the biggest behavioural cost is that they leave it uninvested for too long, sitting in cash, and that is incredibly expensive. People cling on to the safety blanket of cash and pull money out of investments at the wrong point. They miss out on the upside of the next market increase,” says Davies.
Foden-Pattinson agrees that volatile conditions can spook some people. “Money is highly emotive. As an investor you are usually putting your money to work because you have a goal in mind – whether it’s school fees, or protecting your retirement pot. When you start to see that pot change value dramatically, it can trigger a sense of fear because you are trying to protect yourself and your loved ones in the future.”
Ideally, you would avoid the pitfall of rashly pulling out of investments by carefully reducing your exposure to risk while still keeping some skin in the game to benefit from future upside.
Strategic changes
As for the paralysis you might succumb to if you feel overwhelmed by the volatility of the market and unsure of the next right step, it might be reassuring to note that even people who are more confident or knowledgable about finance and investments can still be struck by inertia in the face of turbulence. Indeed, only 14% of high-net-worth individuals surveyed by Charles Stanley last year said they’d made changes to the way they invest in response to the recent global turmoil.
Foden-Pattinson emphasises the importance of making strategic choices – which means your investments need to be properly evaluated. “If you’re holding an investment portfolio and you start to see the value of something go down, it can be much easier to just ignore it and hope the value will go back up, rather than actually digging behind the fundamentals of why it’s gone wrong and considering its potential in the future.”
Ignoring these signs can lead to bigger losses, she adds. “You could miss some important signals that indicate there is a fundamental issue with that investment. So you could see the decline being much more severe than if you’d looked it straight in the eye and said: ‘I’m going to tackle this and understand where the issues could be.’”
Getting the balance right
So how can savers get the right balance, and regain a sense of control over their finances? Foden-Pattinson says the number one priority should be to keep long-term goals in mind, and to have a clear objective for your money in the first place. “There’s a huge difference between saying: ‘I want high risk, high return’, when in reality if you were to lose a portion of the money, you couldn’t afford to live your life. So we spend a lot of time going through those parameters [with clients], which allows us to provide a framework, and understand what protection might be needed.”
This can help maintain focus when things get volatile. “It’s about cutting through the noise and trying to understand what these data points are telling you about both the near future and the longer-term trends.”
Davies advises anyone feeling panic, inertia, or confusion to attempt to embrace that long-term perspective. “A lot of this is about coming up for air and trying to step outside to a vantage point that puts you outside of that spiral. The perspective of others can help a great deal.”
Where appropriate, advisers can help and suggest the best next steps. Davies also notes that just talking to someone to get an external point of view can be useful. “It could also be friends and family, anyone with a bit of perspective,” he says.
Wellbeing benefits
Davies also points out that stress can cause cognitive decline, which can impact our decision making. “People under financial stress show a decline in problem-solving capabilities that’s equivalent to being sleep deprived,” he says. “Our brain needs space.”
Whether it’s asking a friend, seeking professional help, or ensuring you have a long-term plan in place to guide and support you through the volatility, regaining a sense of control over the situation doesn’t just help your finances, but can also have beneficial effects on your general feeling of wellbeing.
“You’re reversing out of that tunnel – so immediately you get the relief from the anxiety and stress,” says Davies. “That opens up your vista again so you can start thinking about the big picture. If you are able to find that space, it has all sorts of knock-on benefits.”
If you want to find out how Charles Stanley could help you, request a call back from an adviser.
The value of investments can fall as well as rise. Investors may get back less than invested. Charles Stanley & Co Limited is authorised and regulated by the Financial Conduct Authority.
