Reasons not to act

Reasons not to act

Image by Gerd Altmann from Pixabay

When it comes to producing reasons for doing or not doing things related to our own money, humans can be astonishingly creative.  This can take the form of constructing a credible-sounding rationale based on logic to explain what is often based entirely on an emotional feeling.  They can be highly elaborate and are used to justify short term actions, or inactions, which can have an adverse impact on our long term best interests.

Here are just a few that we have encountered over the years:

Things look very uncertain currently – I want to wait until they settle down.

When market prices are volatile, it is wholly understandable to be worried by them if you are an investor.  However, they are nearly always volatile.  Volatile prices are a function of multiple market participants all having a view on the future and making their decisions on the basis of those views.  Since their views can change and because prices react rapidly to their resulting actions, prices are always changing too.  On the rare occasions when they are steady, it is temporary.  Waiting for that volatility to reduce can cause you to miss sudden market rises and as just missing the best 10 days in 20 years (that is 1 in 720 of them) can have a serious impact (reducing its value by half after 20 years in one study) on the returns from your portfolio.

I can’t live with the risk

Do you know how much risk you need to take to achieve your goals?  It may be that you don’t need to take as much as you are already taking and a financial planner will be able to help you to determine this.  It may also be that the risk you would need to take to achieve your goals is greater than you are willing to accept, in which case some scaling back of those goals may be necessary.  It is much easier to do that than to force yourself to endure an aggressive investment strategy in pursuit of those goals but which keeps you awake every night.

I want to live for today

Living for today and preparing for tomorrow are not mutually exclusive.  Again, a financial planner can help you to see how the two can be combined.

I just want the income and capital gains are not important to me

Income is only one element of investment return and focusing exclusively on it restricts your options (not all investments pay income).  The distinction is a somewhat artificial one, as companies can decide whether to use profits to pay a dividend or to repurchase its own shares, for example.  All else being equal, the latter will increase the share price.  Focusing on income can also be pretty inefficient from a tax perspective, as capital gains are currently taxed more generously than income for UK taxpayers.  Making use of your annual capital gains tax exemptions can provide you with up to £12,000 of return free of tax in 2019/20 and as long as you are conscious of the long term impact on your portfolio, taking some of your returns in that form can be very effective.

I’ll sell that once I have recouped my loss on it

Being emotionally attached to an investment is natural, particularly if you invested a lot of effort in selecting it originally.  Unfortunately that effort you employed has no impact on its future performance and you are the only one who has that attachment to it – if you wouldn’t buy it now, maybe you shouldn’t be holding it either and you can deploy the capital tied up in it more effectively elsewhere.

I’ve done well out of this investment

That’s great.  Most people who became rich did so by taking a large undiversified risk.  However, many who then became poor did so by the same route; they just don’t have quite the same media profile as they don’t write books or have documentaries made about them.  Now that you have been fortunate enough to do well from it, the goal should be to hang onto that gain.  The best way to do that is likely to be to diversify so that if the investment where you made a killing does plummet in the future, it doesn’t kill you.  Remember that the market not only doesn’t know that you are not diversified; it also doesn’t care.

I read/heard/saw recently that…

The news media’s objective is not to help YOU to achieve YOUR goals.  In most cases it is to generate a large enough audience to support its funding mechanism.  Pundits are not necessarily chosen for their insight (otherwise all financial commentators would just repeat that the market went up today because there were more buyers than sellers, or vice versa) but their ability to entertain.  Even if they happen to be blessed with great insight into the future (in which case why are they giving away that insight for free?), none of them knows anything about what you want from your life or from your portfolio.

A chap I know told me that…

Everyone has an opinion and we all think that ours are more valid.  Of course many of those opinions are simply recycled or influenced by what they themselves read/heard/saw recently….  Again, most of them know nothing about your goals.  I covered this recently here.

I just want some certainty

There is a difference between confidence that your investments will do broadly what you expect of them and knowing for certain that they will.  Certainty, to the extent that it exists at all, has a cost.  That cost reduces the return that you can expect to earn (if there were any high return investments with no risk, nobody would bother to own anything else) so it is cheaper just to diversify widely.

 

As it is so easy for us to fool ourselves with these excuses, sometimes we need an impartial third party to look objectively at our circumstances and guide us back to the path that we selected.  Part of this is to be able to look at the options available and identify the implications and trade-offs inherent in each of them so that decisions can be made from a position of awareness rather than emotion.