Using your adviser as a financial therapist : Research in psychology has found that our past experiences, especially negative ones, can unconsciously affect our decisions. If you have, for instance, witnessed your parents lose their wealth because of a market crash, you will be averse to investing in equity, even if you have the ability to take high risk. This can cause problems if you are self-managing your investments; your aversion would prompt you to invest less in equity, even if doing so will hurt your investment objectives. An adviser, as a financial therapist, can help you recognise your unconscious feelings and moderate your aversion to equity. Sometimes, your biased decisions can also affect your investment performance. Consider these two examples. One, you may have suffered a setback in your business or profession, causing emotional and financial stress. And if the market crashes during this period, you may be tempted to sell your retirement investments at a loss. It is not good to take a financial decision when you are stressed, as your logical-thinking ability can fail. Your adviser can help you moderate your cognitive error and talk you out of such a decision. Two, you may be spending more than you should on non-discretionary expenses or, perhaps, you may be stretching your household budget by taking a large mortgage on your home. Your adviser can apply behavioural psychology to nudge you into spending less and saving more.
Posted on: Fri, 28 Jun 2013 11:03:08 +0000