The simple answer is: Yes, we all are!

In a recent blog, we looked at five financial trip-wires and glanced over the term ‘mental accounting.’ Introduced in 1999, it’s a concept that refers to the different values we place on money. These values are often based on subjective criteria; sometimes, this subjectivity benefits us, and sometimes it doesn’t!

Mental accounting enables us to create emotional connections with our financial plan. When we consider investment strategies or risk cover, an emotional connection to the outcome, or the goal, is established and we are more likely to continue contributing money to that account.

The perceived importance of the outcome causes us to view the money involved differently. However, money is the same, no matter where we put it or how we spend it. There is a technical term for this universality of money; it’s called fungibility. Fungibility essentially speaks to the equal value of assets.

We learn about this very early in life – just think about kids in the sandpit who are learning to share. If one has the spade and bucket, and the other has the castle mould, they will very quickly figure out that swapping the mould for only the bucket, or only the spade, is not a fair value exchange. A fair trade would be both the bucket and the spade for the mould. 

As we grow up and start to trade with money, we conform to the commercial conventions of our society. We exchange money for products or services, and if we pay one price for an item in one place, we expect it to be similarly priced everywhere else. If it’s more expensive, we would expect to receive more value for that item.

This is where it gets more complicated, and we learn that value is highly subjective. Something that I consider valuable may not be something that you consider valuable. Mental accounting comes into play, and we assign a different value to inherently fungible items.

In an episode of the hit series Friends, Monica discovers that Chandler (her fiance) has a large amount of money invested that could pay for her dream wedding. Chandler initially refuses to spend all that money on one event because he had other plans for the money, long-term plans that included a family and a home. After sharing these thoughts with Monica, she understands his perspective, and they make a new plan together.

According to Investopedia, mental accounting often leads people to make irrational investment decisions and behave in financially counterproductive or detrimental ways, such as funding a low-interest savings account while carrying large credit card balances.

To avoid the mental accounting bias, individuals should treat money as perfectly fungible when they allocate among different accounts, be it a budget account (everyday living expenses), a discretionary spending account, or a wealth account (savings and investments).

Mental accounting also affects our approach to long-term investing and our risk cover. When we are young, it’s harder to invest for retirement – but as we get older, this becomes a higher priority. When we are healthy and strong, it’s harder to pay for life cover or income insurance because we can’t emotionally connect to the possibility that we will need those products.

There are many other areas where mental accounting skews our perspective, like when we receive a windfall (an inheritance, a tax refund or an unexpected gift) or finish paying off a large debt. The sudden availability of money that ‘we didn’t have to work’ for seems to have a different value than the money we receive through our salary, wages or investment payouts.

It’s not easy to simply say – it’s just money. When we are emotionally engaged in our finances, we need to have the space to talk about our options (like Chandler and Monica and the kids in the sandpit) and have a third party (your financial planner) to help us find a healthy balance.

A rational approach doesn’t mean we don’t enjoy our wealth; it means we can be more intentional with our wealth. If you’re feeling a little money-mental, maybe it’s time we had a chat.

“It’s not in the way that you hold me
It’s not in the way you say you care
It’s not in the way you’ve been treating my friends
It’s not in the way that you stayed till the end
It’s not in the way you look or the things that you say that you’ll do

Hold the line
Love isn’t always on time.”

If you have the tune of Toto’s yacht-rock hit from 1978, Hold the Line, stuck in your head, then you’re welcome! It’s an iconic tune that reminds us that showing love is not in one act or moment – it’s in everything we do.

It also reminds us that we can’t control the timing of events in our life – and this is why financial planning is so important.

From earning to protecting to investing to enduring, most of us want to know that we’re leaving more than just a fleeting memory behind. Most of us want to know that we’ve found meaning and lived a life of purpose, and are leaving our loved ones with means and opportunity.

Creating this opportunity for them is not easy, which is why we need to hold the line. In most financial plans, there are different ways to provide for your family, one of which includes life cover. Even if we have assets and investments that can provide an income after we are gone, expenses and debt need to be paid back first (remember, we can’t control the timing of life events…). 

Taxes and estate costs also eat into these calculations, which is why life cover is beneficial to boost the financial reserves to take care of the responsibilities for which you currently provide.

Holding the line (holding onto your life cover) benefits the integrity of your entire financial plan, but it’s also harder (and sometimes impossible) to replace this cover when you’re older. New risk calculations, amended products, and penalties will have a more significant impact on your net worth should you cancel your life cover early, hoping to start up later in life ‘when things get easier’.

There are a few ways to alleviate financial strain without forsaking this vital product in your portfolio. These have been shared many times before, but it’s always a good reminder to revisit them:

1. Reduce your monthly expenses

Cut back on items that aren’t essential, such as streaming subscriptions and data contracts. Critically evaluate your budget and examine what is needed and what is simply a nice-to-have. Remember, this is not forever; it’s about prioritizing your financial security.

2. Re-negotiate your debts

Try approaching creditors or your bank to negotiate the terms of any repayments. They may be willing to accept smaller sums over a longer period or help you consolidate loan accounts.

3. Negotiate your premium payment pattern

Request to change to an escalating-premium pattern for your life cover, which means your initial premiums will be lower and increase over time. (this could be product provider dependent)

Holding the line includes ‘the way that you stayed till the end’ – and when it comes to life cover, this cannot be more poignant. If you feel like you need some options to release financial tension or want to initiate life cover again, let’s have a chat and see how we can update your financial life plan.

If you’ve ever seen the mayhem from the middle of the trading floor of the New York Stock Exchange (NYSE), you can be forgiven for thinking it’s a warzone! Whilst most stock exchanges around the world now trade electronically, having cleared out their trading floors, NYSE still hosts the traditional tussle of the floor traders’ open outcries.

But this is not the only place where money mayhem can cause a right kerfuffle. Every day, in all our lives, we face financial tripwires that are linked to our choices. Behavioural finance helps us identify and understand these hidden traps. Financial decisions around things like investments, payments, risk, and personal debt, are greatly influenced by our emotions, biases, and cognitive limitations.

There are five ways that our behaviours can hold back the growth of our wealth; call them blindspots or tripwires, they’re often hard to see, and we need to work on them.

Mental accounting

Nobel Prize-winning economist Richard Thaler introduced this idea in 1999. This concept refers to the different values we ascribe to money, based on subjective criteria, that often has detrimental results.

Herd behaviour

This tripwire is easier to understand, but it’s often hard to avoid due to peer pressure. Herd behaviour occurs when we choose to follow the crowd rather than make decisions based on our own analysis. When our friends, family or colleagues are making specific spending and investment choices, it’s not always easy to make a different decision.

Emotional gap

The emotional gap occurs when we allow extreme emotions or emotional strains (such as anxiety, anger, fear, or excitement) to guide our decision-making process. Often our emotions are a prominent reason why we do not make rational choices.

Anchoring

When we create a benchmark in our financial planning that is based on an arbitrary figure or traditional expectations (because it’s what our parents did) and make decisions around that benchmark, we’re anchoring. This is not necessarily negative, but if the benchmark is not realistic for our personal situation or holds us back from reaching our potential – it can be a tripwire for our financial future.

Self-attribution

Self-attribution refers to a tendency to make choices based on overconfidence in our knowledge or skill. Self-attribution usually stems from an intrinsic skill in a particular area. If we are naturally talented or highly skilled in certain areas of life, we can run the risk of thinking our ability to achieve in those areas will flow into other areas. This is seldom the case, which is why we thrive in a community and not in isolation.

Having a financial adviser is a sure way to identify these tripwires in your financial plan and help you navigate them safely to secure a healthier, happier financial future.

When it comes to financial planning, risk planning, estate planning and investing, many of us like to “set and forget”. Our lives are full of things to remember, for work, family and the communities in which we’re involved – often, the last thing we want to review is our financial portfolio.

As a result, it’s easy to forget why we have some of these financial products in the first place. The complexity of financial planning and investing (and the very reason why having a financial adviser helps) means that keeping tabs on changes and updates is nearly impossible for those who don’t work in the industry.

When it comes to short-term insurance, the different product providers are highly competitive and frequently update their rewards or affiliate partners and benefits. This means that comparing one premium with another is not as simple as comparing apples with apples. It also means that if you haven’t checked in on your short-term insurance recently, you could be overpaying, underpaying (and receiving less cover than you need) or simply be paying for a product that is no longer suitable for you.

Whichever situation you find yourself in of these three, it means that your financial portfolio is no longer optimised in your interest. It’s like going to a tailor in your thirties and having your clothes cut and fitted to your measurements, and then thinking those clothes will fit you perfectly for the next thirty years.

We all know that “a penny saved is a penny earned”, and this applies perfectly to the situation of paying insurance premiums that are either too high or not suited to your needs any more. Either – you will be able to save on premiums and invest more now or allocate those saved pennies elsewhere, or – you will be miss-insured and have to pay out more pennies in the event of a claim.

A sure way to reduce the strain on your financial plan is to check in on your short-term insurance at least once a year or whenever there has been a significant global event (like a pandemic or stock-market crash). At these times, changes are made to policies that could affect both the cost and the outcome of your cover. Reviewing them will either free up unnecessary expenses or lock in the benefits that you genuinely need.

Shopping around for better quotes, keeping your credit score in the positive and updating a list of your household items and assets are all good ways to keeping yourself in a stronger financial position. You can easily do this all yourself, but as mentioned above, the complexity of financial planning and related products means that having a financial adviser who can give you independent advice could save you in the long run.

Money isn’t real. It’s just an agreed-upon system of exchange.

Have you ever heard that? 

This is the realisation that many reach when feeling frustrated with tax systems, witnessing social injustice or experiencing the unfairness of life. While money and currency systems may not be real, they represent value and help us form and communicate meaning.

Money is interwoven with our stories of life and meaning.

“We tell ourselves a story about how we got that money, what it says about us, what we’re going to do with it and how other people judge us.” – Seth Godin

These stories are valuable and help us attach meaning, but they can also keep us stuck in an unhealthy relationship with our money. They reveal deeper beliefs that we have about money but don’t always say out loud. They are foundational to our choices and the way we perceive ourselves and others.

Some of these beliefs include thoughts like “I will be happier if I have more money”, “It’s not polite to talk about money with others”, and “Money corrupts people”.

A team of researchers from Kansas State University interviewed hundreds of people to find out what kinds of stories are common to most of us and compiled a list of four stories (they called them scripts) that help us identify our money mindset. According to a blog on careerattraction.com, they go a little like this:

1. Avoidance

Individuals with an avoidance mindset assume a “head in the sand” approach to managing money — all things being equal, they’d rather not deal with it.

For the avoider, money stirs up feelings of fear, anxiety and disgust. They often don’t know what’s in their accounts and may not open their credit card statements when they come in the mail.

People with an avoidance mindset may think and say things like:

• “I don’t deserve a lot of money when others have less than me.”
• “If I’m rich, I’ll never know what people really want from me.”
• “There is virtue in living with less money.”
• “As long as I keep working hard, I won’t ever have to worry about money”

2. Worship

The worship mindset is most commonly associated with the belief that “things would be better if one had more money.”

Has that thought ever crossed your mind? If so, you’re not alone. According to the research, this is the single most common belief. People with a worship mindset tend to attribute current unhappiness or dissatisfaction with a lack of money and, accordingly, believe that a higher salary or financial windfall would solve their current problems.

People with a worship mindset may think and say things like:

• “You can never have enough money.”
• “Money is power.”
• “Things would get better if I had more money.”

3. Status

Those with a status mindset tend to believe self-worth is linked with net worth. In the context of our core needs, people with this mindset equate money with significance — they use it as a proxy for importance in society. Often, the status mindset manifests as a competitive stance to acquire goods and material possessions, often referred to as a “keeping up with the Joneses.”

People with a status mindset say and think things like:

• “Look at that expensive car… he must be successful.”
• “If someone asked, I would probably tell them that I earn more than I actually do.”
• “Poor people are lazy.”

4. Vigilance

Those with a vigilant mindset pay very close attention to how much money is coming in and how much money is going out each month. They likely wear labels such as “cheap,” “tight”, and “frugal” with pride.

Those with a vigilant mindset commonly live well below their means – struggling, at times, to get comfortable with spending money on themselves even when they can afford to. Lastly, the money-vigilant are often secretive about their personal finances and may distrust financial institutions.

People with a vigilant mindset say and think things like:

• “It’s not polite to talk about money.”
• “Money should be saved, not spent.”
• “It is extravagant to spend money on myself.”

When we can identify the stories that we tell ourselves, we can choose to tell ourselves different stories that are more accommodating, generous, inclusive and kind – first to ourselves and then to those we care for and are in our extended communities.

Let’s start telling and sharing stories that are unifying, accepting and encouraging.

A few short decades ago, we lived in a world that seemed to have far more security and certainty. The rate of change was slower, and many assumed that if you stuck to the system, the system would look after you.

Social security, income security and good health were taken for granted in developed countries. The chance of losing one or all of the above didn’t feature too highly in financial plans. As you’re reading this, you are most likely already acutely aware that this is no longer the world in which we live.

From attacks on political structures that we assumed were unassailable to economic systems bending to the will and manipulation of the mega-wealthy or well-organised-online-communities – it’s harder and harder to protect our financial and life plans.

Planning for protection if you lose your income has simply become imperative.

There are financial products that can help with this, and there are financial planning strategies that can help with this.

When it comes to products, income protection is a popular option. These financial products are primarily designed to pay you a benefit if you cannot work for a while because of illness or injury. As needs evolve, the products evolve too, and some can be set up to provide an income due to retrenchment (not voluntary resignation).

When it comes to financial planning strategies, one can leverage or sell assets to cover a period of non-income or set up emergency funds that give you access to up to six months of income should you need it.

Unfortunately, many people take a head-in-sand approach when it comes to income protection, believing that they’ll never be inflicted with a disability, or assuming they can find a quick resolution if they are.

However, this doesn’t necessarily equate to positive thinking but rather naiveté. A more responsible approach would be to hope that disaster won’t strike while still having a back-up plan for when life has other ideas; because life will have other ideas.

If you’re going through an income crisis presently, then it’s hard to plan for the eventuality of another. You will now need professional financial advice more than ever to swim through the rough waters to solid ground. Only once you have regained an income, and are in an income-secure space, can you begin to protect your income for a better outcome.

If you are currently income-secure, make sure you have a strategy in place to build up resilience and protection for one of your greatest assets – your income!

“… your money deserves to go places,” Ninety One (dual-listed on both the South African and London Stock Exchanges).

Many people who choose to stay in a country feel a sense of pride and patriotism for their local residence. Whether it’s a native birth-right or an adopted sense of nationalism, buying, supporting and investing local is an important priority. 

So much so that the thought of moving money offshore can be off-putting. 

But when it comes to sound investment strategy, an offshore investment will give you access to opportunities across different countries, industries, companies and currencies, exposing your portfolio to more possibilities while diversifying your risk. As Ninety One says on their website: you enjoy life in the country you love, whilst your money discovers a world of investment opportunity.

Those opportunities are dynamic and ever-changing. As markets rise and fall, currency depreciation becomes either a strategic liability to any investment portfolios that are heavily weighted in cash, or creates opportunities for portfolios exposed to the export market.

Currency depreciation is a fall in the value of a currency in a floating exchange rate system. Economic fundamentals, interest rate differentials, political instability, or risk aversion can cause currency depreciation. Orderly currency depreciation can increase a country’s export activity as its products and services become cheaper to buy. (Investopedia.com)

This phenomenon is not unique to any one country and can hit any economy at any time. This is why investing offshore may enhance your returns and reduce risk by diversifying your exposure to a single currency or country.

Whilst it can help to form a prudent part of your portfolio alongside local investments, remember that the level of exposure must be linked to your personal financial plan.

It’s not about saying that one economy is better than another; it’s about recognising that by investing in local property, a local business or the local stock market alone, you are highly vulnerable to local conditions.

Offshore investing can reduce the risk of capital loss by spreading your investments across markets and currencies. It will also minimise the impact of currency depreciation or political and market events on your portfolio. Local fiscal and monetary policies may deteriorate along with the likes of state-owned enterprises and other government-led initiatives.

That being said – there are three things to consider when evaluating the benefits of offshore investing: inflation, interest rates and costs.

For all three, we should have a conversation about your personal setup to see how they could affect your decision to explore offshore.

Typically, you can invest directly, or you can look at an asset swap. According to Investopedia, an asset swap is used to transform cash flow characteristics to hedge risks from one financial instrument with undesirable cash flow characteristics into another with favourable cash flow.

Before you make any decisions, make sure we have checked in on your decision and that it aligns with your personal financial plan.

“If only I’d bought into Bitcoin in 2008…”

“But, it’s not regulated…”

“But, the bubble…”

“Bitcoin – I don’t want to miss out…”

Before engaging in any blog about Bitcoin, it HAS to be stated that Bitcoin is an incredibly risky investment that may or may not pay off. Bitcoin is a decentralised digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.

It could be the answer you’ve been looking for. Or, it could be the worst idea ever.

It’s probably not the best fit for most people. If you’re eager to invest in cryptocurrency, it’s essential to do so safely.

As with ANY OTHER INVESTMENT DECISION – make sure you have a personal financial plan, an investment strategy with a well-diversified portfolio, and you don’t have to borrow money to invest.

Most people have a good handle on what Bitcoin is, but how to use it and whether to invest in it is the tough question that you simply cannot google.

As companies (like PayPal in October 2020) begin to buy into the viability of Bitcoin, its uses will increase and its value.

When Elon Musk announced on Twitter that he was a big supporter of Bitcoin, his particular endorsement rallied the value of Bitcoin significantly. He has repeatedly shown his support to online currencies and caused significant movements in their values due to his own personal wealth and influence.

This alone reminds us of the volatility of this young phenomenon of cryptocurrencies. But… still, people don’t want to miss out. The Brobdingnagian bubbles it’s created in the last decade have always left an aftermath of if-only-I-had-invested-sooner sentiments.

Actuary Imran Lorgat says that a sure way of realising that you are about to make an investment mistake is when an intense fear of missing out is spurring you on.

In an article for BusinessTech, Lorgat says: “Many invest in cryptocurrencies without a solid grasp of the basics. If you are interested in buying Bitcoin, then invest time into researching how it works and the risks associated with owning Bitcoin.”

“The price of Bitcoin over the long-term is driven by supply and demand, as well as adoption and technological development of the currency. However, in the short term, the price is driven mainly by hype and emotion.”

He goes on to talk about the value of buy-and-hold strategies when considering Bitcoin, which is similar to the approach of dollar-cost averaging in conventional investment strategies.

Bitcoin has been around since 2008, and it has always had a vacillating public interest. It is speculated that investors who have resisted the temptation to trade their Bitcoin through the highs and lows have probably gained the most.

“The conventional wisdom of ‘dollar-cost averaging’ applies to Bitcoin as well and is popular amongst Bitcoin investors. This means investing the same amount every month, without checking the price or trying to time the market. I follow this strategy myself,” remarked Lorgat.

If you are risk-averse and don’t have expendable investable income, Bitcoin is most likely not a good idea. But even so, it pays to be aware of how it’s growing and keep yourself educated around both it and other cryptocurrencies.

If anything is certain, it’s that the future is uncertain. Bitcoin is a fresh reminder that anything is possible.

No matter how hard we try, we never seem to get it all right… all the time! We were taught as kids that practice makes perfect, and this phrase set us up for unrealistic expectations. At some point in our future, we figured we would get it perfect. All we needed to do was keep trying and keep practising.

A different way to phrase that saying could be that practice makes progress, not perfection. Progress is far more accessible, sustainable and encouraging.

Progress acknowledges that we won’t get it right all the time. We will make mistakes, we will take risks, and we will have transitional periods where we slow down from fatigue and overwhelming circumstances.

Because, at the end of the day, that’s how life looks. It’s not steady, it’s not entirely predictable, and it’s certainly not perfect. This is why our finances don’t follow a straight line of growth. When we get battered in life, our finances get battered. We can mitigate that battering, and we can bolster reserves and protections, but our money will be affected.

It can be enormously disheartening when this happens; especially when the losses are high and they are accompanied by emotional trauma and loss. Most people cannot get back up on their own – and it’s likely that we were never supposed to do it alone.

We need the support, advice, patience, and love of our family and friends. And, we need to rebuild in bite-sized chunks.

There’s a lovely quote that says the best way to eat an elephant is one bite at a time. It reminds us that we need to break it down into bite-sized chunks when we’re faced with a seemingly impossible task. Another quote that is similar to this is one the Chinese proverb that says: “The journey of a thousand miles begins with one small step.”

When we have been knocked back (or completely flattened) in our financial plan, the best way to regain control is to tackle it in bite-sized chunks. After the turmoil of the initial shock, we need to return to the basics of budgeting, where we become mindful of daily spending and monthly responsibilities. We first work to reclaim control in this area – it could take a few months to take a few years.

This will be an empowering journey, not just for our finances but also for our personal growth and well-being. As our headspace heals and our heart beats more steadily, we will be able to engage more strategically with our financial plan again.

This doesn’t happen overnight – it happens one bite-sized chunk at a time. This is how we build and rebuild a robust life measured by progress, not perfection.

Passive investing has become the most popular investing strategy, globally. Simply put, it’s the strategy of buying the whole market (a diversified reach of stock allocations, ETFs and the like), and continually contributing to your portfolio. The long-term goal is to achieve the average market return.

This strategy avoids buying and selling regularly (like with actively managed strategies), long hours of extensive research into individual companies and stocks. In theory, this sounds like an easy approach to investing, but in practice, it’s hard to keep buying the market when stocks are overvalued, and the short-term performance is looking dismal.

Remember, we cannot predict what will happen tomorrow, but we can look at the stock markets’ performance for nearly one hundred years and learn from how markets have consistently grown. In times like this, it’s good to listen to the late John Bogle’s time-honoured advice

Keep investing

Don’t stop investing when you see the markets moving in a downward slide. If you break the habit of investing, it will be far harder to adopt the behaviour again, and it’s very dangerous speculation to try and time the markets by only buying before a growth phase.

Time is your friend

When it comes to passive investing, time is your best weapon for securing a return on your investment. Every seasoned (even most novices) agree on this point and it’s helpful to be reminded of it when quarterly or monthly statements show negative growth. It’s the three-, five- and ten-year reports that show the robust growth of passive funds.

Impulse is your foe

Money is, and always will be, a highly emotional resource. It affects every facet of our decision making – whether consciously or unconsciously. This makes it challenging to ignore our impulses to sell stocks before we incur further losses. Unfortunately, most people don’t recover from these impulse sell-offs.

Stay diversified

It’s never been easier to buy into the whole-of-market through exchange-traded funds in today’s marketplace. This ensures that the investor can remain diversified. The temptation to sell the wide strategy and buy a focussed strategy means that the investor loses the security of diversification and takes on the risk of fewer companies to try and ensure better returns to make up what the market lost. But the reality is that the market will most likely regain its losses over time.

Stay the course

When we put all of these thoughts together, we are encouraged to stay the course! Passive investment strategies work best when they have time to sit and mature in the markets, rather than prodded, tweaked and adjusted frequently.

If you’re reading this and you still feel like your investment strategy is no longer working for you – then let’s get in touch!