Fear and Greed Do Not Let Your Heart Rule Your Head

In most decisions that we make in life, we are influenced by our past emotional experiences, our hearts rule our heads.

In financial services circles, many people talk about the ‘Fear and Greed’ factor.  We make financial decisions due to fear e.g., fear of losing money, fear of running out of money or greed, we are greedy and wants things as cheap as we can get or we want that one because it is making money, saving tax or has done in the past.  We are conditioned to it.

We once met a real estate agent in Arcos de la Frontera, not far from Cadiz, and we attribute this phrase to him: “You can only con a greedy person”.  When people are greedy, they make mistakes or make impulse decisions.

Do not let your heart rule you head.  Think, use your past experiences and knowledge, use your financial adviser’s experience and knowledge.

Five Head not Heart Rules

We have a set of simple rules that have been gained from professional, academic studies as well as combined experience gained between the two directors of nearly 70 years in the industry.

Emergency Cash Fund

The Chartered Insurance Institute and Personal Finance Society’s basic Financial Planning Certificate study books suggest having a minimum of 3-4 months net salary in emergency cash savings.  We suggest at least this and ideally 6 months emergency savings to cover unexpected shock events such as job loss, illness or major spends e.g., roof repairs, washing machine etc.

Cash Higher Risk and Not Low Risk

Whether you like it not, interest rates on your savings are rarely, if ever, higher than inflation.  By holding huge amounts of cash, the spending power is being devalued in the medium term.  We suggest you should have most of your cash working for you in market related investments that will outperform inflation eventually.  Stocks, shares, investment funds or property.  We recommend that you work out your potential cash needs over the medium term 5 years.  E.g., if you are in retirement, work out how much cash you are likely to need in the next 5 years.  E.g., if you think you will need an additional £10,000 pa on top of any guaranteed pensions such as state pensions, defined benefit pensions and annuity income, you should have at least £50,000 of your market linked pension, investment or ISA funds in cash funds or lower risk cash related funds such as money markets and bonds.  We call this the short-, medium- and long-term boxes.  Short-term money 5 years (low risk), medium-term money 5-10 years (low to medium risk) and longer-term money i.e., pensions or savings that you are not likely to touch for 10 years in medium to higher risk funds, most people can afford to ride out peaks and troughs of markets over a 10-year period to achieve growth.  In addition, when you need to draw income or capital from your investments and pensions, as you have a cash/low risk holding, they can be cashed in without worrying that they have fallen in value whereas if you are forced to cash in funds that have made losses recently due to market volatility, you would be cashing in at the wrong time when markets are lower and crystallising your losses.

Diversification, Multi-Distribution and Spreading Your Portfolio Wide

Never have ‘all your eggs in one basket’.  By spreading your portfolio across a wide a range as possible, when one sector is not doing well, another may well be.  In addition, you are not exposing yourself to just one sector.  For products, we suggest we all have a generous of cash, property, ISAs, investment accounts and pensions.  For funds, we suggest do not focus on just the UK, make sure your funds are spread globally and as wide a sector as possible, particularly in difficult times such as Covid-19 or the more recent energy price crisis and Russia/Ukraine conflict.

‘Do Not Play with Your Food’ or Your Investments

Leave your investments in place, stay invested.  Do not cash in when markets have fallen.  Yes, move between fund sectors or take advice from an adviser yearly on this but stay exposed to markets.  Do not sell property and stay off the property ladder and then wait for property prices to fall and then buy back in.  You cannot time the market.  Trying to find the low point in any market is called ‘bottom fishing’ and it is impossible to do all then time.  If you are out of the property market or the stock market, you may ‘miss the boat’.  Many people do not know that markets tend to trade almost flatly for most parts of the year, and it is only once or twice a year in a 2-4 week period only that markets move significantly up or down.  You cannot time this so don’t try.   Sit tight and hold on, markets will recover.

Fear and Greed of Others - Opportunity Money

We know we said earlier that your own fear and greed are emotional influencers.  Using the fear and greed traits of others.  In the words of Warren: “Be fearful when others are greedy and be greedy when others are fearful”.  If markets have fallen and you have opportunity cash, invest when others are fearful.  When markets hit new record highs or annual highs and others are starting to be greedy, consider moving investments to other asset classes.

Do Not Let Your Heart Rule Your Head, Use Experience, Use Your Head.

Contact  Call Back  Calculators  Our Fees