In uncertain or difficult periods in our lives we naturally rely on friends and family for advice, reassurance and guidance. Whilst this is understandable, when dealing with your financial circumstances this can be problematic, as we are all different and what is suitable for one person may not be suitable for another. In addition to this, as with any decision we make in our lives, emotion plays an important part. Most decisions in life that we make such as buying a house, changing jobs or getting married, are helped by this support structure, however when we are talking about your financial future this can cause the opposite result of what is intended.
By relying on friends and family, the advice you receive is likely to be the result of their personal experiences, which can either be a good or a bad thing. For example, when I was growing up my grandfather’s wealth accumulation strategy was to invest in term deposits, as he was a product of the Great Depression in the early 1930s. Whereas my parents were very much focused on residential property, as that was the best performing asset class in their formative years. Whether or not either of these strategies is the most suitable in the current climate is a difficult question. However what we can say with some certainty is that what was a great investment in the past won’t necessarily be a great investment in the future. The world changes and we need to change with it.
The other downside of listening to friends and family for advice is that emotion plays a big part. We all experience “fear” and “greed” at various times in the investment cycle. These emotions can impact on our ability to make sensible financial decisions. As an example, many investors fall into the trap of chasing past performance. By acting on emotion investors inevitably sell their investments at low points in the market cycle and then buy again when markets have already moved upwards. Investing based on past economic conditions is bound to fail, as markets are always changing. Various studies over the years have shown that this approach is one of the great destroyers of personal wealth, yet investors tend to repeat this mistake time and again during market downturns.
Having a long-term investment strategy that reflects both your short-term needs and long-term goals will help overcome these natural human emotions. Part of this investment strategy involves establishing an asset allocation that you are comfortable with. This is a very personal decision and the asset allocation your friends or family have could be very different to your own.
If you have any questions or issues please don’t hesitate to contact the Main Street Financial Solutions team – firstname.lastname@example.org