“Life’s like a box of chocolates, you never know what you’re gonna get” Forrest Gump.

 

Any of us who have been around for a while know this to be true. However, while life is indeed unpredictable, we can plan and prepare for its twists and turns.

 

I don’t have a box of chocolates analogy but, please indulge me, and think for a moment of a bar of soap. The more you use it and touch it the quicker it disappears. But, left unused, it will last for ages….(or so I’m told). We’ll come back to soap later.

 

 

In addition to life being a rollercoaster, investment markets can feel like this also. Based on many collective years of wisdom, we in Metis Ireland have a firm evidence-based view on how to ride the pension and investing rollercoaster.

 

But, you need to be careful as there are powerful forces working against you; not least media headlines. As if this wasn’t enough, we are, in fact, hard-wired to sometimes take action that damages our own best interests.

 

One of these pre-programmed dispositions is Loss Aversion.

 

What is it? “Loss aversion” is a fancy way of saying we often fear losing more than we crave winning, which leads to some interesting (and damaging) results when balancing risks and rewards. For example, in “Stumbling on Happiness,” Gilbert describes: “Most of us would refuse a bet that gives us an 85% chance of doubling our life savings and a 15% chance of losing it.” Even though the odds favour a big win, imagining that slight chance that you might go broke leads most people to decide it’s just not worth the risk.

 

Confession: I’m one of the 15%.

 

Interestingly, another question addressed by Gilbert is…..”Why are lovers quicker to forgive their partners for infidelity than for leaving dirty dishes in the sink?” That might be a topic for another day.

 

When is loss-aversion helpful? To cite one illustration of when loss aversion plays in your favour, consider the home and car insurance you buy every year. It’s unlikely your house will burn to the ground, your car will be stolen, or an act of negligence will cost you your life’s savings in court. But loss aversion reminds us that unlikely does not mean impossible. It still makes good sense to protect against worst-case scenarios when we know the recovery would be very painful indeed.

 

Suggestions: Many of us would be well-served by protecting one of our greatest assets; our future income stream.

 

When is loss-aversion harmful? One-way loss aversion plays against you is if you decide to put your pension (long-term money) in cash during bear markets – or even when all is well, but a correction feels overdue. The evidence demonstrates that you can expect to end up with higher long-term returns by at least staying put, if not bulking up on stocks when they are “cheap.” And yet, the potential for future loss can frighten us into abandoning our carefully planned course toward the likelihood of long-term returns.

 

Suggestions: Ensure you have a robust, clear and understandable financial plan.

 

  • Keep your short-term money in cash and suffer the poor return.
  • Invest your longer-term money and ignore temporary “corrections”.
  • Especially, ignore predictions of future events and values.
  • Stick with your plan.

As Forrest Gump might say, treat your pension and investments like a bar of soap. Assuming you have a robust and clear financial plan and have received good advice, stick with your plan and avoid the temptation to intervene and make changes.

 

Easy to say…..harder to do.

 

Ian Cooke
Private Client Manager

 


 

 

Disclaimer

Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.

All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified independent financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.

Disclaimer


Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.


All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified independent financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.