Cyprus Mail
BusinessCyprus Business News

Your money, and how you sleep at night

Money Soothes
Sometimes doing nothing is the best strategy.

We are, once again, in a period of unrest and uncertainty, as there is a danger of a second surge in the pandemic.

The health ministry has announced reasons for concern. Possible further restrictive measures are to be discussed.

The news has sent many Cyprus businesses into informal lockdowns, sending workers home, restructuring responsibilities so that work can be done remotely.

Most of us are finding themselves doing at least part of our regular work from our kitchen tables or back porches.

Why should this have any effect on our finances?

Let’s think about it another way: How do you sleep at night?

The Covid-19 crisis threatens everyone’s livelihood, and, in order to sleep well at night, we have the urge to take action, to take piles of money and hide them in the cellar, to cut our household budgets down to the bone, and become vegans.

But financial experts will tell you that this is the very worst way to behave in reaction.

“When something is broken, you want to fix it,” James Norton, senior investment adviser at fund manager Vanguard UK, told the FT: “It goes back to our very, very basic need to protect ourselves. The desire to act in a crisis is deeply embedded in our psychology. But this instinct is our own worst enemy when it comes to money.”

Unless there is a good reason to change how you have placed your funds, don’t race in to change it just because times are a ‘changing. The chance of taking the wrong action is far greater than taking the right one.

So you will take action, and you’ll feel better, and you’ll sleep better at night. And then the financial loss will come along. And you won’t sleep so well.

Investment experts will tell you that more frequent activity can actually lead to worse outcomes. “Research shows investors who trade more frequently have worse long-term outcomes than those who trade infrequently or not at all. Investors who retreat from the market in a downturn rarely time their re-entry correctly, missing out on the recovery,” say say Steve Wendel and Sam Lamas of the behavioural science team at investment research firm Morningstar.

Obviously this doesn’t mean to ignore basic needs. If you need cash, and you have cash invested in relatively high-risk placements, don’t hesitate to pull it out, even at a loss. It’s wise to be as comfortable as possible when there is clear-cut external risk.

At the same time, don’t make the mistake of pulling money out of possibly lucrative investments early, just because of current events. Research shows that investors who do this nearly always lose opportunities, and then re-enter the market at the wrong time.

You’ve made investments because you believe in them. So, don’t short-circuit your gains; hang tight – this might affect your sleep, but you will sleep better later as the return on investment comes in.

Investment behaviour experts advise that financial choices are made on an axis of fear versus greed. In a crisis like the one we are experiencing, first we become afraid, and later we get over it and get greedy.

And it’s when we get greedy that we make the worst choices.

As uncertainty prevails, we become afraid, but we should overcome this fear and take a rational view of what will happen. Yes, investments of certain types will lose value. Ask yourself, what are the chances of those investments bouncing back?

Now, watch out as your instincts shift to greed. Don’t let the Fear-of-Missing-Out (FOMA) factor, cloud your judgement. If you have pulled money from an investment, take a good look at historic action to see how this particular market has reacted in the past. Try to judge the right point of re-entry based on rational factors.

You may be surprised how difficult it is to avoid emotion in placing your money, particularly at times like this. But be rational, even if it’s not good for your night’s sleep.

 

 

Related Posts

Fiscal council sounds the alarm, issues gloomy outlook

Nick Theodoulou

Upcoming Phase three of Gnox (GNOX) presale could be last chance to enter before potential 50x, similar to Maker (MKR) and UniSwap (UNI) launches

CM Guest Columnist

Hermes Airports welcomes adoption of Cyprus’ air connectivity proposals

Kyriacos Nicolaou

Samsung Elec starts 3-nanometre chip production to lure new foundry customers

Reuters News Service

Cyprus will emerge stronger from the current crisis, president says

Source: Cyprus News Agency

Cyprus Business Now

Kyriacos Nicolaou