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The link between human behaviour and investing

Financial planning… Isn’t that based on cold, hard facts and scientific reasoning? Surely feelings  and emotions don’t have much to do with investing?        

We think they do. And here’s why.

A little thing called human behaviour gets involved, you see. Only it’s not so little. 

Human beings are highly complex systems, motivated by many different factors and emotions. This makes us volatile, unpredictable and irrational. We also hold values and beliefs that drive our behaviour; some logical and valid, others not quite so much. 

But despite being so important, human behaviour is often one of the most frequently overlooked aspects of financial decision making.

Factors that influence us

Our financial behaviours are influenced in many ways, from sensational media headlines about the next downturn or star fund to family members telling us they know best. You know the type of thing: ”It worked for me, so you should do the same.” 

Your situation, your objectives and the current market could be very different, so it’s important to draw your own conclusions.          

Beware of the biases

You may think your decisions are based on sound, rational judgement, and sometimes they may be, but equally, the framework in which you are making the decision could be distorted. And that’s not helpful.

This is where you need to be aware of bias. It’s all part of what makes us who we are, but it’s not always useful when making decisions.   

We suffer from two common biases that can cloud our judgment and impede us from achieving our financial goals:

  • Cognitive bias
  • Emotional bias

Cognitive bias generally involves decision making based on established concepts that may or may not be accurate. Emotional bias typically occurs spontaneously and is based on the personal feelings of an individual at the time a decision is made.

These types of bias can be particularly significant in relation to risk. For example, being either overconfident or excessively cautious could each have a damaging effect on your financial well-being.

If you’re an optimist, you may tend to take too much risk, managing your money in a way that may have severe consequences in the future. On the other hand, if you’re risk averse, you may be holding yourself back from achieving true financial independence.

If you’re what’s known as ‘loss averse’, you may fear losing money to such an extent that you avoid making a loss more than trying to make a profit. So your financial decisions may be driven by the desire not to lose £2,000 rather than to make £3,000. Such a bias can be reinforced so that the more losses you experience, the more loss averse you become.        

Another common issue is inertia. This may cause you to put off making a decision altogether. Maybe the whole process just feels too difficult. Maybe you don’t have the time. Maybe you fear making the wrong decision. Whatever the reason, inertia is the enemy of financial well-being, because it gets in the way of action. 

An objective eye 

Whether your financial decision-making is being impeded by an incorrect bias, be that cognitive or emotional, or an unwillingness to move forward at all, working with an independent financial planner can help. Our role is to help you make clear, objective decisions, free from clouded judgment. Those decisions could help you secure better financial outcomes, whether that be retiring on your own terms or passing money to the next generation. 

So the next time you think of financial planning as ‘boring’ or ‘disappointing’, think of the ‘human behaviour’ element. We think you’ll find it a great deal more enjoyable and emotionally rewarding if approached in this way. 

Sources
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/list-top-10-types-cognitive-bias/

An ISA millionaire shows the real power of tax free saving

Lord Lee, hailed as Britain’s first ISA millionaire, tells a compelling tale about how a sensible approach to investment, which includes the prevalent use of the tax free accounts, can pay huge dividends.

Writing in The Telegraph, Lord Lee describes how, after 16 years of investing a total of £126,000 into ISAs, his pot had grown to a hugely impressive £1 million.

Of course, not everyone who invests in ISAs will reach the level of return achieved by Lord Lee, but as we approach the April deadline for using your 2013/2014 annual ISA allowance, his examples proves a potent reminder of just how valuable ISAs can be to your investment portfolio.

Using mainly Stocks and Shares ISAs, Lee preaches patience to ISA investors and revealed that his own biggest investing flaw was a lack of it. Certainly Lee now seems to have little reason to worry, but with one holding sold early for between £4.88 and £11 now worth north of £20, the investor still clearly has some regrets.

For any investors who are not currently following Lord Lee’s example, April 5th is a key date. The end of the current tax year marks your last chance to invest up to the government imposed maximum ISA limit. This year the limit has been set at £11,520, with no more than £5,760 able to be held in a Cash ISA.

Lee ends his article by hailing British business and by saying that we, as a nation, should be encouraging responsible savings and investments. Certainly, using your ISA allowance is one very sensible way of starting to do just that.

Sources: http://www.telegraph.co.uk

building your financial future

Charity tax relief plans scrapped

Chancellor, George Osborne has recently scrapped plans to cap tax relief on charitable donations. This follows a warning from charities that they stood to lose a significant proportion of the £1.4 billion of donations on which relief is claimed each year. In addition, Conservative MPs complained that the measure did not fit with the Government’s policy of promoting volunteering through the Big Society idea.

The cap, limiting tax relief at £50,000 or 25% of income (whichever is higher), was proposed in Mr Osborne’s March 21 Budget and was expected to save the Treasury £50-£80 million a year.

Mr Osborne has now written to representatives of the charities sector to tell them he was ditching the cap proposal, while pressing ahead with limits on other income-tax reliefs for the wealthy.

Speaking about the u-turn, the Chancellor said: “I can confirm that we will proceed next year with a cap on income tax reliefs for wealthy people but we won’t be capping relief for giving money to charity.

“It is clear from our conversations with charities that any kind of cap could damage donations and, as I said at the Budget, that’s not what we want at all. So we’ve listened.”

Charities said they were delighted that the Chancellor responded to their ‘Give It Back, George’ campaign, which was supported by more than 1,000 voluntary sector organisations. Sir Stuart Etherington, chief executive of the National Council for Voluntary Organisations (NCVO), hailed the decision as “a victory for common sense.”

The reported £50-£80 million cost of the decision follows the £70 million hit on the Treasury from recent decisions to drop the “pasty tax” on hot snacks such as pasties sold at above room temperature, and to abandon proposed VAT charges on static caravans. These three recent change announcements seem also to have encouraged pressure for further legislative changes, including:

Campaigns against new regulations allowing nests of the endangered buzzard to be destroyed and the birds to be taken into captivity to protect pheasant shoots;
Campaigns against the “conservatory tax”, a proposed requirement to invest in energy saving measures such as insulating lofts and walls when home owners built an extension;
Campaigns from waste companies who are protesting against a massive hike to the landfill tax for some rubble-type waste and grit, which was recently introduced without warning by HMRC

….. as Britney Spears once said – ‘Opps I did it again !!’

Use it or Lose it

When it comes to ISA allowances the term ‘use it or lose it’ is very true, you only get one annual allowance, and if you miss investing or saving in the tax year, you could be missing out on very valuable tax efficient savings.

ISA savers will be able to invest around £600 more in the next tax year after the Office for National Statistics announced that inflation hit 5.2% in September.

Investors are currently able to place £10,680 in the tax-efficient vehicles. However, that number is set to rise to £11,280 from April 2012, of which £5,640 can be placed in a cash ISA.

The ISA limit was indexed to inflation for the first time in June last year, with the figure being calculated to the nearest £120. The change linked ISAs to RPI but from 2012 the limit will rise in line with the less generous CPI.

This means that investors can invest up to £940 per month into the stock and shares element or savers can invest up to £470 per month into the cash element.

Please click here for our free ISA guide for 2011/2012 HERE

Should you require more information, please do not hesitate to contact us on 01737 225665 or email us at advice@conceptfp.com

The Concept Team

Charities need investment strategies

The Voluntary Community sector in any part of the UK is made up of a great number of agencies and organisations, of all sizes and with a wide variety of functions and purposes. Most are constituted through the Charities Commission and are directed and managed within the terms of their registration with that national body.

Whilst the majority of local charities do not depend on funding from the state, either directly from Central Government or through local authorities, up to 30% in any area do. Most of these are the professionalised charitable organisations, with paid staff and workers who engage in the delivery of local services and opportunities alongside the statutory and private sectors. This is a significant business sector with considerable assets and expenditure. For example the umbrella voluntary agency, in an average sized borough or district, organising support for volunteers and voluntary bodies, may well have an annual turnover of anything between a quarter and a million pounds.

The Coalition Government, with ideas like the “Big Society,’’ seems to be seeking a bigger role for the voluntary community sector nationally. There is a real short-term challenge for these charitable agencies and organisations, to ensure that through 2010 – 2012, they survive to fulfil the expanded future role which the Coalition Government seems to be anticipating.

In these turbulent times, the directors and boards of trustees of such charities are faced with making decisions which both ensure financial survival and meet the Charity Commission’s principal requirements of prudency and due diligence. Most of these charities have reserves (a Charities Commission requirement against insolvency) and at any one time, funds to invest.

Professionalised voluntary and community organisations with physical assets, payrolls and service contracts, are required to seek the services of auditors and to direct and manage their finances effectively, but investment of income and a savings strategy, do not often feature significantly on the finance section of the agenda of board meetings. Having significant sums of money in current accounts or low interest savings accounts can be accepted without question.

There is evidence to suggest that the directors and trustees do not always make the best use for their charity of their investments and at this time every penny of interest earned counts! Many need a greater input of professional information and advice to make effective investment decisions, urgently over the next year or so, and equally importantly for a sustainable future.

If you are a charity organisation seeking further information about investments or would like to put in place a investment policy statement, please drop us a line.