18
April 2023
People don’t understand money
Dawie Klopper CFP® Wealth Manager
And as the name suggests, it’s more about psychology than the economy and investments. Perhaps the reason why the book caught my interest was the many valuable insights it provided on people’s interaction with money, and as an investment adviser I could associate with every aspect of this book. What’s more, as my good friend Professor Jannie Rossouw says, the reason why I have a job as an investment adviser is that people don’t understand money. He may be right. Even well-educated people sometimes have a problematic relationship with money.
“ I recently finished one of the best books on money and investment I’ve ever read – ‘Psychology of Money’ by Morgan Housel. ”
Doing well with money is not necessarily about what you know, but rather about how you manage the emotions or psychology associated with money. When the markets take a tumble, which happens quite regularly, many people become frightened. And if this coincides with a time when people feel depressed about the economy mentioning in one breath recession and bad politics and load shedding, then you regret not having sold all your investments in the previous week. When the markets are under pressure for longer than a week, I receive calls from people saying if the market continues to spiral downwards for another six weeks, then they will have nothing left. When the markets keep falling, I receive lengthy WhatsApp messages on a Saturday evening asking for immediate intervention – never mind the fact that it is impossible to do so at that stage. All I can do then is to try and comfort the distressed person, who is either afraid, upset, doubtful or worried. That’s the time when you fall back on experience and historical statistics telling you it has happened before and things will turn around.
Although this may provide little (if any) comfort, gaining a better understanding of your relationship with money will help you understand this extremely negative market volatility and in particular the way you respond to it so much better. And it’s not only the downward volatility that is getting you down. Just recently, when the JSE reached an all-time high, one of my clients asked me when this will come to an end, because he’s afraid to get excited about it. Perhaps rightly so, as the markets go up and down, but I think it is important not to allow the so-called wealth effect to dictate your actions.
The wealth effect is seen when people suddenly start adjusting their spending habits to the increased wealth they have accumulated either through the outperformance of their investment portfolios or soaring house values. This has been a common phenomenon abroad, with investors borrowing money against their portfolios or houses and then spending it on luxury goods.
But logically, that makes sense, you may say. Surely, somewhere my investments should start working for me. Maybe so, but then you should make sure purchasing that fancy car or bike is something you would have done anyway. Do you really need it? What is your motivation to do this? What do you want to prove or even just show off? I’ve heard people boasting, ‘Because I can.’ We will elaborate on this in follow-up articles at a later stage, but suffice to say, people will not have a higher opinion of you when you show off that new car or bike – they would rather envy the car or bike.
So, in a few months’ time I’d like to chat to you about the big financial decisions you make – considering the fact that you won’t consult a computer to do so but rather discuss your next big decision with friends at a braai, or even on the golf course or when cycling or in a boardroom, basing your decision on the input you get this way. These may be informed decisions, but also emotional decisions, which may either work for you or against you. Finally, you need a financial plan, and you need to stick to it.
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