03 Mar 2021
‘Too hot’, ‘Too cold’ and ‘Just right’
Remember the tale of Goldilocks where she tried the porridge of the three bears.
What can this fairy tale teach us about the real world of investing?
Let’s think about the financial habits of people. Can we group investment habits into ‘too hot, too cold and just right’ instead of the traditional man vs women or Millennials vs Gen X?
Each gender has a different approach to money. Traditionally men are more risk friendly or so-called daredevils, while women tend to be more cautious and aim for security.
“men buy shares from Mars and women have a savings account on Venus” *
This notion might seem the norm on the surface, but a study done by the German Institute for Economic Research (DIW), found that women invest more cautiously because they only have about half of the money that men have. They would however invest more aggressively if they had more money.
We can also follow the viewpoint of the investing styles of generations, Millennials, Gen X, Baby boomers and Gen Z. We have sustainable investing notions where millennial investors want funds that only consist of ethical companies that have environmental matters at heart. The older baby boomers who are in retirement are still conservative in their investment styles and tend to stick to the same funds throughout their life.
All these are very distinct investment styles, but don’t really encompass all the different kinds of investors.
Let’s investigate three encompassing styles ‘too hot, too cold and just right’ These styles don’t distinguish between gender or generation but follow basic investing principles that everyone should be aware of.
This category is for the ‘hot heads’ or aggressive investors who invest on emotion. They always invest at the highest risk level with the notion of ‘the greater the risk, the greater the reward.’ This does ring true in certain circumstances but can be detrimental to financial portfolios. While the possibility of a high return is possible, there is also the risk of a high loss as well. If there is a big loss, there is nothing to fall back on.
This kind of investor also likes to go for whatever is the newest ‘in thing’ and is currently performing well e.g. investing in just technology and commodity funds because they are doing very well currently.
They fund hop continually and do not consider diversification or the long-term effects on their portfolio.
As the term goes, these investors are very cautious when it comes to money and don’t like taking any risks at all. They stick to low risk stable funds that guard their wealth. They do not like anything new and adventurous and prefer the old fashioned and time-tested way. They follow the unemotional mindset of ‘rather a stable low return than risking it all on uncertainties.’
This mindset is good to have when it comes to financial matters but may stunt the growth of a portfolio. Returns may be so low, that after inflation and fund fees are deducted, there is very little profit to show for it. Retirement portfolios could inadvertently be damaged beyond repair and the investor will have to tighten the belt at retirement.
There is a fine line between what is considered the ideal investment and a disastrous one. The ‘Just Right’ investor keeps their eye on the end goal and plans accordingly. Their mindset is one of ‘ignore the short-term volatile markets and think long term.’
The key aspect here is diversification to spread risk. A combination of potentially high return risky funds and stable low return, low risk funds. They believe in balance. They are flexible and open to new funds, but always consult their financial advisers. This way they can still earn good returns to increase their wealth, but also protect it. These investors have well diversified funds that are spread out over different economic areas and asset classes, so that if some funds underperform, as they ultimately will do, only a portion of the portfolio loses money.
When it comes to money, we need to be fussy and get the right balance to protect our financial future.
Chat to your deVere adviser to help you get your financial portfolio ‘Just Right’.
Please note, the above is for education purposes only and does not constitute advice. You should always contact your Acuma adviser for a personal consultation.
* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.