In our previous article – Instincts for Investing (Part 1) – we discussed the book ‘Factfulness’ by Hans Rosling. Rosling details 10 human instincts that prevent us from seeing the world as it truly is. We considered investing and applied the first 5 instincts. We now examine the latter 5 and how they might be relevant to investment.

INSTINCT 6 – THE GENERALISATION INSTINCT

We have all heard that we shouldn’t compare apples with oranges. Yet frequently, we generalise and compare unrelated things because they have some similar characteristics. Apples and oranges are both round fruits but with entirely different flavours. Football, rugby and cricket are all ball sports but are hardly alike in gameplay. The same is true of investments. The returns generated will ultimately depend on factors such as the split between bonds and stocks (or defensive and growth assets). Comparing returns produced from a portfolio constructed 40% defensive/60% growth assets to one 30% defensive/70% growth assets is unwise and unfair. Such a comparison fails to factor in the added risk created by investing in a higher percentage of equities (growth assets) which may produce temporary falls in value with which you would be uncomfortable.

INSTINCT 7 – THE DESTINY INSTINCT

It is easy to believe current circumstances will never change. Small changes often occur unnoticed. If you experience low-interest rates, you can feel they will always be low. Yet, the power of small changes in your finances spread out over many years can be dramatic. Small gains year-on-year can compound into substantial long-term gains. Small weekly, monthly or yearly savings can have dramatic long-term effects.

INSTINCT 8 – THE SINGLE PERSPECTIVE INSTINCT

“Give someone a hammer, and they’ll use it for every job”. Tell someone about a new method or piece of tech, and suddenly they see it as the answer to every new problem. Similar biases occur when it comes to our finances. When we first hear of an ISA, we might see this as the financial promised land and ignore other options better suited to our needs. Evaluating your finances with an expert may open your eyes to solutions you would otherwise not have considered.

INSTINCT 9 – THE BLAME INSTINCT

We are quick to blame when something negative happens. When financial downturns occur, as they inevitably will, look beyond the drop in value of the portfolio and consider ‘is the drop as bad as it could have been, or was this drop worse than it should have been?’. The answer may prompt an examination of your financial holdings. A globally-diversified portfolio balanced according to your tolerance to risk should eliminate the need to blame individual securities.

INSTINCT 10 – THE URGENCY INSTINCT

When we think things are urgent, it can reduce our ability to analyse a situation objectively, and we often act, with hindsight, irrationally. In financial matters, while there are times urgency is vital, (e.g. ensuring a pension contribution is maximised by the end of a tax year), there is much to be said for slowing down. Take time to consider your money goals and make sure the way you are investing is aligned with them rather than simply focussing on short-term results.

If you have enjoyed these two articles, we encourage you to read ‘Factfulness’ by Hans Rösling.

Patrick Christie
Graduate Intern – WealthFlow
Patrick.Christie@wealthflow.com

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.

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WealthFlow Group Ltd. Registered in Scotland No SC635011. Registered Office: 10 Charlotte Square, Edinburgh EH2 4DR.

Head Office & Consulting Rooms: 10 Charlotte Square, Edinburgh EH2 4DR.

Mail correspondence to our Central Scotland Admin Hub: WealthFlow Group Limited, PO Box 14947, Grangemouth FK3 3AU.

WealthFlow Group Ltd is authorised and regulated by the Financial Conduct Authority.

The guidance/advice contained in this website is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK.

For your protection, unresolved complaints can be referred to the Financial Ombudsman Service.

To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk.

WealthFlow Group Ltd. Registered in Scotland No SC635011. Registered Office: 10 Charlotte Square, Edinburgh EH2 4DR.