The winds of change blowing through the financial world mean more of us feel under pressure to make big money decisions — yet many feel ill-equipped to make the right choices.
Warnings of painful tax rises in October’s Budget have prompted readers to give away inheritances early, sell shares and property and, depending on their age, pay in or withdraw large sums from their pensions. But have we done the right thing? Added to this is the uncertainty of how our investments might perform in a turning interest rate cycle, what size of cash buffer to hold and when the optimum time to remortgage might be.
Decisions, decisions! So, when I saw that HSBC had researched how more than 17,000 people in 12 countries went about making different calls with their cash, I was intrigued to learn more.
The study found the best financial decisions involved mindset and method. Having optimism about the outcome, an openness to change and the opportunities this might bring, while acknowledging that things might not go to plan was the optimal mindset, researchers concluded. So, a bit different from the Budget-induced panic of recent months.
As for the process, your head, heart and network are all important, the study found. Planning, research and hard-headed analysis of the facts are obviously key. It may be awkward, but talking about potential decisions with a wider network of people — including those who might disagree with us — was vital. And while our emotions should not be the sole guide of financial decisions, imagining how we’d feel if we did or didn’t make a certain decision had particular value.
If you’re grappling with a decision of your own, the researchers told me that a big predictor of having the confidence to act is if your plans are adaptable: I’ve weighed up the risks, I think this is the best option but, if X happens, I’ll do Y.
It all sounds so easy. However, the current climate of uncertainty is making financial decisions so difficult, we might risk putting them off for even longer. That also carries a cost.
A conundrum that’s occupying UK financial regulators is why Britons are hoarding an estimated £430bn of “excess cash” rather than investing it in the stock market.
So, what mindset would get more of us investing? And what lessons can those who are invested but nervous take from this?
“The key thing about making decisions under uncertainty is that you have to accept that you cannot know [the outcome],” says Professor David Tuckett, who acted as an academic adviser to HSBC on the project.
In his 2008 book Minding the Markets, he asked more than 50 active fund managers to list three examples of investment decisions they were happy with, and three they were not.
“What I noticed was that there was nothing different that you or I could see in the two classes of decision,” he says. An equal amount of research, discussion and tyre-kicking had gone into both. “The only thing that was different was the outcome. And that is because, fundamentally, the outcome is uncertain.”
Even managers who had made the right investment calls admitted that sometimes their outperformance was powered by a factor they hadn’t originally considered.
However, when he asked managers why they thought certain investments had failed, they tended to blame themselves: “They said things like I didn’t work hard enough, that’s why I didn’t succeed.” Interesting — though you can be sure they were still rewarded handsomely for trying.
For retail investors, accepting that not all of our investment decisions are going to work out can be hard to do (especially when we start out). Experience, taking a long-term view, being diversified and having a strategy in place to regularly review your portfolio all help. And as every index investor knows, while some active managers beat the market, it’s virtually impossible for them to outperform consistently.
We’re all finding it hard to make financial decisions but the HSBC study identified one group who found it even harder — the neurodiverse. Some readers might dismiss this as just the latest buzz term but, if you or a family member have autism, ADHD, dyslexia or dyspraxia, then you will know the struggle is real.
Nearly two-thirds of neurodivergent respondents felt ill-equipped to manage financial decision-making, and more than half often regretted decisions they’d made about money — significantly higher than the neurotypical respondents.
Clare Seal, the author of Real Life Money, uses the term “the ADHD tax” to describe how being neurodivergent has had an impact on her own finances. She says being indecisive about money management has a cost — such as late fees if you don’t pay on time, and higher interest rates on debt if you damage your credit score.
Plus, impulsive spending is a very common issue. If you can’t budget effectively, there’s less chance of having so-called “excess cash” to invest. She has introduced more friction in her own finances to counter this. “If all you need to do is tap or click one button to buy something, you’re much more likely to give in to that impulse.”
Harbouring regret about poor decisions is the flip side of this coin. “Feeling remorseful undermines confidence and adds to the self-limiting belief that you are bad with money,” she says. This can contribute to what’s called pathological demand avoidance, which she describes as feeling like “a concrete barrier” has prevented her from engaging with her finances in the past.
We are both hugely encouraged that banks are finally showing more interest in this very under-researched issue. What’s more, some are developing new services to help neurodivergent customers.
Monzo, the digital bank, promotes a suite of digital budgeting tools to customers with ADHD, including its automated salary sorter, plus the ability to opt out of borrowing entirely and set custom daily limits for ATM withdrawals and card transactions. Its business account offers the ability to set up a “tax pot” to automatically hive off a set percentage of payments and save towards future bills.
Of course, you don’t have to be neurodivergent to make use of these features. But thinking about the needs of different customers is what’s resulting in the kind of innovations that can help everyone feel more confident managing their money.
As the financial regulator moves closer to enabling simplified financial advice and targeted support, I’m hopeful that much more will follow in the investment world too.
Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com; Instagram @Claerb
