As a wealth adviser, I’ve witnessed the various ways people react to financial stress. While I’m sometimes surprised at an individual’s response, I remind myself that people have deeply ingrained beliefs and patterns about money.
There is a large body of research that explores the relationship between money and emotions, financial archetypes, and money psychology. The Money Coaching Institute (opens in new tab)® holds that there are eight “money types” or archetypes:
- The Innocent
- The Victim
- The Warrior
- The Martyr
- The Fool
- The Creator/Artist
- The Tyrant
- The Magician
Though not specifically included in this list, I’d add one more as a common financial archetype among investors: The Saver/Conservative.
During the COVID-19 pandemic, I’ve seen clients acting in ways consistent with many of these financial archetypes. It’s a universal truth that we learn things about ourselves during difficult times. So, perhaps now is the time to better understand your relationship with money so you do not let your own stress behaviors derail your financial game plan.
Below are the three most common behaviors I have observed in the wake of COVID-19, as well as the respective financial archetype for each stress response:
- Increasing risk within an investment portfolio in hopes of a large payoff (The Fool/ Pleasure Seeker)
- Selling investments in favor of cash (The Saver/Conservative)
- Refusing to inspect your financial situation or make changes (The Innocent)
Are You a Fool/Pleasure Seeker? Here are Some Tips for You
After the best 50-day rally in history for the Standard & Poor's 500 Index — which occurred in April and May — many investors are experiencing FOMO (fear of missing out). Some people are now looking for a quick profit by going all in on one or a handful of stocks.
If you find yourself fighting the urge to do this, or day trade your accounts, perhaps you fall into this archetype … and you are not alone. In fact, Barstool Sports founder Dave Portnoy has amassed a social media following for his stock picks and daily trades. If you are not familiar with Barstool Sports, Wikipedia describes it as a sports and pop culture blog, not an investment adviser!
If you are going to engage in speculative investing, consider limiting your bets — and remember, they are bets — to no more than 5% of your portfolio. If your bets don’t play out, you can at least write off your losses through tax-loss harvesting if the losers were purchased within a taxable account, not an IRA or 401(k).
Are You a Saver/Conservative? Keep These Considerations in Mind
It sounds counterintuitive, but a bear market is a good thing for long-term investors, because you are buying investments at discounted prices. If you ever consider moving your investments into cash during these periods, consider the following information:
Dating back to the early 1970s, a portfolio consisting of 60% stocks and 40% bonds (60/40) experienced a negative return 9.5% of the time when looking at rolling-year returns. A less aggressive portfolio, 40/60, only lost money 3.3% of the time when looking at rolling three-year returns. However, when looking at rolling five-year returns for the same portfolios, both had a positive return 99% of the time*.
Moreover, a JP Morgan Asset Management study shows that missing 10 of the best stock market days can reduce your return by over 3.5%, and most of the best days follow the worst days, which is typically when investors throw in the towel.
So, if you are more than five years away from needing to tap into your investments, do not let your emotional desire for stability and certainty cloud your judgment when times get tough. Going to cash may give you certainty in knowing your investments will not lose any more money in the short term, but it can also lock in significant losses.
For the clients who cried uncle in March of this year, some have locked in losses of 20% or more!
An Innocent? Here’s What You Should Consider
For those investors who couldn’t bring themselves to look at their investments when things went haywire earlier this year, they actually did themselves a favor, because the stock market has skyrocketed after falling over 30% in a little over a month.
Studies show (opens in new tab) that the less frequently you look at your investments, the better your accounts typically perform. Taking the “ostrich approach” (burying your head in the sand) may work from time to time and spare investors some heartburn, but it does have the potential to do lasting harm, specifically for retirees.
If you are withdrawing from your accounts, any downturn will be exacerbated by selling investments at low prices. For this reason, it is important for retirees to keep ample cash on hand to prevent from having to sell investments during a downturn. When you need to take money out of your accounts, consider selling bonds during a stock market sell-off and trimming stocks during a bull market.
Taking the ostrich approach may have worked for retirees over the past decade, but not monitoring your withdrawal rate is a recipe for disaster. Assuming no change to your annual withdrawals, a 30% decline in portfolio value would increase your withdrawal rate by ~43%, potentially taking years off your portfolio’s longevity.
Understanding why people react in different ways can help you be a more compassionate spouse, parent, friend or business partner. Once you become more aware of your “money type,” you can leverage the positive traits to empower you to achieve your goals and dreams, while preventing the negative consequences from derailing your financial game plan.
Finally, if you would like to find out more about your own money type, take The Money Coaching Institute’s free online quiz (opens in new tab).
*Information based on Ibbotson Large Cap Stocks and Corporate Bond historic performance. The three-year rolling return data dates back to 12/31/1972 and the five-year rolling returns date back to 12/31/1974.
Thomas Farmer is a partner and wealth adviser at McGill Advisors (opens in new tab), a division of CI Brightworth. He obtained the CERTIFIED FINANCIAL PLANNER™ certification in 2011, the Certified 401(k) Professional designation in 2014 and is a member of the Financial Planning Association.
This Week in Cannabis Investing: Safe Banking Act in Focus During Lame-Duck Session
Marijuana advocates are hoping the outgoing Congress will take action on the Safe Banking Act, legislation that will improve cannabis companies' access to finance.
By Morgan Paxhia • Published
Kiplinger's Weekly Earnings Calendar
stocks Check out our earnings calendar for the upcoming week.
By Karee Venema • Published
Can You Build a Retirement Income Plan With Both Risk and Reliability?
Two strategies for making retirement savings last — probability-based income planning and guaranteed income planning — can help ensure you have what you need in your golden years, but which is right for you?
By Scott M. Dougan, RFC, Investment Adviser • Published
5 Financial Wellness Tips to Help Weather the Winter
You can regain some control over today’s money pressures by exploring your employer's financial support options and benefits, making plans to save and taking other simple actions.
By Aaron Harding, CFP® • Published
10 Common Investing Mistakes That Can Easily Be Avoided
Some of these missteps might be a given when you’re starting out. A financial adviser offers tips on how to stay on track for years to come.
By Vincent Birardi, CFP®, AIF®, MBA • Published
I'm a New Widow. Who Are the Experts I Should Consult?
A support network of experts who can help a new widow can be just as important as your personal support network at such a difficult time.
By Stacy Francis, CFP®, CDFA®, CES™ • Published
Is Your Money Really Working for You? A Math Lesson in Rates of Return
Getting a high average rate of return does not necessarily equate to actual money in our pocket. A personal finance expert explains why math doesn’t equal money.
By Kyle Winkfield • Published
What’s Standing in the Way of Your Successful ‘Money Mindset’?
Many of us have common biases that keep us from making the best financial, and other, decisions. Knowing what they are and addressing them can help us set a new path forward.
By Ali Swart, CFP®, MBA • Published
Getting Ready for Retirement? We Explain Key Elements and Options
Retirement savings are just one component of your financial profile once you hit your golden years.
By Cory Chapman, Investment Adviser Representative • Published
3 Deadly Sins of Delaware Statutory Trusts
DSTs can be highly attractive to real estate investors, but it’s imperative to temper expectations and consider the big picture before diving in.
By Daniel Goodwin • Published