What’s Your ‘Money Type’? Knowing It Could Help You Avoid a Financial Blunder
Financial advisers are seeing some interesting stress responses to financial uncertainty. With that in mind, here are some practical tips for three of the most common money behaviors.
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® 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.
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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 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.
*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.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Thomas Farmer is a partner and wealth adviser at McGill Advisors, 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.
Is Chevron Stock Set for a Rebound?
Chevron stock received its second analyst upgrade in as many days, boosting hopes for a recovery in the lagging energy major.
By Dan Burrows • Published
Where Americans Most Use Deals and Coupons
While you may not be an extreme couponer, you’ve probably had deals on your radar. Here's where shoppers practice the most savings strategies.
By Erin Bendig • Published
Retirement Planning with Life Insurance
An indexed universal life insurance policy can help you with tax mitigation and extra retirement income in addition to death benefits for your beneficiaries.
By Mike Decker • Published
Which Retirement Accounts Should You Withdraw From First?
Here’s a standard order for when you should tap which account when you’re in retirement.
By Evan T. Beach, CFP®, AWMA® • Published
Nervous About the Markets and Economy? Consider History
To put things in perspective, focus on what you can control and remember that the ups and downs of the markets and economy can be cyclical.
By Erin Wood, CFP®, CRPC®, FBSⓇ • Published
Expecting a Recession? Seven Steps to Help You Power Through
Instead of panicking, consider opportunities to add flexibility and resilience to your financial position. These steps can help you enter a potential recession from a position of strength.
By Christian Mitchell • Published
What Is Indexed Universal Life Insurance and How Does It Work?
This permanent life insurance provides a death benefit to your beneficiaries but also offers a cash-value component that can grow over time.
By Mike Decker • Published
How to Fail as a Leader
The authors of the new book 'Real-Time Leadership' outline the traits of effective leaders (kindness is key) and what will ensure a leader’s failure.
By H. Dennis Beaver, Esq. • Published
Are You Worried About Running Out of Money in Retirement?
Planning that integrates income annuities can help alleviate the No. 1 fear of retirees, even in worst-case investment scenarios and when living way beyond your life expectancy.
By Jerry Golden, Investment Adviser Representative • Published
Three Ways Charitable Organizations Can Boost Public Trust
Silicon Valley Bank’s collapse adds to distrust in institutions, and that’s affecting nonprofits and grantmakers. Fresh expressions of transparency can show that the nonprofit sector is different.
By Stephen Kump • Published