The psychology of investing: why your early experience can dictate your future wealth

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Speaker 1

Why do we make the decisions we make around money? And how can we become more confident in our choices?

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Speaker 8

People are really scared of taking risk or what people perceive to be a big risk. That can be hugely overwhelming.

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Speaker 9

It kind of gets melded together, money and numbers, but they're kind of different things. A very analytical mind for numbers can make it much harder to make decisions about the future.

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Speaker 8

Different cultural backgrounds might come to the table. That's what's been familiar, that's what mom and dad did.

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Speaker 9

You cannot even remember the formative events in your life, but they're still running the programming behind the scenes.

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Speaker 1

Welcome to the power of good advice, a series built on a simple belief. Good advice shouldn't be kept behind closed doors. Everyone deserves to have clarity, to feel confident, to build a prosperous future and to unlock the good advice that can lead you there. We believe wealth isn't just about numbers, it's about your goals and the people who matter to you and the life you want to build.

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Speaker 1

I'm Katie Durham, and I'm joined by two leading experts from Evelyn Partners, Financial Planning Director Anthony Flynn and Investment Management Associate Director Kate Duggan. Hello to you both. In the other episodes in this series, you'll find advice on what to do with your money at various stages of your life. But in this episode, we want to get to grips with something that underpins every decision we make when it comes to our financial health, namely the psychology behind investing. I mean, Anthony, I have to say, it's a bit of a block with a lot of people, isn't it? You know, we're quite good, hopefully, or at least we know we should be quite good about our health and maybe our mental wellbeing and exercise diet, all that kind of stuff. But when it comes to finances, we often just bury our head in the sands. Why is that?

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Speaker 9

Do you know, we're incredibly social creatures, us humans, and I've been thinking about this. And what I think is going on, a lot of it, is that certainly the wellbeing side of things, health and diet and so on, is so readily, socially reinforced and rewarded in a way that money is just not. So making progress with money has less of a kind of dopamine hit in a social sense. And there's stuff we'll get into about what our childhoods and how that affects how we think about money. But I think that social aspect is probably underestimated about how important it is from a reward perspective.

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Speaker 1

And is it because we've been told that it's not very polite to talk about money? Are we already getting too much into our childhoods at this point?

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Speaker 9

We probably have been told. There's a sort of ego for a lot of people that comes with money, particularly if you maybe didn't grow up with much money. And it's taboo, but I don't really know the reason why particularly. We don't compete on money, do we? You see that with clients. Clients aren't really trying to outdo each other, but they might want to look better than another client, for example.

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Speaker 8

I think there's a difference as well between wealth, which a lot of the time can be hidden. So it's not something that's seen. And money, which can be at the forefront. So it's tangible. You can see money in action if you wanted to, cars, big houses, all the rest of it. Whereas I think certainly with clients that we deal with that have wealth, that's often hidden. And so that's money not spent. And so there's not sort of tangible benefits to it that you can see most of the benefits from wealth are intangible. Autonomy over your time, flexibility in the rest of it. So in that sense, it won't be something that's talked about readily at the dinner table, depending on the house you grow up in.

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Speaker 1

And yet it's interesting, isn't it, what you're saying, those, all the reasons that having wealth will be good for you in terms of having more time, having freedom, having choice, having security, those are good for us. You'd think people would want to take care of it. It's very interesting, isn't it, that they think that's something they can just slightly ignore.

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Speaker 8

I think a lot of people are scared of getting it wrong. And I think if I wasn't in the industry that we're in, I would feel exactly the same because it's how I feel about a lot of other things about life. So we should talk about it more. And hopefully that has changed over time. But I think that people are really scared of getting it wrong. There's a lot of uncomfortable feelings that come with taking risk or what people perceive to be a big risk. And if you're not familiar with that, it's not part of your day to day. That can be hugely overwhelming. And so I think it's uncertainty, it's fear of getting it wrong, and it's a lack of experience for a lot of people, despite what they do for a living.

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Speaker 9

Kate's right. And it's not just about the fear of getting it wrong. There's a real issue around people's level of confidence about being able to cope with it, if it does go wrong. We are, by nature, quite fearful. And hopefully we can explore that a bit as we go through. But that sense of getting it wrong or the worry about it is actually underpinned by a feeling of actually, I don't think I can cope with it if it does not go to plan. And we're so hardwired to be able to predict the future, particularly when it comes to money. It's very difficult, therefore, when we're coming along and saying, well, maybe that isn't likely to happen or this is likely to happen. And so that unpredictability is really quite unsettling for a lot of people.

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Speaker 1

It feels like we're gonna dig into cultural impact and environment. We're gonna dig into societal expectations and particularly, I think, family and upbringing and your childhood and the sort of attitudes you have. Because I mean, how many times have I heard people say, oh, money or maths or numbers? Not my thing, I'm not. And it's kind of cool. It kind of seems to be okay for people to say that, which is actually very irrational, isn't it? If you stop to think about it.

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Speaker 9

Yeah, it is. And so this is the interesting thing, is that it kind of gets melded together, doesn't it? Money and numbers. But they're kind of different things in many respects, because the money is just the currency that we're using, but we're still making decisions about something that might benefit us in the future. And so you don't need to have a particularly good head for numbers. And in fact, sometimes a very analytical mind for numbers can make it much harder to make decisions about the future.

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Speaker 8

I think there's very few aspects of life that combine sort of the hard numbers and spreadsheets and formulas, which is what drives a lot of finance, especially what we're taught at school and university, with the softer side, which is, well, behind all of that are people. So people are driving, their behaviours are driving, their greed, their fear, their pursuit of more is driving everything else. So I can't think of another industry where the two are so combined. There's certain aspects of finance, fundamentals that are true and should be applied.

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Speaker 8

But if you think everyone's gonna apply those in the manner that they should, they're definitely not. And I think that's where the personal aspect comes in, because everybody's coming at it from a completely different point of view, because of, I know we'll get into this, how they've been brought up, what's the history of the stock market looked like while they were growing up, what was inflation like what they were growing up, interest rates, everything sort of molds together to create your own personal mental map of how the world works. And that's gonna influence sort of a huge percentage of your financial decisions, but is actually when you stand back, a really tiny percentage of how

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Speaker 1

the world actually works. I mean, you were talking about, the way your childhood affects you. And I'm thinking if we discount the political or international geopolitical sort of scenario of when you were little, I guess the way your mum and dad behaved is crucial, isn't it? It's gonna be pretty influential.

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Speaker 9

It is, and not just your mum and dad, it's other caregivers that had an authority over you when you were a kid. So that could also be teachers, for example, or parents of friends and that kind of thing. And so this concept of the childhood development triangle is really interesting to kind of pick up on because it will underpin. And the beauty about this is, or also the tragedy in some respects, is that you might not necessarily know the event that caused you to have a certain reaction to things. And it might not necessarily be money related or might not obviously be money related. We were talking before, there could be an example where say you were six or seven years old and you were desperate to go to the park with your mum or your dad, but that has to work late because the boss said, the boss of the company works for said, you got to stay late. And so, you know, little Johnny doesn't get to go to the park, but it seems really silly, but they are fundamental moments in people's lives. And this childhood development triangle is essentially, what did we do when we were young to feel safe? So what cost, or what was the cost of doing something to feel safe? There's a social aspect, which is friends. How did we maybe suppress our own selves in order to gain social currency? So that's an interesting one to explore. And then also rewards. So what actually was a reward for you and what did you do in order to get them? And they're the building blocks of how we make decisions about things. And we don't even really know that. You can not even remember the formative events in your life, but they're still running the programming behind the scenes.

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Speaker 1

And so, I mean, in terms of the clients that you've been dealing with, Kate, do you find that these sort of barriers or issues or challenges with their emotional or psychological development, does that affect people differently depending on what level of wealth they're at or in their life cycles? Or tell me a little bit more about how you see it manifest.

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Speaker 8

It's so unique per person. So at every single wealth level, but keep in mind, we're only seeing certain levels of wealth, I think predominantly in our business, but I think it is unique to each person. And at every single level, I've seen people that have either come at it from the way they usually tackle other aspects of their lives. So you might find that a lot of entrepreneurs, for instance, are used to being in the driver's seat, used to making decisions, and will come at the approach quite transactional and say, "This is, I need X, Y, Z,

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Speaker 8

and that's all I need." And then you've got to read the person and be able to say, "I can see that these things are important to you. Have you thought about this? Yes, we can do the transactional part and that's fine, but have you thought about the wider aspect here in terms of sort of generational wealth and family planning, et cetera?" It's a lot about reading people and reading people quickly because you do have to make certain assumptions quite quickly when you meet people, but you can definitely see at all levels, no matter what someone does, how senior they may be in their role, in their world, they're still subject to the same biases and mental trip-ups that you and me are. Yeah.

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Speaker 9

We're all wearing masks and sometimes you don't really know that we are and we certainly come to these sorts of events or a client might come in or a prospective client particularly might come in and there's a mask that goes on which maybe is not the real person underneath that. And so we have to really see through that, but be very sensitive to it as well because you can't just unmask somebody like in the first 30 seconds. You need to create an environment with your presence more than what you say so that somebody feels relaxed enough and trust you enough to be able to start to talk more honestly about what's led them to this position and what they're hoping to... Do you know what? We always say what they're hoping to achieve, but actually I think a bigger motivation is what we're hoping to avoid and that's an interesting, sounds quite a negative way to frame things, but its people are way more motivated to avoid things than they are to achieve things, generally speaking.

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Speaker 1

It's interesting as well, Kate, thinking about the fact that you're originally from South Africa,

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Speaker 1

different countries, different cultures do have different attitudes towards wealth, towards how you discuss it, to the importance that's put upon it. I mean, do you take that into account or how do you take it into account?

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Speaker 8

I think it's made me sort of more empathetic to where people are coming from and their own experiences and more curious about people's experiences and more likely to spend time talking about that. So I think you can't generalize, but in my personal experience, I've definitely noticed that different cultural backgrounds might come to the table, historically holding more of a certain asset class or less. So it might be quite large physical property holdings, large single stock holdings. And a lot of that is just from, that's what they're used to, that's what's been familiar, that's what mom and dad did, could be a lot of cash holdings out of, coming from a culture that's a bit more fearful of risk, or not as used to it. So it's different each time, but you can't generalize, but I think that if you're curious about it and you want to ask the questions and find out, that itself leads to a natural conversation around risk and what people are comfortable with and what their experience with risk has been in the past.

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Speaker 1

I mean, you say we can't generalize, but I am about to shamelessly. Because I mean, we talk about Great Britain as being a nation of savers, traditionally and America being a nation of investors. And that's something that has been very much in the headlines recently with everybody saying, we need to become more like the Americans because our young people particularly need to learn how much money they could save themselves, if they actually treated it as investment rather than savings.

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Speaker 9

There's a culture is a key part of identity and it's an identity that drives behaviour. And so there is a contrast between, there's always outliers, but we're talking about the majority of people, let's contrast British and Americans. And I think what it comes down to is, from an American perspective, there's been a real devolution of responsibility down to the individual. And that's very different from a British person, which people say about Nanani State and so on, but you can see the difference playing out. And it's not taboo, we talked about taboo before, didn't we?

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Speaker 1

Again, a very British thing to say, actually.

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Speaker 9

Precisely that. And so you do see that playing out when you contrast

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Speaker 9

the kind of traditions of both nations, so to speak. But there was a point you made earlier, which was also really important about the era in which you're born, but it's also the place from which you get your information. It's really quite important to your worldview and your perspective. And so different generations will consume media or different types of media, and they'll have a very different view on something than another set of people that have a different source of information. So you've got to be sensitive to that also.

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Speaker 1

Yeah, so interesting. So when somebody comes to you then, and it's clear that they've come at the right time, they need your help, they're not going to grip their finances, what do you normally hear? What are the kind of common themes that you're hearing at the moment?

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Speaker 8

It depends on the person, but probably what I hear the most is,

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Speaker 8

I've been really busy, I've really neglected my own stuff, I want to be able to get a handle on it. I've got two weeks of leave now and I really want to get on top of it.

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Speaker 9

Can you just fix everything, please?

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Speaker 8

Yeah, can you just? So neglect, so very honest up front, just saying, I've neglected this, I know it's important, can you help?

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Speaker 8

That's what I see a lot of.

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Speaker 9

There's a value bit in that as well, in that there'll be people watching this and when they are able to be honest with themselves, they'll be telling themselves, I don't deserve to fix this, I don't deserve for somebody to fix it for me. And that's really sad, but also quite liberating when you get, people come to that realization that they do deserve it.

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Speaker 1

I mean, I'd love to hear more about that. Give me an example, what sort of person would be saying that?

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Speaker 9

I think a lot of people, it goes back a little bit to what you said at the beginning, what we said at the beginning about why diet and exercise seems really easy and so on. Yeah, financial security is something that, or the benefits of having wealth, let's say, is a perspective that a lot of people don't believe that they have deserved. Whether that's because they haven't fulfilled a potential they thought they have, or they've been told from a childhood, you're this precocious individual and you've got these expectations to meet up to, that can be a real blocker to somebody actually taking control or even asking for control to be taken.

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Speaker 1

So this is a situation where somebody might actually be doing notionally very well, but they think they haven't fulfilled their potential, so therefore they think, well, like, I'll just sit on what I've got and not feel, I'm intrigued though, because if they go to the point where they've got enough money in the bank to be thinking about getting financial advice, then they've done, do you know what I mean? I don't see quite where the shame is in there.

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Speaker 9

Well, there's, you know, people still don't, this is the mask thing, isn't it? So, you know, you have somebody who present, and maybe they have been very successful, and maybe it's fortuitous, or maybe they're absolutely amazing about the thing that they do, but the thing that they do is often for somebody else and not for them, and that is a point of differentiation as well.

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Speaker 1

Very good point, yes, okay. So maybe they feel that they need to not show that they don't understand it, is that part of it as well, do you think?

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Speaker 9

We probably get that, a fair bit, I think.

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Speaker 8

It's definitely a fear of, this is not my comfort zone, this is not what I'm familiar with, and therefore I don't wanna portray that I don't know what I'm talking about, and the reality is there's plenty subjects that, you know, Ant and I don't know anything about. We just happen to know about this, because we've applied our effort. So again, it's about chatting to the individual and understanding where they're at, understanding where the mask is, and then being able to talk to them about it and have a real conversation around maybe some of the intangible benefits of starting to tackle it and admitting they don't know where to start.

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Speaker 1

That's often it, isn't it, with so many things in life, whether it be sorting out your wardrobe, to sorting out your finances, it's like, you know, oh, no, I haven't got time to do that today, I'll put it off, I'll put it off, I'll put it off. So do you not often find that it's a crisis point? Something has really got to the point, they can't ignore it anymore when they come to you.

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Speaker 9

You do get that impetus where something's gone on too long and people just cannot live with the cognitive dissonance any longer because they're presenting this image in one hand, and yet at home when they're alone, they're feeling very, very differently about things. So you do get that. You also get the positive side where somebody, say we'd worked with somebody and they've gone and weirdly told a friend how amazing it was, for example, and that might be just the final piece of reassurance that somebody needs to actually come and engage.

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Speaker 1

And a lot of the emotions that you're having to deal with and negotiate and navigate around, they're quite negative ones, aren't they? It's fear and it's lack of confidence and it's shame and, you know, overwhelm and anxieties. I guess particularly at the moment, volatile times, lots of things going on in the financial markets which are tricky and unsure and unpredictable. And how do you help people navigate their way through that and keep them on a straight and narrow and keep them happy with your advice?

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Speaker 8

I think everybody's got different methods and I think naturally you end up attracting the clients that sort of agree with your methods of explaining things. So for me, I'm very honest. So I have a real conversation around what's in my control, what's out of my control. Then we can sort of dive deep into that and say, within your portfolio, this is what's in our control and this is the tools we're employing. These are the jobs they have to do and this is how they work together to navigate times like this. Depending on the type of client, but if you give them a sort of breakdown of sort of mental accounting of what their portfolio is doing, the different aspects of it, are the tools doing the job that they want to for your goals, then I find most people relaxed. And I think it's important to be honest around investing in finance will always, because it involves humans, will always involve a degree of fear, uncertainty, regret sometimes, unfortunately, and just a general lack of control because you can't control everything. You can't control markets acting consistently year on year. In fact, they don't. But I know what they're gonna do over the longterm because I can look back and say, this is what's happened over time. This is what should happen going forward and this is how we're gonna meet your goals. So real honesty, giving a clear breakdown of what's in your control, being able to sit comfortably with the stuff that isn't in your control, I think all of that leads back to a certain level of risk that technically all three of us could probably enjoy and it's probably different levels, but emotionally the level that we can enjoy is probably a bit different and those two might not always match. And that's the art about it is technically, I can tell you what we should do, but reasonably and emotionally, what's comfortable for you, what's gonna help you sleep at night. And that's the sort of tightrope that we have to walk and build something that allows that whilst reaching your goals.

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Speaker 1

And holding your client's hands through that. I'm guessing that maybe at the moment, are you getting more calls from clients, wanting more regular updates as things are a little bit unpredictable at the moment?

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Speaker 9

They're their sort of own worst enemy really, because this principle of just ignoring it for a period and checking in six months later is really actually quite sound because the things that happen day to day are really not that important in the lifetime of managing somebody's wealth. And I don't wanna, at the risk of making it seem like every time somebody comes and sees KNI, it's like a pseudo-therapy session, but it is worth people-- Sometimes it is. Yeah, even this itself is quite therapeutic. Yeah, but it's helpful for people to know about how the brain works really. And what the brain is is a pattern-seeking machine and it will always seek out what's familiar, not what's best.

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Speaker 9

And there's a saying which is quite helpful for people to kind of really take on board is that if it feels familiar, it feels safe. If it feels safe, it becomes attractive. If it's attractive, it gets repeated. And anything that is repeated over a period of time ultimately becomes automated. And so you have this complete vacuum in the middle that you're not even aware of happening that your brain is seeking what's familiar, which is why people see patterns and things that don't exist. And sometimes that's a motivator for good and sometimes it's a motivator for bad, but the brain is always gonna pick what it thinks, it recognizes, because it knows, well, I survived that last time. So that looks like this.

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Speaker 1

Which again is where all those patterns set in childhood come in, right?

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Speaker 9

Yeah, absolutely. And again, we're not aware of them. And sometimes it's a difficult tightrope to walk between showing somebody the answer and giving them the answer. And really we've got to try and help them help themselves. That's ultimately what good wealth management is about. The technical stuff is the easy bit, arguably. Yeah. But that's, we can do all of that stuff as well, but the relationship and the emotional side of things is what we excel at.

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Speaker 1

And building trust, isn't it? I mean, that's what it's all about, I guess, yeah? Absolutely.

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Speaker 8

I mean, you've almost got to be, you've got to build trust very quickly with individuals because it's such a personal subject to so many people. And so they have to naturally like you, fit with you, click with you in order to go uncomfortable with such a big personal aspect for me and my family. And you're gonna be part of that now. So we don't take it lightly at all. It's a huge amount of trust that's handed over to us.

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Speaker 9

There's a sort of implicit trust that comes with the role that we play in. So a lot of it actually is working hard not to undo that trust that is immediately imbued upon other people because of the nature of who we are and what we do. So that's important. And we've talked about this before. The trust thing is deeper than that because what we really need to get clients to the point of is that they trust themselves.

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Speaker 9

That will be the point of liberation from which more confident decisions will come.

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Speaker 1

If there are people watching who know they've literally got box files of paperwork, oh my goodness, probably in the loft, untouched for years, and they have a sneaking suspicion that some of that paperwork is quite important. They should really go through it. And there might be some money somewhere sitting in account, not doing very much. What can they do? What's the one thing they could do today?

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Speaker 8

You have to tackle it at some point. Don't wait until a huge life event because you dismiss a lot of options if you wait until then. So just face it and sit down with someone and have the conversation. I mean, that's the thing. We have so many conversations with people that might not necessarily lead to something, but they've started the conversation. And sometimes you have a conversation with someone and two years later, they phone you up and they say, "I'm ready, can we chat? Can we pick up on the discussion?" So it's just about starting. And I think if you think about the fact that time's marching on, it's coming for all of us, you want your outcome to be as close to your expectation as possible, right? That's happiness, outcome expectation, matching. There's one part of the equation that is in your control

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Speaker 8

and that's your expectation. So if you can go out there and get the knowledge and get the information to educate your expectations and what can you do to be bringing that closer in line, then almost it doesn't matter at the end of the day what the outcome is because you're prepared, educated, informed to match that over time. So just start really.

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Speaker 1

Just start really is kind of the headline, isn't it? I mean, would you agree with that, Adony?

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Speaker 9

Absolutely. You, for people watching,

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Speaker 9

you do deserve it. And the other part of that is that nobody is coming to give you permission to do it. You've got to permit yourself to do it and then we're ready for you.

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Speaker 1

Yeah, very, very good advice. Thank you both so much. It's been a pleasure having a chat.

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Speaker 9

Thank you.

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Speaker 1

Thank you.

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Speaker 1

Thank you so much for joining me for today's conversation and thank you to my guests, Financial Planning Director, Anthony Flynn, and Investment Management Associate Director, Kate Duggan from Evelyn Partners.

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Speaker 1

If you'd like personalized guidance or want to explore your own wealth management plans in more detail, then the team at Evelyn Partners are here to help. Just follow the link in the description below. Thank you for watching and goodbye.