 A major financial firm in Colombo asked me to meet with a group of “high net worth” individuals in order to help them design a service for this segment of clients. The organisation had already made the assumption that these so called “high net worth” individuals, somehow, had needs and motivators of investing money that was “different” to you and me. This is a common mistake that permeates the entire investment and financial services profession globally. At the heart of the issue is a lack of clarity on why individuals invest to start with.
Why do you invest your money? It’s an obvious question, but essential one for understanding an important frame through which you view the markets. A surprisingly common reason that people invest money is this: to get rich. It sounds tacky, we know. But although our investing motivation is rarely thought of as “to get really rich,” when investors start from the assumption that they invest to “make money” and hopefully to “make a lot of money” that is unwittingly the frame in which they operate.
Of course making money is a desired investing outcome, but focusing on and worrying about making money leads to trouble (and less money in the long term). When your focus is on how much money you’ll make versus the actual life you hope to live, you are in the money-focused frame.
It’s not hard to see how investors get caught up in this approach. To make lots of money (without having to work) is as popular a daydream as ever (ranking just behind the “fountain of youth”). And there is no more alluring place to pursue this dream than in the share markets. The problem gets accentuated by a 24-hour news cycle, focused on pushing bad and negative news over the quiet successes.
By nature and nurture human beings fear bad news, part of our DNA that all things must come to an end. Media organisations have found that there is money to be made from this fear. Research has shown that higher sales and viewership are directly and proportionally related to the absurdity along with fear a media outlet can induce in the public.
The focus on negative news had a profound effect on our outlook and investment behaviour when operating form a money-focused frame. During good times the market is constantly roping investors in with the lure of easy money. There is no shortage of compelling anecdotes and news stories nudging us into this frame of mind. There are multiple stories of “investing in the next big thing and winning a zillion dollars.” When investing is described in these terms it practically is the functional equivalent of winning the lottery, rather than the long term patient journey it ought to be.
Perhaps the biggest problem with the money-focused frame the media portrays investing to be is that “getting rich” or even “making money” isn’t a helpful goal. It’s amorphous and idiosyncratic. How much money does it actually take to “be rich”? It’s hard to say and most people can’t. All other things being equal, having more money is better than having less. But the question still remains, why do you want to have the money? Money is a means to achieve your lifestyle goals, not an end by itself.
Rather than thinking in terms of making lots of money, a much more productive frame is to focus specifically on what we’d like to achieve in life: the experiences we’d like to have and the misfortunes we would like to avoid, the nature of how we would provide for the people we love, the legacy we’d like to leave behind.
These are the true reasons we put our money away. Working from a life-focused frame roots our investing choices in tangible outcomes. It gives us a more grounded idea of what to shoot for and what to expect. It also helps us avoid the traps that lure investors into the false choices and gambling mentality that torpedo so many portfolios. When we have clear life goals, we can design an investing approach that aligns with them – one that can be measured and adjusted accordingly.
When you find yourself tempted to think diffusely about “making money” with your investments, try picturing how you’ll use that money to live a more fulfilling life. Think in terms of the safety net it provides, the standard of living it affords, and specific accomplishments you’d like to ensure.
Changing you investment frame from being money oriented to lifetime goal oriented will dramatically change the way you react to scary headlines of the day and calibrate your understanding of investment risk.
(Kajanga is an Investment Specialist based in Sydney, Australia. You can write to him at kajangak@gmail.com). |
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