QUESTION: I want to invest our hard-earned savings in stocks so we can make more money and, perhaps, retire early. But my wife is so conservative and afraid of the potential loss. She wants our money placed in guaranteed short-term investments. Do you know of a way to convince her to see it my way?—sent via “ask a friend, ask Efren” service on www.personalfinance.ph
Answer: You and your wife are obviously worlds apart in terms of your preference for risk-taking. Don’t worry, be happy. This is the type of combination that can bring about a better managed investment portfolio.
But first things first, there is no “my way or the highway.” There is only “our way.” Unlike in the movie, there is no lord of the wedding rings in a marriage. The ideal marriage is where husband and wife form a collegial body in crafting monetary policies that impact the entire family. When the policies have been laid down, either the husband or the wife is appointed to serve the family through the execution of relevant strategies.
I agree that it is not as easy as it sounds. Just like in the movie, a diminutive hobbit had to go against all the might of a dark lord. But conquer the dark lord he did through patience, persistence and perseverance, otherwise known as the power of three. That power of three is what successful couples use to conquer their daily financial challenges.
Undoubtedly, you see your wife’s risk aversion as being a drag to making more money and possibly retiring early. She probably sees you like a kid running with a pair a scissors. Even if both of you are looking at just one thing, you can very well interpret it differently. In this regard, both of you have to see the pros and cons of your respective risk preferences.
Please consider that your wife is like many other people who simply do not like to experience losses.
Losses generally hurt more than gains please, according to the book “Why Smart People Make Big Money Mistakes and How to Correct Them” by Gary Belsky and Thomas Gilovich. Moreover, people tend to see losses independent of their overall impact on wealth.
I was on a provincial training trip recently where my out of pocket expenses were to be reimbursed by my client. In my rush to catch the plane back to Manila, I forgot to ask for a receipt from the taxi I took to the airport and, therefore, passed up on the opportunity to have the taxi fare reimbursed. The amount was just P200, a measly sum compared to the fee I would earn. Yet it took me a while to get over that P200. I even found myself thinking of the many items I could have bought with P200. However, I bet that if someone just gave me P200, I would not fuss over it that much.
Combine this aversion to loss with confirmation bias. It would be so easy for anyone to cite the legions of investors who lost a lot of money in the stock market even though there could be just as many or perhaps more who profited from it. This confirmation bias is so strong that it causes people to stay put or be held back by the status quo bias.
You too can suffer from overconfidence when you get carried away in stock investing, especially if your first few trades turned out to be winners. You can also be selective in confirming your brilliance in stock investing by taking things out of context. For example, making money in a bull run, such as what our stock market has been in the past several years, does not make one brilliant as almost everything was moving up. If you were like Jesse Livermore, who made US100 million during the 1929 stock market crash, or grew your wealth by the multiples, as enjoyed by Warren Buffet, you would then be considered brilliant.
Your wife’s risk aversion will help put your feet back on the ground and be prudent with the way you invest your family funds.
Two of the ways to combat this aversion to loss, overconfidence and confirmation bias are to: frame rules on how to prudently manage your money, perhaps with the help of an expert, and invest periodically but only in bite sizes so you and your wife can avoid being overwhelmed by either the risks or gains.
To help you in framing your investing rules, download Ya!man™, the country’s first personal finance mobile app. The Android version of Ya!man™ may be downloaded from Google Play. The app’s Symbian (40 or higher) OS may be downloaded from www.personalfinance.ph. The iOS version will come out soon. Ya!man™ also comes with a feature where you can ask a financial expert about financial planning. Everything with Ya!man™ is free.
If you want to learn more about personal finance for couples, visit www.personalfinance.ph. There are more free resources there for you to benefit from. You may also attend EnRich™ on Aug. 3, 2013, our public training on personal finance. Details on EnRich™ can be found in the website.
(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-5050709 or e-mailed to firstname.lastname@example.org. To learn more about RFP program, attend a free personal talk on Aug. 8, 7 p.m. at PSE Ortigas. To register, e-mail email@example.com or text name_email_RFPinfo to 0917-3464126.)