I worry a lot about financial decisions, particularly when it comes to investment, and often put things off so much that I end up doing nothing. What should I do?
First of all, I would like to reassure you that this is not uncommon. The fundamentals of personal finance are not particularly complex but there are so many different products, promising the world and often delivering somewhat less, that it can feel difficult to make decisions.
Whether you do it yourself or appoint an adviser, financial planning is about creating a long-term and coherent strategy to help you meet your lifetime financial goals and aspirations. It is about giving you peace of mind if you are on track or creating direction for your finances if you are not.
Ultimately, if you save enough money you should have a financially secure retirement and if you don’t, you won’t. We see it as a process rather than a one-off exercise.
There is no overnight solution and there are many different approaches that might prove successful in the long run. You do not need to worry about getting things 100 per cent right.
Regarding investment, logic tells us that risk and reward go hand in hand. However, behavioural finance suggests that most investors are more concerned about potential loss. In fact, some research suggests that investors give almost twice as much weight to the risk of loss than they do to the potential reward.
This focus on the potential for loss is particularly unhealthy if it leads to inertia, as has happened with you. It is not unusual to procrastinate when we cannot visualise the outcome but, unfortunately, many areas of financial planning, and investment in particular, have very uncertain results, particularly in the short term.
The best way to avoid this inertia is to have a strategy that you buy into and then stick with it through rough and smooth. If your personal circumstances change, then by all means adapt the strategy but don’t change it just because you are nervous about investment markets.
The more aspects of your finances that you can put on autopilot, the more time there is for you to focus on the areas where well-timed analysis and decision-making are more likely to pay off.
Setting up investments by direct debit can help. With the example of an Isa, rather than putting £10,680 into the markets in one go, why not invest £890 a month? Then, when the Isa allowance goes up next tax year, the decision is a small one – do you increase your direct debit to the new maximum or not?
Similarly, a structured and dispassionate approach to portfolio rebalancing can work well. If you start the year with 50 per cent invested in bonds and 50 per cent equities and this is the right level of risk for you, it should still be right for you at the end of the year if one has gone up and the other gone down.
Rebalancing back to your target will get you into the habit of buying low and selling high and might stop you worrying about investment timing decisions.
Finally, rather than focusing too heavily on the performance of one fund, or one aspect of your finances, it is better to look at your overall picture.
Ultimately, what is important is whether you have, or will have, enough money to achieve and maintain financial independence and achieve of the things you want in life.
Our experience is that using a lifetime cashflow analysis forecast is the best way of bringing this to life. Numbers can sometimes feel hard to put into context but a picture speaks a thousand words.
Jason Witcombe is a director of Evolve Financial Planning