The maths always looks simple. You put money into your stocks and shares ISA, wait and watch the riches roll in. We should all be millionaires! The problem is not with the maths, it’s with the psychology.
Oxford Risk research showed that UK investors lose around 3-4% a year from their own behaviour. At £200 a month invested from starting work at 20 to retiring at 70 that’s the difference between a million-pound pot and £275k – £375k (assuming 7% returns). That’s not a small difference, that’s a completely different retirement. Don’t forget £120k is the money you put in, so we’re talking about losing up to 80% of your investment returns!
So why do we self-sabotage our investments this much? This is the real investing cost of being humans. Five decades is a very long time to keep our emotions and human failings in check. I’ve only been investing a couple of decades and I’ve fallen into these traps many times.
There are the bad days, the long days at work, the burnout and endless cost of living crises that make bad decisions seem logical. There are real fears, like losing your life savings, not wanting to miss out on the opportunity that could have saved your finances or not wanting to go bankrupt that can drive our decisions in less-optimal ways.
Where does the money go?
If most of our money is falling down this gap, where is it going to? There’s loads of reasons why we get tempted to reduce our own investing returns, and all of them seem completely natural and logical in the moment. It only takes 1 minute to completely derail your investments, and each decade has over 5 million of those.
Some of the many ways that us being emotional fallible squidgy humans lose money compared to our robot friends are:
- Cash: It’s easy to think money in your cash ISA is investing, but you’re probably not even keeping up with inflation, never mind actually making a return.
- Buy high sell low: When the papers are full of record profits it’s easy to buy, but prices are high. When the news is doom and gloom and companies are going bankrupt you want to sell, but prices are low. It’s not what we want, but it’s what happens.
- Fear of the unknown: We all have a comfort zone in investing, which for most of us Brits is buy to let. Unfortunately, the government are on to this and are making it much less profitable for us. Expanding your comfort zone will let you find some much better options.
- FOMO: Even if the boring option makes you more money, it’s a lot more fun to be one of those people who made a million trading in crypto. It’s a shame that you’re more likely to make your million in the boring option.
- Playing catch up: If your investments go down 10%, your retirement can feel like it is retreating away from you. It’s really tempting to throw out the plan and invest in something risky to bring it back again. This can quickly lose you a fortune.
This isn’t a full list, it’s just some of the biggies. There are a lot of pitfalls that you can fall into, and the cost regularly adds up to costing you the majority of your investing returns. The reality is mastering the psychology of investing can easily be more important to your results than mastering the mechanics and investment theory.
It’s one of the reasons that I made this site. I find the psychology of investing both vital and fascinating, and it seems odd to me that so few investment sites have that much about it. If you could learn an investing method that could literally quadruple your investing returns over your lifetime you’d think it would be worth a bit more focus.