Acting on impulse: Is it making you poorer?

Impulses can lead to poor financial decisions but there are ways to keep them under control.

We like to think of ourselves as rational and in control, but being human means impulses can drive our decision-making.  Exactly how many decisions do we make each day? According to Cornell University, the average person makes an eye-popping 35,000 choices every day.

From the moment we wake, we face a never-ending stream of decisions. Stay in bed and hit the snooze button or spring out of bed and go for a walk? Of course, some decisions are more important than others. Deciding how much to spend at lunch is much simpler than deciding how to invest your retirement savings.

When it comes to important financial decisions, we should consider what is best for us now and in the future—but the reality is a little different. That’s because negative feelings like anxiety, fear and panic - things we’ve become all too familiar with in recent months - can hinder our ability to think about what’s best for our future self.

Victoria Baranov, senior lecturer in economics at The University of Melbourne, says the current global coronavirus pandemic has caused a great deal of stress and fear and these feelings can lead to poor financial decisions.

“Typically economics has focused on rational decision making, but we now understand decision-making is affected by the emotional state people are in,” Baranov says. “If they feel stressed, are in fear, are worried about budget constraints or feel there is scarcity, they end up putting pressure on their mental bandwidth.”

For KiwiSaver investors, the financial consequences of an emotional reaction can have long-term consequences. For example, when markets fell in March 2020, some investors rushed to change their KiwiSaver investment option in favour of a lower risk option, such as Cash or Conservative, to minimise their losses and gain some control. However, investors who switched investment options without considering their investment timeline or objectives may suffer significant losses down the track.

Five ways to help control the instincts and biases that could be losing you money

1.      KiwiSaver is a long-term investment, so it’s important to stick with your long-term investment strategy to reach your financial goals. If you’re not sure what strategy is best for you, seek financial advice.

2.      Try to avoid taking shortcuts, as it’s generally unhelpful when it comes to financial decision-making.

3.      Remember markets surge and fall. You can keep your finger on the pulse without being reactive and by taking an active interest in your financial future.

4.      Work with your financial adviser to help manage emotional reactions during periods of market volatility.

5.      Always consider your investment time horizon.

Our financial advisers can help you make the right decisions to help grow your KiwiSaver money. Free financial advice is available by emailing NZadvice@mercer.com or calling 0508 637 237.