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Behavioural finance: 6 unexpected ways bias could affect your financial decisions

How much does bias affect your financial decisions? While you may try to make decisions based on facts, it can be much easier than you think to overlook when your decisions are being influenced by emotions or bias.

Last month, you read about why bias occurs and how it can lead to “irrational” decisions through making shortcuts. Now, read on to discover six signs that bias could be affecting your financial decisions.

1. You hold on to certain information

When you make financial decisions, there may be a lot of information to process. So, you may focus on one piece of data. This is known as “anchoring bias” because your view is anchored to the information.

For example, when thinking about how valuable an investment is, you may anchor your view to a previous share price, even if further data means this is no longer accurate. It could mean you choose to hold on to an investment longer than is appropriate because you view it as being more valuable than it is.

This type of bias could mean you’re not looking at the full picture when you make financial decisions as you are blinded by a specific piece of information.

2. You’re too cautious

Often when you think about making investment mistakes, it’s taking too much risk that comes to mind. Yet, being too cautious when making financial decisions could be just as damaging.

Psychology theory suggests that you feel the pain of losses more than the joy of gains. So, it’s natural that you’d want to avoid a loss. That could mean you choose to take too little investment risk or not invest at all due to fear of potential losses.

However, being too cautious could erode value and affect your plans. It could mean you miss out on opportunities to grow your wealth even if they’re suitable for your risk profile and goals.

3. You’re overconfident

In contrast to being too cautious, overconfidence can be damaging too. It can mean you don’t manage risk properly and could lead to reckless financial decisions.

Overconfidence can mean you overestimate your abilities. This can often be seen in investing, where some people may believe they can time the market to maximise returns, despite markets being unpredictable.

Overconfident investors will often attribute “wins” to their skill and knowledge, but when they “lose” it’s blamed on things outside of their control. This mindset can lead to investors taking on even more risk that may not be right for them and a short-term outlook.

4. You follow the crowd

There’s something comforting about doing something that everyone else is. It can make you feel like you’ve made the “right” choice because everyone can’t be wrong, can they?

Herd mentality is another bias that can often be seen in investing. If all your colleagues are talking about an opportunity they believe will deliver returns, you can feel left out if you’re not part of it. You don’t have to know the people to be affected by herd mentality, reading the news or financial commentary can also encourage you to follow the crowd.

It’s a bias that can mean you make decisions that aren’t right for you.

5. You seek information that supports your views

It’s normal to seek out people that have like-minded views. It’s a bias that can affect how you seek and process information too.

Known as “confirmation bias”, some people will place a greater emphasis on information that reaffirms what they already believe. When making financial decisions, that could be that an investment is “bad” or “good”. It’s a process that can mean you discard valuable details without giving them the attention they deserve.

6. You give all information the same level of importance

How you process information can lead to bias. In the case of “information bias”, you give all information the same level of importance even though they could come from very different sources.

When you’re bombarded with information, it can be challenging to decide what to focus on. However, understanding that not all information is equally useful is important.

Knowing which information to discard and which to use to guide your decisions is difficult, but improving this process could help you make choices that are better for you.

Recognising bias can help you overcome it to make better financial decisions

Realising that bias could affect your financial decisions can mean you’re in a position to spot the signs and start to make better choices. Look out for our blog next month for tips on how to reduce the effects of bias.

If you have any questions about your financial plan or would like our support when making decisions, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Mortgage lenders are told they can scrap affordability rules. Here’s why it’s still important to assess your budget

The Bank of England’s (BoE) decision to scrap some affordability tests for people taking out a mortgage could mean you’re able to borrow higher sums. However, it’s still crucial that you have confidence in your budget and don’t overextend yourself.

From 1 August 2022, lenders won’t have to carry out affordability tests that assess how buyers would cope if interest rates increased.

The decision has attracted some criticism given that interest rates are beginning to climb.

After more than a decade of very low interest rates, the BoE has slowly started to increase its base rate. It now stands at 1.75% and is likely to rise further.

There are concerns that the UK could face an economic recession and households could struggle as the cost of living rises.

However, the BoE has said that it will not withdraw the loan to income (LTI) flow limit. This limits the number of mortgages lenders can extend to borrowers at an LTI ratio of 4.5 or greater. The Bank said this, along with wider assessments of affordability, “ought to deliver the appropriate level of resilience”.

The Bank of England introduced the stringent affordability test after the 2008 financial crisis

The BoE introduced the affordability test, which it is now scrapping, in 2014. It was intended to make sure borrowers did not take on more debt than they could afford and end up “amplifying” a downturn, as happened in 2008.

In 2007, the “credit crunch” was driven by a sharp rise in defaults on sub-prime mortgages. These mortgages, normally issued to borrowers with lower credit ratings, were mainly in the United States. However, the effects spread throughout the world and triggered a global recession in 2008.

According to a report published in the Guardian, repossessions in the UK hit a 12-year high in 2008. Around 40,000 repossessions happened in 12 months, and the high levels continued into 2009.

Growing unemployment and buyers overextending themselves in the days of easy credit – when 125% mortgages were available – contributed to the number of repossessions.

The BoE’s stringent affordability tests were designed to prevent this from happening again, by ensuring that most borrowers could meet repayments.

How will scrapping the affordability test change what you can borrow?

Scrapping the affordability test doesn’t automatically mean lenders will change how they review applications or that you can borrow more.

Lenders still have a duty to lend responsibly. They will also have their own criteria to ensure they’re not taking too much risk by increasing the amount of credit they offer or the people they approve applications from.

However, it could mean you’re able to borrow more than you could before, and some lenders may be more flexible. If you have a good credit score and can demonstrate you’ve reliably paid rent for years, you may find that a lender will now approve your application that was previously rejected.

If you’ve struggled to secure borrowing in the past or affordability tests mean you delayed plans, the change could be good news.

Working with a mortgage broker can help you identify the lenders that are most likely to approve your application. These could be lenders that don’t have a high street presence and you may overlook them if you’re applying for a mortgage alone.

We’re here to offer support and advice if you have any questions about how the changes could affect your goal to buy a home.

Homebuyers should still carry out their own affordability tests

Just because a lender says you can borrow a certain amount, doesn’t mean you should take out a mortgage of this size.

You should still consider how it’ll fit into your budget and other plans you may have. If taking out a mortgage for the maximum amount could mean you’d struggle financially, opting for a lower figure can make sense. It means you can have confidence that you’ll be able to make repayments now and in the future.

Spending some time reviewing your income and outgoings to conduct your own affordability test can mean you’re more financially secure.

Keep in mind that interest rates are rising. If you take out a variable- or tracker-rate mortgage, the amount of interest you pay could increase during the mortgage term. So, you should give yourself some leeway when calculating your outgoings.

Do you want to discuss mortgages?

If you want to take out a new mortgage, whether to buy your first home, step up the property ladder, or borrow more, we can help.

We’re here to offer advice throughout the mortgage process and help you identify which lenders are right for you. Please contact us to discuss your needs and speak to one of our team.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

5 unexpected lessons you can learn about finances from Roald Dahl

Roald Dahl’s books are known for colourful characters, fantastic adventures, and simply being fun. As a child, they’re the perfect books for capturing your imagination. As an adult, you can even find some unexpected money lessons nestled among the talking creatures and magic.

Here are five financial lessons you can learn from the stories of Roald Dahl.

1. Patience can pay off

The rags to riches story of Charlie and the Chocolate Factory has enchanted readers since 1964. It also includes a valuable lesson about holding on to assets.

When Charlie first finds the coveted golden ticket, he receives offers to sell it. Wisely, he keeps hold of it and goes on to become the heir to Willy Wonka’s chocolate empire. If he’d sold the ticket, the cash would have been far less valuable.

When you’re investing, a long-term outlook is important.

2. A decisive plan is crucial

While many of Roald Dahl’s books are about going on an adventure, coming up with a plan to reach these goals is crucial for many of the stories’ happy outcomes.

Would the fantastic Mr Fox have outsmarted the wicked farmers Boggis, Bunce, and Bean without devising a plot to reach the chicken houses? No, it took careful planning to safely burrow underground to secure the loot.

When you have a goal, learn something from Mr Fox and set out a plan to reach it. Whether you want to build a nest egg for children or are thinking about your retirement, without a plan, you can easily miss a target that was within reach.

In the words of the BFG: “You’ll never get anywhere if you go about what-iffing.”

3. Protect your assets

Aunt Sponge and Spiker aren’t exactly the heroes of James and the Giant Peach. But, as an adult, you have to admire their ability to spot an opportunity.

When a giant peach starts to grow in their garden, the aunts are quick to spot what a valuable asset it could be. They quickly erect a fence and start selling tickets to tourists eager for a glimpse of the peach.

Of course, it doesn’t quite go to plan for the aunts – it wouldn’t be much of a story if nephew James didn’t crawl inside the peach to make friends with some giant insects.

Yet, there’s still a lesson to be learnt; know what’s valuable to you and take steps to protect it.

From a financial perspective, that could mean taking out financial protection to ensure your family is secure or adding to a pension so you can enjoy the retirement of your dreams.

4. Diversify

If you’re going to make something marvellous, you need to mix lots of ingredients. It’s something that the titular character of George’s Marvellous Medicine knows all too well.

When George decides to make a magic medicine, he takes components from all over the home – floor polish from the laundry room, shampoo from the bathroom, and gin from the kitchen.

In the same way, you should diversify your investments. Choosing investments from different industries and geographical locations can help balance out some of the volatility you experience when investing.

There’s another investment lesson in George’s Marvellous Medicine too.

When he tries to recreate the medicine, there’s lots of chopping and changing as he attempts to remember the correct ingredients. He can’t get it right and it leads to bizarre results until George’s grandmother drinks a cup and shrinks until she disappears entirely.

What’s the lesson to be learnt here? Set out an investment plan and stick with it. While it might be tempting to make a change and respond to market conditions, keep your focus on the long term.

5. Don’t follow the crowd

Roald Dahl's books are filled with characters who don’t always follow the rules and what others are doing.

While others are standing back, Matilda Wormwood stands up to the cruel headmistress Miss Trunchbull and defeats her. Likewise, in Danny the Champion of the World, nine-year-old Danny “borrows” an Austin 7 that’s been left in the garage to rescue his father.

It can be all too easy to follow the crowd, but sometimes you need to focus on your own goals. This is especially true when you’re investing. While it may seem like everyone is investing in a particular asset or selling another, it doesn’t mean that’s the route you should be taking.

You should tie investment decisions to your goals and circumstances. Even when a decision is right for many others, it doesn’t mean it is for you.

Are you ready to make a financial plan?

Roald Dahl's books have taught us some valuable financial lessons, but now you may want to speak to an expert. Arrange a meeting with us to discuss how to create a financial plan that’s right for you.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

Cover will cease on insurance products if premium payments are not maintained.

7 essential money lessons your children need to know before they go to university

The day that you send your child or grandchild off to university can bring up mixed feelings. There's pride and joy at their accomplishment, but also fear and worry as they venture out into the world on their own for the first time.

There's also the issue of their financial security, with the National Student Money Survey estimating the individual cost of going to university for the average student is £57,000.

Providing your loved one with a few pieces of key advice ahead of university can help them to deal with any financial issues they may encounter. It can also help to relieve any money-related stress and allow them to better focus on their studies.

So, here are seven lessons to share with your children before they head off this autumn.

1. Why students need to understand how their tuition and maintenance loans work

Your child or grandchild can normally apply for two key loans each academic year, one for tuition and another for general maintenance.

Tuition loans cover course fees and are paid directly to the university, so they aren’t something you or your child need to worry about in the short term.

Maintenance loans are meant to provide for the basic living expenses of students. In England, they are paid in three instalments across the academic year, typically at the start of each term.

For the 2022/23 academic year, students living away from home can receive maintenance loans of up to £9,706 (£12,667 in London). The exact figure is determined by means-testing that is largely based on parental income.

The government website provides a full breakdown of how maintenance loans are assessed.

Additional support can be found through scholarships, grants, bursaries, and hardship funds. These usually depend on a student’s personal circumstances, and they can typically find out more information through their respective university.

Understanding how much they will be paid and when it will arrive is essential for budgeting for the academic year. Maintenance loans don’t stretch very far and will mostly cover rent and utilities.

It may be advisable to pay essential bills in lump sums at the start of each term, even if monthly payments are an option. This can reduce the risk of overspending on non-essential items and leaving key bills unpaid.

2. The pros and cons of overdrafts and credit cards

Student overdraft facilities and credit cards offer plenty of positives for students trying to make ends meet.

Student credit cards can be a useful tool in emergencies, but your child or grandchild may end up paying high interest rates and monthly fees that can be difficult to manage on a student budget.

Overdraft facilities, while often interest-free for students, can leave them with large debts. This could place extra financial pressure on them after graduation.

Understanding the potential pitfalls associated with credit facilities can be a helpful money lesson.

Talk to your child or grandchild about how interest on debt can accrue over time. It may also be instructive to explain how making only the minimum payment could mean it will take years to pay off debt.

Money Saving Expert shares a useful example. Assuming the minimum payment is 1% plus interest or £5, whichever is higher, it would take 27 years to pay off £3,000 of credit card debt. The total interest paid would add up to almost £4,000. This assumes no further spending is made on the credit card and that the interest rate is 17.9%.

3. Why they should be wary of buy now, pay later and other instalment-based options

According to Bloomberg, buy now, pay later (BNPL) apps such as Klarna are one of the fastest growing payment options among Generation Z.

They typically offer a range of alternatives to traditional purchases, such as:

  • Buy now, pay 30 days later
  • Pay in three instalments
  • Longer-term payment plans for larger purchases.

BNPL can be highly beneficial in reducing short-term cashflow issues for students and could help spread the cost of big-ticket items such as a new laptop.

However, BNPL is still a largely unregulated market and doesn’t provide consumers with the same protection as other borrowing options.

Talk to your child or grandchild about how apps like Klarna run the risk of damaging your child’s credit score, and how they could encourage them to spend beyond their means.

4. The advantages of group plans, discounts, and other potential saving opportunities

Collective planning can be a vital part of a student’s financial arsenal. Communicating with housemates and reaching mutually beneficial agreements can spread some of the additional costs outside of rent and utilities.

So, encourage your child or grandchild to find ways of partnering with others to reduce their total expenses.

For example, making essential household purchases (toiletries, cleaning supplies, and food staples) from a communal pot can reduce the total cost. Students can even look at planning weekly meals together to reduce waste and make every penny count.

If you have a family phone plan for your household then you might be able to help reduce any mobile phone charges, especially if devices need replacing in the future.

Similarly, TV or music subscriptions can be collective agreements, whether that’s shared family streaming services or an agreement among housemates.

Students also have a wide range of discounts available to them, from supermarket savings to the 16–25 rail card. You can help your child or grandchild seek out these savings.

5. The importance of factoring in insurance

Students should carefully consider what kind of insurance they’ll need while they are away from home. It is advisable for all students to look at contents insurance.

A study by Endsleigh Insurance estimates that students travel to university with more than £2,000 worth of hi-tech gadgets. So, contents insurance can provide a valuable safety net in the event of theft or damage.

You may be able to add this cover to your own home insurance policy. Teaching your child or grandchild about the benefits of insurance can be a valuable money lesson, so make sure you chat through their needs and whether they have the right cover in place.

6. The benefits of a part-time job

Ultimately, there may come a point where your child or grandchild needs to make up an income shortfall. If you’re financially able to assist your child, it will enable them to focus completely on their studies.

However, for many households, students will need part-time jobs to make up the difference. Having a conversation with your loved ones about potential job opportunities, before they head off to university, may help them make an informed decision.

Sharing valuable hindsight from your own life experiences and pointing them in the direction of useful information can help them select the most appropriate part-time job for their studies and goals.

7. How to carefully plan and budget

Finally, unforeseen emergencies can hit at any time. As a relative, you’ll feel the urge to bail your child out if this occurs, but it would be smart to advise them to keep a “rainy day” fund set aside.

Work out what their outgoings are likely to be every week or month and create a spreadsheet to help them keep on top of their expenses. Learning to budget will be one of the key financial lessons they will learn while at university.

Get in touch

If you have a child or grandchild heading off to university and you’d like advice on how to manage the costs, we can help. Whether you want to cover some of the essential costs or start saving for younger children, putting a plan in place can give you peace of mind.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Women are investing earlier than men, and it could close the wealth gap

The gender wealth gap is a widely acknowledged issue in the UK, particularly in the context of pension savings and women’s ability to retire.

Indeed, a report by Now Pensions and published by consumer group Which? suggested that on average, women would need to work an additional 18 years more than men to close the gender pension gap alone.

Yet fascinatingly, according to research published in FTAdviser, women are actually investing their money earlier in their lives than men.

This research may come as somewhat of a surprise, as the gender wealth gap has been widely proven. In fact, previous research carried out by the Royal Mint in October 2021 suggested that women were less likely to invest, finding that:

  • Just over a quarter of women said they regularly invest, whereas more than half of men said they did
  • Only 37% of surveyed women said they understood the basics of investing, whereas 56% of men said the same.

So, find out the details of this new research, and how women investing sooner could ultimately help to reduce the size of the gender wealth gap.

Women start investing aged 32 on average

According to the research published in FTAdviser, women are starting to invest at an average age of 32. Meanwhile, men don’t start investing their money until age 35. Overall, the study found the average age people start investing to be 34.

Across age groups, people stated that they broadly had the same goals for investing, including:

  • Feeling “financially stable” and having “necessary financial liquidity”
  • Having enough to maintain their lifestyle in retirement, after realising that the State Pension would probably not be enough to do this on its own
  • Seeing friends and family around them invest.

At the other end of the spectrum, the survey also discovered the biggest barriers to investing that both men and women faced were:

  • Having spare money to invest – 53% of survey respondents stated that they didn’t have money left over to invest after spending to live their lifestyles.
  • Having the knowledge needed to put their money in the markets – 27% of respondents thought they were too young to invest, while 26% simply didn’t realise that investing was important.

So, while women are managing to put their money in the markets sooner than men, there still remains an issue of many people feeling uncertain about doing so themselves.

Closing the gender wealth gap

The upshot of women choosing to invest earlier is that it may be an effective way to close the wealth gap that exists between men and women.

Consider this example. Imagine that a 32-year-old woman invests £20,000 across a range of assets, holding her investments in a Stocks and Shares ISA so that they’re entirely free from Income Tax and Capital Gains Tax (CGT).

Let’s assume that she manages to generate 4% annual growth on her investments after any costs and charges on her account. She then also invests a further £5,000 each tax year. 

Based on these figures, this woman would have investments worth £38,105 (rounded to the nearest whole pound) by the time she turns 35.

For the average man investing at 35, this means he’ll be £3,105 worse off, even if he invests the same £35,000 that this woman has invested so far.

These effects become even more pronounced over longer periods of time, even if you invest the same amount as someone else just one year later.

According to investment provider Hargreaves Lansdown, there’s a discrepancy in investment returns if you start investing in a Stocks and Shares ISA at the end of the tax year, rather than at the start.

This example assumes that two people invested £5,000 each year from 1999 to 2022. However, one invested their money on the first working day of the tax year (running from 6 April to 5 April) while the other did so on the last working day.

Using historical market data, the individual investing on the first day would have had £259,625 in their account by March 2022, based on historical Lipper Investment Management data. Meanwhile, the other would have had £249,381.

That’s a difference of more than £10,000, despite only investing a year apart from one another.

All in all, by choosing to invest sooner than men, women are giving their money the opportunity to grow in the markets, reducing the size of the wealth gap by making up the difference in investment returns.

Overcoming the barriers to investing

Whether you’re a man or a woman, you can see these figures demonstrate the importance of overcoming those investment barriers and the potential advantages of putting your money in the market sooner rather than later.

Not having spare money to invest is an understandable and tricky issue, but it’s far from insurmountable. For example, creating a budget with all your income and expenditures may help you to identify areas where you can cut back on your spending, allowing you to set money aside specifically for investing.

Better yet, working with a financial planner can be transformative, giving you a mathematical breakdown of what you can afford to invest and how doing so can help you towards your life goals.

Meanwhile, financial education may be an easier problem to overcome. There are plenty of resources online you could use to boost your investment knowledge.

Again, working with an investment expert can make a huge difference. As a financial planner we can explain difficult concepts to you in simple language, helping you to make informed decisions with your money.

We can also invest your money on your behalf, giving you the confidence that an expert has a handle on your investments.

Get in touch

Whether you’re a novice investor or a seasoned veteran, you could benefit from investment advice.

Get in touch with us today to find out how we can help you.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.

The favourable tax treatment of ISAs may be subject to changes in legislation in the future.

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