The world of investments is often unhelpfully plagued by hype, metaphors and parables.
Among these however are often some more useful stories. And, with this in mind, I started to delve into the detail of the seven ‘sins’ and give our interpretation of these capital vices. The list we have today was drafted around the Fourth Century – time for an update then!
1. Acedia/ Sloth: an absence of interest
I know it sounds wrong that not being interested in something should be deemed to be a bad thing, but it is as far as your money is concerned.
We’re all living longer, you have never had more choice about how you can invest for your pension and yet most of us aren’t doing anything about it at all.
We all tend to procrastinate about the future, we’re too busy living our lives. This is particularly the case when you’re younger – I don’t remember thinking beyond the next weekend let alone pondering life after my mid-60s. However, the fact that we as a nation spend more time planning 10 days in the sun than we do for perhaps 30 years in retirement should probably worry more people than just me!
So please do try to start to do something.
2. Avaritia / Greed: the pursuit of (unnecessary) material possessions
It’s tough enough purveying the huge range of investment opportunities available to you without giving in to greed.
By way of temptation, there are quite a lot of companies, from holiday through to high street ones, which offer discounts to shareholders who hold a certain number of shares.
However, when you look what the minimum number of shares is, it’s often quite a hefty number. This may mean that you’ve inadvertently become overly allocated to a handful of stocks and your proverbial eggs are now mostly in one basket – so a one-off event could very easily cause quite some losses to your portfolio. Then you realise that performance may be better in a different investment that didn’t need that extra incentive of discounting its goods as it’s returning what it should financially…
Please just stick to investing for financial reasons.
3. Gula / Gluttony: to gulp down or swallow
We all know that too much of a good thing doesn’t often turn out well, especially over the long term. And the same is true of many investments. If you take on too much risk, you may see the value of your portfolio fluctuate by more than you’re comfortable with. You may be left with the same feeling of heartburn that you get from eating overly rich food.
So have a think through why you want to invest. If it’s for the long term (as it should be), it might end up being in something that some would describe as deeply dull, but it could be the right investment for you – everyone’s different after all.
To establish the difference between gluttony and good, you really need to have a goals-based conversation. What do you actually want to do when you retire? At least talking this through with someone may mean you can determine how much risk you need to take to meet your financial goals (and aspirations) and then plan accordingly.
If something sounds too good to be true, it probably is.
4. Invidia / Envy: discontent towards rewards
There’s a theory1 in the investment world called ‘loss aversion’ or ‘prevention focus’. This is where people prefer to avoid losses to such an extent that they are willing to forego an equivalent gain. Some suggest that the losses are actually twice as powerful emotionally as the gains given how much we’re all keen to avoid making mistakes.
As I have pointed out before, risk is a very personal decision, but you should probably have a conversation with a professional wealth manager about risk and the potential rewards needed to achieve your goals. Investments can go down as well as up, and your capital is at risk. However, you don’t necessarily want to focus solely on investment risk. There also are a number of other risks to bear in mind, one of which is goals risk i.e. not meeting your retirement goals.
Try then to concentrate on ‘promotion focus’ – setting goals that give us opportunities to be better off – rather than concentrating on ‘prevention focus’.
5. Ira / Wrath: self-destructive behavior
We all know of the ‘once bitten, twice shy’ feeling and our experience with investing will, of course, inform future decisions. This is particularly true when you’re starting out and you’re not drawing on a lot of familiarity with the financial markets. A slew of press and research highlighting the fact that Millennials are not likely to be risk takers isn’t therefore a surprise. But the conclusion that this is self-destructive behaviour isn’t necessarily the case.
Research recently undertaken by 7IM shows that you only need to start to put some investment risk to work when your investment returns are more than the money you pay in. Until then, there often isn’t enough in the pot for it to compound meaningfully i.e. to give recognisable profits on profits. When you have money ‘at stake’ is the point at which returns can develop exponentially. This is usually much later in your investing journey, when you’ve probably learned a lot more about finance.
So, in fact, it could be seen as self-destructive behaviour to take too much risk early on as it could put you off investing for life. Again everyone’s risk profile is individual and should reflect personal circumstances… but please don’t just follow the herd only to find that you’re angry with the results.
6. Luxuria/ lust: the lack of self-control
Lust is defined as a psychological force that produces an intense wanting for something in life. And so you throw caution to the wind and indulge in something that deep down you know you shouldn’t.
Anecdotal evidence suggests though that increasing numbers of investors are also exhibiting this trait, but which could mean you’re not taking advantage of time in the market. The more time you spend invested, the more chance you have of earning dividends, and being able to invest these dividends and enjoy cumulative (aka compound) returns.
Pensions’ freedoms allow investors to dip (perhaps unnecessarily?) into their pensions – pensions that may need to last them for 20 years or more. I hear of some savers who treat ISAs as a bank account. I worry that, because our retirement savings may be more easily accessible than before, what was traditionally seen as the least serious of all the sins, could be the one that trips up far too many of us.
7. Superbia / Pride: refusing to acknowledge one's own limits, faults, or wrongs
If I had a Pound for every time that I was told by a DIY investor that their investments were doing better than the professional is...
Yes, there are undoubtedly a very few investors out there who have − either through research or luck – seen their portfolio provide returns with which they’re satisfied. And there are undoubtedly some bad professional investors.
However, as we are often told ‘pride comes before a fall’ and you are probably taking significantly more risk than you might need to. Since those risks may not always pay off, you could be due for that fall.In addition, a study by the Investment Association last year calculated that it cost seven times as much for a DIY investor to invest as it did for a professional because, for example:
- They don’t enjoy savings such as the economies of scale we can and do pass on to our clients
- They can’t access the full range of investment vehicles we can e.g. futures contracts which are cheaper and more flexible than index funds
- They may have to pay for the set-up of their ISA or SIPP/ self-invested personal pension
- They can’t unitise their investments so pay VAT on portfolio costs and trades
- They can’t determine when (and how) investment gains are crystallised and so may pay more in Capital Gains Tax
My list can go on…
So if you are a DIY investor, I am very pleased if you are doing well AND that you are actively engaged in your money (see point number one!), but at least have some sense to admit that you can’t have it all your own way. Investors should be aware that investments can go down, as well as up, and you may get back less than you invested originally. However, there’s a reason we have 240 people looking after around £11 billion of investments and that our own money is ‘at stake’ alongside that of our clients.
Justin Urquhart Stewart
Co Founder and Head of Corporate Development
1 Stamford University’s Amos Tversky and Daniel Kahneman; Columbia University’s Tory Higgins
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Important information: The information contained in this document does not constitute investment advice and it is not an invitation or inducement to engage in investment activity. The value of investments, and the income from them, can fall as well as rise and you may not get back the full amount invested. Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.