Emotions, investing, and FTSE 100 record highs

interactive investor’s Myron Jobson comments in the run-up to Valentine’s Day.

With the FTSE 100 hitting another record high on 8 February, 2023 has started on a more positive footing. But it comes after Investment Association (IA) data last week showed that investors were not feeling the love in 2022, with £25.7 billion withdrawn from funds, the first-ever annual outflow of money.

• Learn with ii: How many ISAs can I have? | How to become an ISA Millionaire | Pensions vs ISAs Compared

interactive investor today looks at the emotional side to investing, how it can be mitigated, and why it’s important to talk about money.

There is obvious value in couples having honest conversations about their finances to avoid money issues that could lead to arguments.

Yet, when it comes to finances generally, many people seldom talk to a partner about money, says interactive investor’s Myron Jobson.

interactive investor’s Great British Retirement Survey 2022, involving a sample of more than 10,000 UK savers, found of people in a relationship, 47% admitted to discussing finances only occasionally; 36% at least a few times a week; and 17% rarely or never.

Younger adults are seemingly more vocal with their partners about money matters. 44% of those aged 40 and under told us they discuss finances at least once a week.

Investments to love and those to ditch 

Valentine’s Day is also a topical time to think about the emotional side to investing. With ISA season in full swing, now is an opportune time for investors to consider investments that they might have got too emotionally attached to.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “A common investment mistake is to get too emotionally attached to the holdings in your portfolio, perhaps waiting that little bit too long for performance to turn a corner. It’s worth a regular dispassionate check, and you might want to check to see if the fund manager has broken up with the fund management group, underperformed the benchmark or peer group, or turned flighty and changed investment strategy. It’s not too taxing to check.

“Rebalancing your portfolio can be a good way to help make sure you are not too over-exposed to one stock or sector. Also, while it might seem counter intuitive, a comprehensive review of your portfolio once or twice a year, selling investments which are no longer required along with perennial under-performers, can be a useful way to bring some fresh blood into your portfolio. Whatever your strategy, diversification is the name of the game when it comes to investments, reducing potential risks and increasing potential returns by spreading your investments across different assets.

“It is important to not consider your investments in isolation, but factor in other financial products such as savings accounts, pensions and any forgotten Premium Bonds. It is important to factor in changes in your circumstances – be it a separation, job loss, a pay rise or a windfall. Having a broader view of your financial position can help give you a better idea of how much risk you can afford to take.”

Keeping a handle on emotions when investing

Myron Jobson adds: “It’s not always easy to take the emotion out of investing. When markets reach new highs, it can be tempting to feel excited and confident – and the opposite after significant falls. The problem is that these emotions often lead investors to make bad decisions. Markets are sometimes exposed to high volatility, which can cause investors to panic and sell at the worst time when the markets are at low points.

“Similarly, during a strong bull market, investors often rush into the market because they feel euphoric and buy at the peak when the markets can carry the highest risk. All markets go through cycles in the short run and this kind of emotional behaviour can have a detrimental effect on portfolio performance. But you cannot be a successful investor without remaining invested. The key is to learn how to take the emotions out of your investing.

“Regularly drip-feeding money into your investments can help take emotions out of investing, while mitigating investment risk and smoothing out the inevitable bumps in the market, buying fewer shares when prices are high and more when prices are low – a process known as pound-cost averaging. interactive investor offers free regular investing for funds, investment trusts and popular UK shares.”

On money and relationships

Myron Jobson says: “It might not seem romantic but being open about your financial situation can foster stronger ties between you and your significant other.

“Even those who have been in a relationship for a short period of time shouldn’t feel pressured to spend a pretty penny on their new squeeze – especially if money is tight. With many Britons reeling from the cost-of-living crisis on personal finances, perhaps the best Valentine’s Day gift would be to talk openly about money.

“We all have our unique cost-of-living experiences. Some couples who have earned money separately for years, may find themselves relying more on their partner’s income. It is not an easy situation to digest. A difficult conversation is needed here to stop financial insecurities from snowballing into financial anxiety, which can put a huge strain on relationships.

“Between couples who share resources and live together, it’s difficult to imagine anything you shouldn’t be able to talk about. Those approaching retirement, in particular, should have a clear idea on where they both stand financially if they want to turn their joint retirement dreams into reality. Not having that conversation risks not maximising pension tax relief available between them that can bolster their retirement income.

“There is no substitution for talking. Crucially, communicate and agree upon financial boundaries or limits in a tactful manner. There may be good reasons you don’t want to disclose some financial matters to your partner – particularly if you haven’t been together for too long - but there are ways of talking about money that don’t involve giving away sensitive details.”