Understanding the Psychology of Money
In this week’s PIO, we switch gears from our usual market and economic focused material to take a closer look at the role of emotion and behaviour in our financial lives. Whether you are a seasoned investor or just starting your financial journey, understanding the psychology behind money can help you make smarter economic choices. In this write up, we look at a few ways in which our minds can influence financial decision making and why financial goals are important.
The Power of Emotions
Emotions play a significant role in our decision-making process, financially and otherwise. Whether we’re excited about a potential investment or fearful of a market downturn, our emotions can impact our judgment and lead us to make irrational choices. By being aware of our emotional triggers and learning to manage them, we can make more informed financial decisions.
Cognitive Biases
Our brains are wired with certain biases that can impact our financial behaviour. For example, confirmation bias leads us to seek out information that confirms our existing beliefs, while loss aversion causes us to fear losses more than we value gains. By recognizing these biases, we can try to avoid falling into common traps and make decisions that align with our long-term goals.
Instant Gratification vs. Delayed Gratification
A common challenge in managing money is balancing instant gratification with delayed gratification. It’s tempting to spend money on impulse purchases or short-term pleasures, but sacrificing immediate rewards for long-term goals can lead to greater financial success. Learning to delay gratification and prioritize future needs over immediate desires can be beneficial to building wealth and achieving financial security.
Setting Financial Goals
Setting clear financial goals is essential for staying on track and making progress towards your objectives. Whether you’re saving for a down payment on a house, planning for retirement, or paying off debt, having specific, measurable goals can help you stay motivated and focused on what matters most. However, establishing goals can be challenging. Initially we may list objectives without enough scrutiny that don’t align with our core values. It is beneficial to take time and work through what you are looking to achieve and why.
“This means that” we should look to identify the emotions associated with saving, spending, and investing money. There are opportunities to improve financial wellbeing and happiness by planning for the emotions and resulting behaviours. Financial goal setting can help manage our financial behaviour to improve outcomes. As always, please feel free to contact us if you’d like to iron out your financial goals or discuss this topic further.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Conviction Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.