Watching television recently, I learned about something called ‘the phenotypic age’. Apparently, it’s the physical age of the body, not the chronological age. It’s the age at which your body is functioning. Some people are unfortunate to have prematurely ageing bodies, and others are lucky. Some work on their bodies to keep them growing and others abuse their bodies and bring on premature ageing.
Blood tests measuring eight elements can now reveal how old our bodies are, and can accurately predict how long we will live. It would be interesting to have a test that measures how ‘mature’ a person’s personality is around money.
In my experience, some investors just do better than others — they take more risk, they accept costs, and they don’t panic when prices fall. They’re ‘mature’. For many reasons, and for reasons that are mostly not their fault, others struggle.
Three categories of investors
There’s a lot of research on investor behaviour and, in my view, investors fall into three categories. Those that understand what it takes to do well, and do it; those that have made mistakes and learn from them; and those that don’t learn from their mistakes, and keep repeating them.
The first group — the ‘adults’ — fall into two sub-categories. The first understands how risk and reward are linked. They’re not afraid of risk, because they understand the basics of capitalism. They know that they could lose money but they believe in the power of business and human beings to create growth. Some are very experienced at making money; others are simply used to the volatility of markets and have benefitted from long-term patience. The second sub-group of adults is accepting of the nature of markets, and trust the structure of their portfolio to others. They are relaxed, even though they are not experts.
The second group — the ‘teenagers’ — have made mistakes and although they have struggled, usually make improvements. They have often paid quite a heavy price, and have regrets. They wish they could have their time again — because they would have been multiple times wealthier. At least they’re on track and feeling better. They’re learning.
The third group — the ‘children’ — haven’t changed. They have made mistakes, but they continue to make the same mistakes over and over again. They don’t learn. Often it’s because they feel out of control. They usually follow the same strategy that doesn’t work, which could be the ‘get rich quick’ strategy that always blows up, or the ‘keep it in cash because the stock market is too risky strategy’, or the ‘pick an adviser because they seem nice’ strategy.
They either make excuses, or they don’t care. One way or another, this group is destined to fail financially and they need to be protected. Those around them will find it difficult.
Changing who you are isn’t easy
How do you become a member of the first group?
- Become aware of your beliefs and where they limit your success
- Get educated
- Speak to people in this group – understand how they think, more than what they do
- Start small – practice and entrench one good habit
- Be clear about why it’s important to you.
How do you get out of the third group?
- First, decide if you care
- Then, accept it’s all under your control
- Uncover your money beliefs
- Don’t judge yourself
- Create the life you want and set some targets
- Get help, and hand over control – in the short term
Every investor is different. No matter how old they are chronologically, some always remain child investors. Unfortunately, like children, they will also end up dependent on others, and will give up their freedom. The best way to help a ‘money child’ is to casually discuss their memories and beliefs around money and help them to remove any blame. Then focus them on what kind of lives they want, and finally, on the strategies they need to implement. It needs to be their decision.