NASTASSIA ARENDSE: We are talking about your relationship with money, looking back at your childhood memories and if you can remember anything that you’ve picked up with regard to your parents, how they viewed money, how they spent it, how they saved it. We are going to be dissecting the psychological effects of growing up in a low- to middle-income household. Fast forward, how does it affect your relationship with money, what are you teaching your kids about it – is it bad or good habits?
I’m joined on the line by John Anderson, portfolio manager at Sygnia Asset Management. John, thank you so much for your time.
JOHN ANDERSON: Good evening, and I thank you for having me.
NASTASSIA ARENDSE: I know in terms of behavioural finance the role of it is to basically study the habits people have, and how you can best understand them as somebody who’s in the financial space, so you can tailor products or help them with their financial decisions so that they don’t make poor choices without necessarily realising that they are.
JOHN ANDERSON: Well, that right. There’s been a lot of work done to understand how people think, and I think we can really unpack some key features. This is across the income spectrum.
People generally look at the present rather than the future; they want to look at their current needs rather than their future selves, and that really drives not saving sufficiently, for example, for retirement. That’s a key one.
The other one in behavioural finance is that people feel losses more than they feel the gain. So if you lose R100 you’ll feel it more than if you were to gain the same R100. And what that results in is people really having potentially investment strategies that are inappropriate – too conservative, not enough growth, because they perceive that having things like equities and growth assets, which in the short term are volatile, but they give you the best long-term growth actually drive inappropriate behaviour in terms of investment strategy.
And the last key one is procrastination. People get very busy, we’ve all got lives to lead, and we put things off. We know that we need to save; people know what the right things to do are. But because we get busy we always put it off.
Now, if you have a lower income, these things are heightened even more. The reason for that is that if you have less money every month, you’ve got more things to think about than someone who potentially has more money. They don’t need to worry too much about some of the, in their terms, smaller expenses – water and lights, some other things. So they don’t have to worry and therefore they don’t have to apply their minds to as many things with their higher income.
So what you actually find is the less income you have, the more your mind is taxed on all the other detail, and it heightens these behaviours where people think about the present, you feel loss-aversion more, and then the procrastination in making decisions.
I think those are the key ones in terms of behavioural finance.
NASTASSIA ARENDSE: John, in terms of your relationship with money growing up, what’s that one habit that you’ve picked up from your parents as you’ve seen them? Was it good or bad? Would you share?
JOHN ANDERSON: Look, I think the key thing that I’ve learnt – and this is an important point – the way you grow up does influence how you view money or your relationship with money. The way I grew up was maybe more seeing the typical behaviour that people see, high debt, not saving sufficiently.
So I actually learnt from my wife, and I think she is a good example. She has a very good relationship with money and she taught me and influenced me to do things more appropriately, correctly. And the secret behind it was her dad taught her from a very early age what money is all about, how to make sure you don’t spend on things that you don’t need and think very carefully. If I am going to buy this, am I getting it at a reasonable cost, should I not shop around?
Then she was taught from a very early age to budget, to do things. Even when she went to school, she had pocket money, she needed to show what she’d done with it and also how she made decisions. Eventually when she went to university she had to show a budget for the year, why do you want to do this if she was paying rent. Did you shop around? That’s quite a lot to do, but I think parents have a very valuable role in shaping how kids view money. And roughly my wife helped me shape mine.
NASTASSIA ARENDSE: I read a very interesting article that talks about the psychological effects of this entire topic – that it can cause relationship strain in the sense that if your relationship with money is because I didn’t have it as a young child, that’s why I overspend and I spoil myself. I grew up in a household that didn’t necessarily have all the money in the world, so you kind of overlook some of the sensible investment decisions that you should be making.
JOHN ANDERSON: Absolutely. I think it really goes also to in terms of Maslow’s hierarchy [ of needs] – I think everybody knows Maslow. The theory behind it is that for humans we first need to take care of our basic needs. And then, as you go up the pyramid, you can start looking at higher-level needs, looking after others, etc. The same thing applies with money. In theory, if you don’t have a lot, you should be looking after the basic needs – food, water, all of that.
The problem is that in an unequal society a lot of people see what’s out there. People are spending on cars and doing that, and it creates this issue of trying to keep up with the Joneses, and it’s all aspirational. So instead of focusing on the key things – and this is natural, it’s human behaviour – we then want those things, even though we don’t need them.
NASTASSIA ARENDSE: We have a caller on the line. Vele is calling from Johannesburg. Vele, how are you doing? What’s your relationship with money?
VELE: I think the basic thing is borrowing in general must be done under extreme circumstances, where the repayments match the valued derived. So if it’s something that will disappear in one day, then you can’t borrow to acquire that – if it’s food and drinks. But for something like a house and a car it begins to make sense. So my own mother never borrowed money unless she really had to, and she’d only buy big things when she got her bonus, when she was able to put a big down-payment to reduce the burden of debt. If there is one behavioural thing to tell people, it’s rather wait.
NASTASSIA ARENDSE: Vele, do you have any kids?
VELE: I have four.
NASTASSIA ARENDSE: So in terms of the relationship you have with money currently, what’s that one lesson that you are teaching them about how they should view their relationship with it?
VELE: I think for me what I’ve pushed very hard is that you must put effort into something to get a reward. There is nothing for mahala, even at work. You need to do chores. You get an extra amount in your allowance if you get better marks. So just to mention the effort and reward – that you must put some effort in it to get something out. Things don’t just come. It’s the big money lesson.
NASTASSIA ARENDSE: Thank you so much for your time.
John, in terms of ways that I can break some of these psychological effects of my money habits, what are those that come mind that can help us going forward?
JOHN ANDERSON: I think, if we just go to the previous caller, the key thing is debt. Be very, very wary of especially getting indebted for things you don’t need, which you should actually be able to cover with your finances. If you get a letter in the post saying you’ve just won R50 000, tear it up. The debt should only be for the big things. Often with those things they prey on people’s emotions and the temptation to need things, and it’s very, very expensive. So be very, very suspicious and wary before you enter into those things.
But in terms of other practical things that people can do, there was an interesting study that was done in Kenya. In Kenya in a specific area where there wasn’t a lot of income, and people were complaining about the health hazards in terms of mosquitoes and they were getting into health problems, and they said they don’t have enough money to spend on the healthcare products that they need to combat all these things. So a project was done to have a look at how one could improve this, and somebody came up with the idea to say, okay, let’s give a whole bunch of people a lockable metal box, a box you put into your house…[ See http://wilsonquarterly.com/quarterly/fall-2014-mexican-momentum/are-lockboxes-key-prosperity-in-developing-world/]
NASTASSIA ARENDSE: John, we have another caller from Potchefstroom. We are just going to take him quickly. Strauss, what’s that habit that you have?
STRAUSS: I’d just like to ask a question. I heard someone say that one of the main things in terms of financial management is one should find an investment like a commodity that will grow at a rate that allows the rand to keep up with inflation. For example, saving a lot of money is not really going to be that useful over the longer term as its purchasing power is not that much by the time you can access it. So another party said that therefore one should find a way to invest the money into a commodity that will allow the money to keep up with the rate of inflation. So I’d like to ask John if he is aware of any commodities or investment options?
JOHN ANDERSON: Look, it really depends on why you are saving. You mentioned very specifically commodities. You can only go into something like that if you have other assets that are really diversified. The first starting point is always to have a more diversified portfolio. If you are saving for the long term, the first starting point is to have shares, not commodities. And of those share, to diversify.
Once you’ve got that, you can then start looking at things to enhance the overall strategy. I certainly wouldn’t be taking a whole bunch of money, if that’s all you’ve got. Putting it into commodities can be very risky. But I think as part of an overall portfolio it’s possible, but typically it would only be a small portion.
Most people should be looking at what’s called balanced portfolios. They really take a lot of the guesswork out for you. The underlying investments are invested appropriately in higher-growth assets, of which of course commodities would be one. But it’s a very specialised area, and I would think it’s better, if one doesn’t have sufficient knowledge about these things, to go for something that really already encompasses and allows investment in those if the portfolio manager thinks it’s appropriate. And balanced portfolios are very widely available, easy to invest in, you can see what returns you are getting.
So I would suggest that’s good and for the long term go for higher growth investments because, as the caller said, it’s important that your investments for the long term keep up with inflation. That’s is very, very important . If it’s for short-term things, for example, emergency funds, or you want to go on a holiday at the end of the year, then cash is better.
NASTASSIA ARENDSE: John unfortunately we have run out of time. But it certainly has been a really good conversation and something we can speak about in the next week or so.
That was John Anderson, portfolio manager at Sygnia Asset Management.