5 Money Habits That You Got From Your Parents
Published: April 20, 2015 | Updated: April 21, 2020 | Posted by: Moneymax | Personal Finance
Studies have shown links between genetics and money habits, but why do these matter? Understanding what drives us to spend, borrow or invest the way we do is not an excuse for poor financial planning. Rather, they provide solutions we can apply to counter these habits.
Read More: 5 Habits That Will Stop You From Being Rich
When it comes to financial decisions, both nurture (the way we were raised) and nature (genetics) play a big role. This is why parents are reminded to train children early to save and spend money wisely.
This is a common habit shared by many people, including Filipinos. According to a study conducted by Hersh Shefrin, a Canadian economist known for his behavioral finance works, only 25 percent are born with a gene that tells us to stop buying what we should not be buying. This is why some are just better at self-control than the others are when they see something irresistible at a clearance sale.
Before you have your brain tested for this, you should also know that you could trick your brain to be smarter when it comes to money matters, and science does prove this. We can actually come up with our own heuristics or rules-of-thumb based on experience, when we are facing financial decision-making.
For instance, you can say that you only buy something you want as a treat for yourself because it’s your birthday, or you never shop during a sale because you have a tendency to buy what you don’t really need.
A study conducted by three distinguished researchers – Stephen Siegel, Henrik Cronqvist and Amir Barnea – reported that genetics might lead a person to make few common portfolio mistakes.
For example: if your entire portfolio involves stocks from one single company, and this company fails, so do your stocks. The researchers came up with this conclusion after studying Swedish identical and fraternal twins’ financial portfolios.
Thus, if you are thinking of investing, consider re-balancing your portfolio and choosing a good mix of bonds and stocks so that one area does not have a more powerful impact on your overall status.
In the same study on Swedish twins, the researchers asserted that genes also play a part on the tendency to invest based on how they had done before, also called performance chasing.
This is a big no-no when it comes to stock investment. In the stock market, if a tech stock or mutual fund has done well today does not necessarily mean it will also do well in the succeeding periods.
What you can do about this investing mistake is to always think level-headed. Avoid getting overexcited and deciding based on your emotions.
It is true that investing involves some risks. However, if traders buy or sell quickly or frequently just because they have learned something that predicts a big win or loss, they are trying to predict the future. It is truly difficult to foresee all factors that move the market and studies back this up. One of the researchers, Siegel, also points out that investors would profit more by the end of the year should they veer away from changing portfolios because of short-term trading.
Financial planning experts tell their clients to not rely solely on information that they get from news, but rely on their own analysis whenever they have to decide on buying or selling stocks. They even ask clients to think of the reason why they are buying, their target price and desired return. This is a rational measure to ensure that actions are based on their own judgment.
According to Siegel, 40 percent of a person’s risk tolerance is genetically predisposed. Researchers have even identified which genes predict the willingness of a person to take risks. Your risk tolerance is your ability to accept riskier over non-risky investments. If you are serious about stock investing, you may consider taking risk tolerance quizzes to determine your comfort levels or consult a financial planner for your peace of mind.
Nurture and education both have significant roles to play for people to become better in spending, trading or borrowing money. It is liberating to know that our genes play a role in how we spend or manage money. Knowing your financial predisposition will help you in countering unsound money habits by taking the opportunity to learn how to be better in financial decision-making.
With a goal to help Filipinos lead healthier financial lives, Moneymax regularly publishes tips and tricks on personal finance and lifestyle, among many other topics. For more finance-related news and articles, follow Moneymax on Linkedin.