How to make better financial decisions

The winds of change blowing through the financial world mean that more of us feel under pressure to make big money decisions – yet many feel ill-equipped to make the right choices.

Warnings of painful tax rises in October’s Budget prompted readers to give away inheritances early, sell shares and property and, depending on their age, pay into or withdraw large sums from their pensions. But did I do the right thing? Added to this is the uncertainty of how our investments might perform in a changing interest rate cycle, what size cash reserve to hold and when the best time to remortgage might be.

Decisions, decisions! So when I saw that HSBC had researched how over 17,000 people in 12 countries made different calls with their cash, I was intrigued to find out more.

The study found that the best financial decisions involved mindset and method. Being optimistic about the outcome, an openness to change and the opportunities it might bring, while acknowledging that things might not go according to plan was the optimal mindset, the researchers concluded. So, a bit different from the budget-induced panic of the last few months.

When it comes to the process, your head, heart and network are important, the study found. Planning, research and determined fact-finding are obviously the key. It can be uncomfortable, but talking about potential decisions with a wider network of people – including those who might disagree with us – has been vital. And while our emotions shouldn’t be the only guide to financial decisions, imagining how we’d feel if we did or didn’t make a certain decision was of particular value.

If you’re faced with a decision of your own, researchers have told me that a big predictor of the confidence to act is whether your plans are adaptable: I’ve weighed the risks, I think this is the best option, but if X happens, I will do Y.

What I noticed was that there was nothing different that you or I could see in the (good or bad) decision classes

It all sounds so easy. However, the current climate of uncertainty makes financial decisions so difficult that we may risk putting them off even longer. That also comes at a cost.

A conundrum occupying Britain’s financial regulators is why Britons are hoarding an estimated £430 billion of “excess cash” instead of investing it in the stock market.

So what mindset would lead us to invest more? And what lessons can the invested but nervous take from this?

“The key thing about decision-making under uncertainty is that you have to accept that you can’t know (the outcome),” says Professor David Tuckett, who acted as HSBC’s academic adviser on the project.

In his 2008 book Attention to the markethe asked more than 50 active fund managers to list three examples of investment decisions they were happy with and three they weren’t.

“What we noticed was that there was nothing different from what you or I could see in the two classes of decisions,” he says. An equal amount of research, discussion and rubber-stamping had gone into both. “The only thing that was different was the result. And that’s because, in principle, the outcome is uncertain.”

Even managers who made the right investment calls admitted that sometimes their outperformance was fueled by a factor they hadn’t initially considered.

However, when he asked managers why they thought certain investments failed, they tended to blame themselves: “They said things like we didn’t work hard enough, that’s why we didn’t succeed.” Interesting – although you can be sure they were still handsomely rewarded for trying.

For retail investors, accepting that not all of our investment decisions will work can be hard to do (especially when we’re starting out). Experience, taking a long-term view, being diversified and having a strategy in place to review your portfolio regularly helps. And as every index investor knows, while some active managers beat the market, it’s virtually impossible for them to consistently outperform.

Feeling remorse undermines confidence and adds to the self-limiting belief that you are bad with money

We all have a hard time making financial decisions, but the HSBC study identified one group that had it even harder – the neurodiverse. Some readers may dismiss this as just the latest buzzword, but if you or a family member has autism, ADHD, dyslexia or dyspraxia, then you’ll know the struggle is real.

Nearly two-thirds of neurodivergent respondents felt ill-equipped to handle financial decision-making, and more than half often regretted decisions they made about money—significantly higher than neurotypical respondents.

Clare Seal, author Real life money, uses the term “ADHD toll” to describe how being neurodivergent has impacted his own finances. She says being indecisive about money management comes at a cost — like late fees if you don’t pay on time and higher interest rates on your debt if you damage your credit score.

In addition, impulsive spending is a very common problem. If you can’t budget effectively, you’re less likely to have so-called “excess cash” to invest. She introduced several frictions into her own finances to counter this. “If all you have to do is tap or click a button to buy something, you’re much more likely to give in to that impulse.”

Harboring regret for bad decisions is the flip side of this coin. “Feeling remorse undermines confidence and adds to the self-limiting belief that you’re bad with money,” she says. This can contribute to what’s called pathological demand avoidance, which she describes as feeling like “a concrete barrier” has prevented her from engaging with her finances in the past.

We are both extremely encouraged that banks are finally showing more interest in this very under-researched issue. In addition, some are developing new services to help neurodivergent clients.

Monzo, the digital bank, touts a suite of digital budgeting tools for ADHD customers, including automatic paycheck sorting, plus the ability to waive loans entirely and set personalized daily limits on ATM withdrawals and card transactions. Its business account offers the ability to set up a “tax pot” to automatically remove a certain percentage of payments and save for future bills.

Of course, you don’t have to be neurodivergent to use these features. But thinking about the needs of different customers is what results in the kind of innovations that can help everyone feel more confident about managing their money.

As the financial regulator moves closer to facilitating simplified financial advice and targeted support, I hope there will be much more to come in the investment world as well.

Claer Barrett is the FT’s consumer editor and author of ‘What they don’t teach you about money‘. [email protected]; Instagram @Claerb