Once upon a time a farmer was ecstatic to find that his new goose had laid a golden egg. Every morning he visited the nest to discover the goose had laid yet another. The farmer takes these golden eggs to market and soon he is rich.
Life is going very well. Until he becomes impatient. The goose is only laying one egg a day! The eager farmer then has a bright idea: kill the goose, cut it open and get all the shiny golden eggs at once!
At this point in Aesop’s fable any engaged children will usually shout ‘NOO!’ urging our hapless farmer not to make this mistake. Alas for the farmer, we know this story does not end well – his precious goose is now dead.
The point made by Aesop here is understood by most: if you have a golden egg laying goose your priority should be keeping it safe and healthy. Trying to optimise her output for short term gains should not be attempted.
At one level the story is a warning on greed and an encouragement to show patience. The psychological aspect of investing can be challenging for the inexperienced. It is natural to feel impulsive and impatient, particularly in times of great uncertainty.
When advising on investments we consider an individual’s experience of and attitude to risk before assessing capacity to bare loss. The attitude to risk is largely subjective and may vary depending on how we are feeling on any given day.
It has been shown that we tend to be uneven in emotional reactions to financial gains and financial losses. We tend to feel the pain from a 10% loss much more than the pleasure of a 10% gain.
Having a robust financial plan that is documented and regularly reviewed will provide reassurance during uncertain times. This is because a financial plan will focus on the primary objectives and keep issues such as short term volatility in perspective.
Investing based on emotion is the main reason why so many people are buying at market tops and selling at market bottoms. Allowing emotions to drive short-term investment decisions may lead to selling low and buying high, classic mistakes that can make it difficult to achieve goals.
Van Gough neatly identified these “little emotions” as the “great captains of our lives”, those we obey often without thinking. An important part of wealth preservation is having a plan to avoid impulse or emotion when making important decisions.
For many of those we advise their wealth has already been created. As a result, their capital is precious, and usually irreplaceable. In this situation the priority is for wealth preservation.
As chartered financial planners and independent financial advisers our priority is to keep the goose safe and healthy. This will allow the golden eggs to keep arriving for many years to come.
Barra Gorman APFS
Chartered Financial Planner