Kim Stephenson is a former financial adviser who retrained as a psychologist. Being a financial psychologist possibly makes him unique. The British Psychological Society thinks so.
Asked for the names of some of experts in financial psychology, a BPS spokesperson says: “It’s not an area in which we have a huge number of people.” The BPS puts forward only one person: Kim Stephenson.
And Stephenson has some unique opinions to match. He dismisses much of the orthodoxy surrounding investment advice based on risk profiles, and counters the traditional view that trading biases that divert investors from using logic are universally bad.
Each investor is unique
Independent financial advisers (IFAs) have to use risk profiles, yet Stephenson rubbishes them.
“99% of risk profiles are not psychometrically valid. They are about as good as a quiz in Cosmopolitan magazine. You could use a horoscope out of the paper,” he says. “The risk profile is just a conversation starter.”
He is equally scathing about general concepts of trading biases. “A lot of advice on biases and trading is based on averages, but for that advice to work the individual must have 2.4 children and a live in a 3.1 bedroomed house. They don’t. Each person is unique.”
Sex and money
Stephenson’s starting point is that people need to be more open and honest about their finances and their investment needs.
“There was a survey of university students and the outcome was that males and females were far more comfortable talking about the sex they were going to have after the meal than who was going to pay for the meal before they had sex,” he says.
“For previous generations sex was taboo, now it’s money.”
Open about finances
Ditch the risk profiles, says Stephenson, and focus on what it is people are investing for.
Each individual needs to consider their personal choices and those of their ‘significant others’. “If someone did get a load of money what would their priorities be and are they the same as their partner?” he asks.
“If they become millionaires, yes they both want a big house, but he sees it as a status symbol and wants a massive car in the garage; she wants a nest for the kids with a huge safe play area and a pool. If your investments do well, you are going to end up divorced if you are not careful.
“The most difficult job of all is to be honest and to sit down with your nearest and dearest and think what you want your life to be like.” As an example, he says: “You might be well paid but in a job you hate.” Quit it, is his advice.
What to do with your money
The questions you need to ask if, for example, you are saving for your retirement, include:
- What does retirement mean to you?
- Are you going to continue working, doing a bit of consultancy?
- Are you going to write that novel you always said you were going to write?
- Are you going to travel?
- What really motivates you?
“If you’ve got a very clear idea of what you want to do, instead of playing around for the next six months or year or even just for right now, you can think about the future. It’s a lot easier to invest for 15 years’ time,” he says.
The trouble is, our heritage gets in the way. We’re the ancestors of hunter gatherers, insists Stephenson and that is why we don’t save well or invest long-term. “One of the big biases is that all human beings are very ‘now’ focused.
“When we were hunter gatherers if you got obsessed with what was going to happen next year, you’d miss the prey today and your family would go hungry. You’d die and so would all your family and you would not pass on your genes.
“So the families who survived and did pass on their genes – the ancestors of all of us now, thousands of generations later – are people who discounted the future hugely.
“People say it’s very short-sighted to spend money and not save for the future but our brains don’t think like that.”
The way to break that cycle is to remind yourself why you want to change. “Take cash, put it in a wallet, with a clasp, and then put an elastic band round it. That reminds you of the picture on your wall of what you are saving for. Investment should be a long-term thing,” he says.
From cave to computer
The real danger is following the herd. “People ask what everyone else is doing. If someone asks ‘what’s a good investment? the answer should be ‘what do you want to achieve?’ You are getting it upside down,” he says.
His suggestions are:
- How much do you need?
- When do you want your money (liquid or illiquid)?
- How safe do you want it to be?
- What’s the required rate of return?
“Some advisers tell people their risk profile shows they are attracted to risk and match them with risky investments when they don’t need that rate of return.
“That makes no sense. That is not rational. That is emotional. If there is a safe investment that can get you that return, why take a greater risk?”
Slaves to money
Stephenson has seen too many people become slaves to their investments. “The money is just the tool, you must not allow it to intimidate you. You make the decisions,” he says.
“What I’m trying to do is help people use their money to give them the life they want, rather than have them either terrified or worshipping money, because that’s one of the big problems.”
Stephenson says a major issue is people having mental accounts – pockets of money they have allocated to a particular purpose that cannot be spent on anything else, even if that means getting into debt to fund other spending.
He points to research in the US among 600 households that found the average emergency fund saving was $5,000 but the average on a rolling credit card bill was $3,000.
“Some say people need savings to make them feel better. They might feel a bit better but they’re paying the credit card company about £400 a year for the privilege of having that money. You shouldn’t be like that and have mental accounts, but everybody does.”
Altering behaviour is not easy. “If you say to somebody ‘oh you shouldn’t do that’ you straight away turn them into a naughty child. I tend to go very much on the ‘hey that’s perfectly natural. Here’s why it doesn’t help you much and what you can do about it’,” he says.
Stephenson works with charities and some companies but mainly consults with individuals – people for whom “there’s always too much month left at the end of the money”. They’ll treat themselves to a night out and have a good time but then be worried about it.
Keeping up with the Joneses can lead to the worst mistakes, according to Stephenson.
“Most people suffer from ‘comparenomics’ – when the person you don’t like down the road buys a new BMW and you feel like you need to buy a new Porsche. You end up spending money you don’t have on something you don’t want because of someone you don’t like,” he warns.
Getting finances right is about valuing yourself as an individual, not as someone who must always be compared with others – siblings, neighbours, workmates or fellow investors.
Stephenson says: “If people just do what they want to do, or can do, they are generally a lot happier and use their money a lot better.”