By now we know that our genes
determine more than just our height and hair color—they can also influence whom
we love and whether we should wear deodorant.
But did you know that your genes
affect many of the money decisions you make, too? From how immune you are to
making impulse buys, to whether or not you’re prone to committing common
investing mistakes, lately, researchers have been delving into just how
hardwired our money habits are.
However, when it comes to your
finances, biology isn’t destiny, so today we’re digging into the latest
research—including a study which examined the money habits of hundreds of
Swedish twins—to reveal how to turn what could be financial faux pas you’re born
with into sound money habits instead.
Read on for five money mistakes
your genes could lead you to make, and how to override those tendencies.
Overspending
What It Looks Like: Well, most of
us know what overspending looks like, but according to Hersh Shefrin, lead
researcher of a new report from Chase Blueprint called “Born to Spend? How
Nature and Nurture Impact Spending and Borrowing Habits,” only 25% of us are
born with what you might call the self-control gene that makes us immune to
spending temptation. Luckily, if you know you have these tendencies, there are
several ways to stay on the straight and narrow.
What You Can Do About It: In a
recent article, “4 Ways to Trick Your Brain into Banishing Bad Money Habits,”
we outlined several science-tested measures that are surefire ways to curb
unnecessary spending. For example, having a money mantra, like “I always take
my tax return to the bank,” can help encourage you to use your purchasing power
wisely, says Shefrin, who is a professor in the finance department at the Santa
Clara University Leavey School of Business.
Putting
All Your Eggs in One Basket
What It Looks Like: Recently,
Stephan Siegel, a professor of finance at the University of Washington Foster
School of Business published “Nature or Nurture: What Determines Investor
Behavior?,” along with fellow researchers Henrik Cronqvist and Amir Barnea.
After studying the portfolios of
identical and fraternal Swedish twins, they concluded that “a genetic factor
explains about one third of the variance in stock market participation and
asset allocation.” In other words, your genes could lead you to make several
common portfolio mistakes, the first of which is not diversifying enough.
What does that mean? If you have
a non-diversified portfolio, then you’re putting all your eggs in one basket,”
explains Lorrie Minor, a certified financial planner™ with LearnVest Planning
Services. Simply put, if every stock you own is from one company, and that
company stumbles, so does your portfolio. Or as Minor puts it: “If that one
basket doesn’t do well, it’s going to tank your entire account.”
After studying the portfolios of
identical and fraternal Swedish twins, they concluded that “a genetic factor
explains about one third of the variance in stock market participation.”
What You Can Do About It: Depending
on your investing goals, you may want to choose a mix of stocks and bonds,
consider investing in both U.S. and international opportunities and regularly rebalance
your portfolio, to make sure that one area doesn’t have too much influence on
your account’s overall performance. Still confused? Our Start Investing
Bootcamp will give you an overview of how and why to begin building a portfolio.
Chasing
Hot Stocks
What It Looks Like: The
researchers found that genetics also factored into a tendency to invest in
stocks based on how they’d done before, a known investment no-no called
performance chasing. Here’s the problem: Just because a given mutual fund, or
tech stock, has done well in the past doesn’t mean it will always continue to.
In other words, in real life, past or recent performance is a good indicator
that something will continue to be good, but, says Siegel, “in the stock
market, that’s just not true.”
What You Can Do About It: Minor
calls this “chasing hot money.” And the problem with it, she says, “is that
you’re going after something that’s already gone up, and it’s not necessarily
going to go up again.” Instead, she says, be levelheaded when you’re eyeing
your next investment, and try not to let any get-rich-quick excitement get the
best of your emotions—or your bottom line.
Trading
Too Often
What It Looks Like: No one can
predict the future, but investors are trying to do just that when they buy or
sell too quickly (and frequently) because they’ve seen or read something that
they think foretells a big win—or loss. “Studies show that it’s extremely
difficult to anticipate all the factors that are going to move the market,”
says Minor. And, Siegel adds: “Studies also show that people would actually
have more money at the end of the year if they stayed away from changing their
portfolio due to trading.”
What You Can Do About It: Minor
advises her clients to use themselves—not something they read in the
headlines—as a gauge of whether to buy (or sell). “Before they buy a stock, I
tell them to write down on a piece of paper why they’re buying it, what their
target price is and what return they’d be happy with. That way, they’re forced
to judge their account performance by their own measurement, and not the
media’s,” she says.
Being
Averse to Loss
What It Looks Like: Your risk
tolerance is a measure of your willingness to accept riskier investments over
non-risky investments, in favor of a potentially higher return. “And 40% of how
risk-averse you are,” says Siegel, “is genetically determined. Researchers have
identified specific genes which seem to be predictive of people’s willingness
to take risk.”
Minor says she can spot this kind
of investor by their stubborn unwillingness to throw in the towel. “When
someone else will say, ‘I’m outta here,’ this person so dislikes taking a loss
that they’ll hold on to a stock much longer than they should,” she explains.
What You Can Do About It: In this
case, your genes can trip you up if you don’t take on an acceptable amount of
risk or hold onto an investment that’s no longer an asset to your portfolio. In
this case, just as with overspending, you want to put a system in place to
override what your bias might be telling you.
Start by taking a risk tolerance
quiz to find out your comfort levels, then build—or tweak—your portfolio based
on your investment goals and timelines. If you’re still wary, consulting a
third party, such as a financial planner, to help you is another way to avoid
falling prey to any pre-programmed tendencies. |
/1 
