It’s bonus season for many expats living in the UAE - time to reap the well-deserved rewards of your yearlong efforts to hit targets. There are so many ways to spend your money in this land of opportunity but should you spend your hard earned bonus or invest towards those things you really want to achieve. Investment markets have seen some corrections over the last year and probably left you less than confident as an investor. Read on as John Astrup, Investment Expert discusses your 2019 end of year bonus and the bigger picture.
Back in 2017, the Noble prize for Economics was won by Richard Thaler. His award winning work became a top selling book called ‘Nudge’. Nudge presented an enlightened view on how we make decisions– it also looked at the concept of a ‘bonus’.
Nudge examined how Joe Average (You and I) would spend cash we received according to whether that cash was labelled a ‘bonus’ or a ‘rebate’. Think annual bonus from your employee versus a rebate from the taxman – but both to the tune of the same dollar value. The argument is that you and I perceive a ‘bonus’ as a gain from the status quo and a ‘rebate’ as a return to a previous level of wealth. Simply put, we are more likely to spend a cash windfall described as a bonus and save the same amount of cash described as a rebate.
Actually, this is pretty consistent with what we see in the United Arab Emirates for those lucky enough to receive a company bonus. The reality is that the majority of people in this land of opportunity are using this extra cash to settle debt or pay bills. Probably not what we envisioned when we moved here.
The majority of expats move to the UAE for better earning potential through increased salary, tax free income and career progression opportunities. Living here represents a great opportunity to increase your savings and build a pot to secure your financial future when you return to your home country. Bonuses are a key part of that, acting as a financial springboard when we do receive them. Sadly, many expats are missing this opportunity by not setting or realising their financial goals and often return home with little more than a good sun tan.
I can say with near-certainty that every one of these expats knew better, knew they could have used that bonus in better ways for their future and yet they couldn’t help themselves. The official name for this phenomenon is the ‘knowing-doing gap’, and its effects are powerful and pervasive. A survey from a leading US university found that only 4% of people who wanted to invest more actually ended up increasing their investments.
While part of the answer is poor financial planning, prospect theory is often the main barrier when investing a one-off cash lump sum. Also known as loss aversion theory, this concept proposes that if two equal choices are put before us and one is presented in terms of potential gains while the other in terms of possible losses, the first option will be chosen.
Looking at this in terms of why we choose not to invest a bonus? As we evaluate important decisions in our life, our primary aim is to avoid the most costly errors. We want to ‘not loose cash’ more than we want to live abundantly when we leave the UAE, so we defer investing, waiting for the ‘right time.’
I’ll admit that the evolutionary roots of this system of self-preservation make sense as does holding on for that ‘the right time to invest’. It was not all that long ago that our ancestors were called upon daily to make life and death decisions - preserving physical safety and meeting our more basic needs. Although in this life-and-death scenario, minimising risk is only logical, times have changed and our thought patterns have not kept up.
We are programmed to choose safety. Unless we learn to train our brains to evaluate risk and reward on a more even keel, we will remain trapped in a life of risk-aversion that keeps us from taking the very investment risks with bonuses that might pay off many times over for ourselves in the future. We took a look at risk and the power of perspective in our previous Zurich IQ blog article about investment risk.
Because of the pretty linear means by which we tend to evaluate investment risk, it could be truthfully and plainly said that there is never a good time to invest. After all, investing that cash bonus requires us to make ourselves financially vulnerable to an unknown future with a very real downside. There will always be worries, some founded, others not and investors who are paying attention will never have a sense that it is ‘all clear’ and ‘now is the perfect time’.
This uncertainty, is the hallmark of both life as an expat and capital market. Those that have mastered both come to embrace it and benefit hugely from it.
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