Overcoming Financial Phobia

By Brian Bloch AAA

Many people feel sick at the sight of bank statements and other financial information. Sound familiar? Although this reaction is common - and may even be natural - this revulsion can cost a lot of money. It's certainly easier to leave your finances in the hands of your financial advisor, but even investors who are satisfied with the way their money has been managed ought to have some understanding of their own financial affairs. In this article, we'll face up to financial phobias and show you why it doesn't always pay to keep your head in the sand.

The Issue
In 2003, researchers at the University of Cambridge found that almost one in five people in the U.K. suffered from what they described as "financial phobia". Although a similar study has not yet been conducted in the United States, there is no reason to believe that the situation is any better in North America.

The symptoms of financial phobia can be strikingly physical. According to the study, nearly half of sufferers experience a racing heart at the mere prospect of dealing with their money, while 15% feel frozen and immobilized, 12% feel ill and 11% become dizzy.

Apart from these medically-oriented symptoms, a dread of financial issues and having to cope with them leads to dangerous behavior such as an inability to deal with changes in investment situation and trusting or relying on the wrong people. In extreme cases, people neglect their affairs totally, leaving correspondence unopened and deadlines ignored. This level of avoidance can allow debts to pile up and can put an investor at risk of being exploited. In fact, anyone who does not devote sufficient attention to their finances and ensure that their portfolios are actively and sensibly managed may be displaying some level of financial phobia.

Who Is at Risk?
The Cambridge study suggested that many financial phobics are intelligent and perfectly competent in other areas of their lives but are struck dumb at the notion of dealing with their money. Regardless of the reason, the reality is that there are probably many people out there who simply hate to deal with investments and other financial matters. However, the problem is more prevalent among certain groups of people - social class, age, sex and character are all factors that influence who will suffer from this problem. Financial phobia is particularly prevalent among women (23% compared to 18% in men) and younger people (30% of 16- to 24-year-olds and 26% of 25- to 34-year-olds compared to 11% of people over 65).

Money management can be complicated, and part of the reason why people develop an aversion to money matters could be that they are often presented in a complex a manner. Long, involved brochures and books can be very daunting and off-putting, especially if people have to cope with them on their own. Furthermore, financial jargon can seem like a whole different language to those who are unfamiliar with financial topics. Individuals who dislike numbers and figures may also be more likely to turn away from financial topics.

However, naiveté about the financial services industry can expose investors to risk if their advisors do not have their best interests in mind. This is one of the main pitfalls of avoiding financial topics. People who avoid thinking about their financial lives contrast with those who understand the need to work with financial advisors and brokers rather than leaving everything in someone else's hands. Ironically, being in control may actually make financial matters less stressful. (For further reading, see Shopping For A Financial Advisor and Understanding Dishonest Broker Tactics.)

Dealing with the Problem
As with most phobias, accepting that there is a problem and confronting it in small doses, with the right supervision, is the best solution. Simple advice from financial experts with the right attitude can also be extremely helpful. Doing these things is at the core of getting over most financial fear.

There is an enormous amount of literature on investment in every conceivable form, ranging from newspapers, to magazines and books, the internet and CDs. If people are actively introduced and are given access to various financial resources, they will probably find something that appeals to them. Their fears are likely to erode rapidly. (For a list of some of the top investment books, check out Books Worth Investing In and Ten Books Every Investor Should Read.)

Many investors are extremely relieved to discover that the basics of investment are quite straightforward. On a basic level, only a few of the many numbers and ratios out there are really necessary for the average investor. The fundamentals of asset allocation, for instance, are simply enough for almost anyone to grasp. (To brush up on some of these basic concepts, visit the Investing Basics archive.)

If you don't wish to direct your financial life and investing all on your own, you can transfer some (but not all), of this responsibility to somebody else. A relatively small fee will often be enough to hire a genuinely independent advisor - in this case, even a little knowledge can help you choose a good advisor and keep tabs on the work he or she does on your behalf.

In terms of prevention, schools, universities and various other institutions, including continuing education, can play a valuable role in financial education by integrating some form of financial training painlessly into the curriculum, particularly if they offer it in a laid back way. The "Idiot's Guide to Investment" or "Fun with Finance" approach is a good way of disarming people's fears. Unfortunately, this type of training is not yet commonplace, but if financial training of some form was integrated into more people's lives early on, financial phobias might never arise in the first place. (If you're a young investor, check out Portfolio Management For The Under-30 Crowd and Picking Your First Broker.)

Summing It Up
There will always be those with some degree of horror of financial issues, but this does not have to be an insurmountable problem. Mild financial phobias can generally be resolved with a combination of desensitization and delegation. In other words, if you recognize this problem in yourself, begin taking steps toward gaining control of your financial affairs. For those with a more minor form of the affliction, the simple realization that it pays to keep an eye on your finances is a good first step.

Whatever the case, it is absolutely essential for investors to take the time to ensure that their portfolios are properly structured and remain that way. In particular, they need to understand their risk preferences and which investments suit these preferences. Overall, this is not difficult to achieve. With just a bit knowledge, some determination and an open mind, you can gain control of your financial life. After all, once you understand what it's all about, it may not seem so scary after all.

For further reading, see Financial Concepts, Investing 101: A Tutorial For Beginner Investors and A Guide To Portfolio Construction.

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