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.
1. The Money Mistake: 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.
RELATED: 6 Times We Tend to Overspend
2. The Money Mistake: 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.”
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.
3. The Money Mistake: 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.
4. The Money Mistake: 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.
5. The Money Mistake: 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.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial advisor for advice specific to your financial situation.