While we all assume that good personal financial habits are easy to acquire and live by, what we see around us does not confirm that notion. For instance, data shows participation in securities markets and mutual funds is at best marginal.
There is just nothing new to write about. What must be said in personal finance, has been said. Many times over. Much of what we discuss here are but pieces of interpretative intelligence. There is nothing original to say. So why write?
There is something we haven’t solved yet. While we all assume that good personal financial habits are easy to acquire and live by, what we see around us does not confirm that notion. Data shows participation in securities markets and mutual funds is at best marginal. Individuals still primarily prefer to keep their money in property, gold and bank deposits. Several buy insurance, unsure if they did the right thing. Many are routinely cheated into losing their money to quacks masquerading as experts.
The pathway to efficient personal financial decision making is still strewn with many obstacles: complexities introduced by policy makers and regulators that investors do not grasp easily; too many products described in too much jargon; issues of implementation that require paperwork and process investors do not know how to complete. The financial marketplace continues to attract crooks out to scalp the gullible. The scars of serious fraud and misbehaviour have eroded trust in the minds of investors.
It is easy to assume that financial literacy can solve all this. Not really. The automobile industry struggled for years with the notion that good roads and safe driving will reduce road accidents. Until they realised that they must correct unsafe driving practices and build better cars. We cannot find solutions to policy and production issues in this column. Nor can we pretend that education will solve everything. We can focus on what investors can do in this situation.
That premise takes me back to a constant crib about this column. Investors complain that I do not provide specific directions. The reason is simple. Efficient decision making always supersedes actionable points for implementation. Without setting the context, without defining the problem and its boundary conditions, without conceptual mastery over what strategies will work and why, and without observing what works and what does not, decision making will remain impaired. This column simply focuses on enabling investors to master that framework. One concept at a time. One principle at a time. One idea at a time. In the hope that over time, investors will know how to take charge of their personal finances.
Why take charge? There are three reasons why each one of us should get involved in managing our money. First, the era of the government providing for us is over. Those visages of retired investors enjoying a sizeable pension should not fool us into hoping that retirement is about reunions, travel and celebrations. A generation that does not work in pensionable jobs will soon retire.
Second, the marketplace is ruled by sellers. They are growing by the thousands. The only defence have from their armies that will pursue their targets with aggression, is being in charge of their personal financial decisions, and remaining unwilling to cede it to smooth talkers.
Third, we will all live longer. After the initial years of loans and liquidity crisis, and the middle age worries about career progression, we will sail past the pangs of entrepreneurship and freedom, and land in that place where we will worry if the money will last a lifetime. Maybe it will. Living with regret about decisions not taken on time is awful. What are those concepts, principles and ideas that might help us? Let me put in five things to think about.
First, personal finance is not about the many decisions you make in your life. It is about the few strategic decisions you make for a lifetime. All else is implementation. If your goal is financial independence, you cannot achieve it without a steady income, controlled spending, and accumulation of assets. Make sure your everyday decisions fit within that big picture.
Second, if sensible investing is on your mind, you must commit to strategic asset allocation and diversification. If you mindlessly added financial products to your kitty, or invested most of your wealth in property since you think it is the best, or left cash uninvested in the bank because you have no time and can’t trust anyone else, you have made serious asset allocation decisions that will come to bite you.
Third, grasp the idea of growth vs income and decide how well your money is aligned to your needs given the phase of your life. What you need every day must be served by your income and all else must be invested to grow in value. The marketplace can offer a million products. You must ask whether what is on offer delivers income or growth, and if that is what you need. Your money must work for you.
Fourth, every decision has a pure form—the right thing to do. Grasp that, completely and fearlessly. Then deal with what the compromises are, and if you are willing to accept those compromises given your situation. Whether it is a loan, a credit card’s unpaid dues, the IPO that you bet on, the policy you signed up, or the fund you bought, you have to be satisfied they are right for you. And explicitly know what you compromised for what.
Fifth, as Peter Drucker famously said, a decision that does not degenerate into work is but a good intention. Decisions are at a high level of competence. They need thorough conceptual understanding, and expertise to deal with the entire cycle of thought, action, observation and correction. Be sure about what components of this cycle you would deal with, and what you will outsource. Do not hope that your distributor or relationship manager who executes your decision, will also provide the expertise.
There are components of your financial life that you have to take charge of, and you must make decisions while being there. Columnists like me hope to help, but the task remains yours.
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