Financial Planning involves many things – our money, our efforts, our goals, our personality, and behavior.
It is a long-term activity as well that extends to many years/decades. While we do try our best to plan our finances optimally, we do run into some problems –
- The unexpected loss of income source
- Mismanagement of income and expenses
- Unexpected financial burden
- Underperformance of Investments
- Our behavior
Check – Importance of Financial Planning
Yes our Behaviour is a BIG Problem
Yes, our behavior towards our finances is a crucial aspect of optimum financial planning. Social, cognitive and emotional factors play an important role in financial decisions. Sometimes, they make us behave in a manner that is not in the best interests of our financial status.
Here are some examples of bad behavior –
- Manas buys a stock that has appreciated in price significantly for the last couple of months because he has been hearing his colleagues talk about it and everyone around him has been buying it. He might end up buying it at a high valuation which can lead to losses later on
- Shilpa invests her money only in bank FDs. She is scared to invest in any other assets fearing losses. This is irrational as she has to understand and analyze other investment options and decide on a healthy mix of investments.
- Many financial products are heavily advertised. When it was time to file tax returns, Riya invested in a few random products that caught her eye to save some taxes. This is not the best way to make investment choices. Riya should understand her risk tolerance and financial situation and only then invest in appropriate assets.
My New book is all about Investor Behaviour – available on Amazon
What can an investor do in this situation where behavioral biases affect his financial decisions?
In some cases, an active mindful change in behavior will improve decision making. For example, in the examples above, Shilpa can visit financial portals and blogs to understand about other investment options.
Manas should let go of the herd mentality and research and analyze on stocks before investing in them. If he feels, he is inexperienced or not knowledgeable to do so, he can invest in equity mutual funds rather than invest directly in stocks.
Another important consideration that will help one in making better decisions is to entrust the financial plan to a financial advisor.
A financial advisor will help in many ways –
Get your finances in order
You might be overwhelmed with all the work to be done to manage your financial life. A financial planner will easily get your portfolio in one place. He will set up nominations, joint holders and other banking and financial steps that will ease your financial life. He can assist in making a will and in estate planning. He can ensure that documentation is complete and accurate.
Support in tax issues
A financial planner can plan the taxes such that the tax outgo is minimal. He can help with solving issues related to tax.
Work with you on setting up and achieving your financial goals
When you set your goals, you might let your emotions color them. A financial advisor will give advice on setting your goals without any emotional bias.
He will buy and sell assets at the right time (not timing) based on your requirement without getting attached to an asset. He will sell off underperforming assets as he will not have any emotional attachment to them.
Regular review of finances
Unless we are highly disciplined, we tend to ignore regular review of finances. We forget to check our investments. Sometimes we do not remember to pay insurance premiums. When we are busy or face extreme emotions, finances tend to take a backseat.
The financial planner will manage finances and review investments regularly for his client. It is his job and he will not let emotions or surrounding situations affect financial planning.
Balance your emotions
When the stock market crashes and your portfolio shows a notional loss or you purchased a property a couple of years back only to see the real estate market stagnating, it is difficult to not be panicked.
You might take some rash decisions as emotions overcome logic. In these cases, a financial advisor can encourage you to think logically and suggest the best course of action. It might be to stay put with your investments or sell off some bad investments. He will give you a true picture of the financial scenario.
Check – The Art of Thinking Clearly
Save Your Time and Money
You are busy with work, family and social commitments. You may not want to spend time and effort in managing your finances with the doubt looming over your head that you may not be making the best decisions. In this case, it is better to have a financial advisor who already knows the stuff and can make decisions quickly.
The investment decisions of competent financial advisors will generally be better than those of layman investors which will result in saving money and also getting better returns.
Financial planning is not an easy task. It becomes more complex when behavioral aspects such as biases and emotions come into play. It is, therefore, a good idea to consider getting the services of a professional financial advisor. You need not to give full control but work with him to improve your financial future.
Please share your views in the comment section.