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Financial Behaviour

"Financial Freedom is available to those who learn about it and work for it"

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Focus on Things That Matter

Humans have a tendency to focus on all the wrong things. We fixate on things that don’t matter, and things that we can’t control. Of course, if it doesn’t matter, focusing on it is pointless; and if we can’t control it, focusing on it is futile. What would happen if instead of trying to focus on everything, we only focused on the things that really mattered that we can also control? For example, we can’t control the markets, but we can control how we react to the markets. We can’t fix global economic problems, but we can tackle our own financial issues. This sketch from Carl Richards hits the nail on the head when it comes to where we place our attention. Ultimately, you have to ask the question: “Does this really matter, and do I actually have control?” Based on the answer, you’ll know whether it's worth your time and energy.

Fear and Greed

Most investors make the same mistake with their money over and over again. At the top of the market, they can’t buy fast enough. When the market bottoms out, they can’t sell fast enough. They break the number one rule of investing by buying high and selling low. Most people just call this bad investing. But as The Sketch Guy, Carl Richards, illustrates in this sketch, buying high is a form of greed, and selling low is a form of fear. To be clear, the solution here is not to simply throw your hands in the air and give up, since fear and greed are human emotions that you will likely grapple with the rest of your life. The solution is to recognize that, in aggregate, investors tend to be very bad at timing the market. So why even bother? Instead, try this: 1. Ignore what the crowd is doing. 2. Base your investment decisions on what’s needed to reach your goals. 3. Stick with the plan despite the fear or greed you may feel.

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Between You and The Big Mistake

At some point, all investors face what New York Times Columnist Carl Richards calls “The Big Mistake." Otherwise known as buying high and selling low. It’s only natural. When the market drops, our instinct is to sell now and stop the pain. When the market shoots up, we tell ourselves it's time to buy, buy, buy. However, our odds of avoiding The Big Mistake go up dramatically when we have a good advisor. In fact, according to Richards, preventing clients from making The Big Mistake is an advisor’s primary job. Investors can (and do) make lots of small mistakes: failing to rebalance on time, owning a mediocre investment, or being a little tax-inefficient, for a few examples. These are all things people can survive and still reach their goals. But if an advisor isn't using every ounce of persuasion they possess to convince their clients not to make The Big Mistake, then there is a major problem.

Days or Decades

One of the things we love to do as humans is take the recent past and project it indefinitely into the future. We do this in good times and in bad. Turns out, there’s a name for that. It’s called recency bias. And one good solution for recency bias is to lengthen your definition of the recent past. In other words, as New York Times Columnist Carl Richards shows in this sketch, shift your focus from days into decades. This is especially true when it’s been a painful week in the stock market. What if, instead of talking about the last ten days and the next ten days, we talked about the last ten years and the next ten years? How might that change our outlook on what actions we do or don’t take at that time?

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Current Reality

In its most simplistic form, financial planning is the process of charting a course from where you are today to where you want to be. The first step is to become crystal clear about what The Sketch Guy, Carl Richards, calls your “Current Reality.” In other words, a balance sheet. Where you stand financially today. The cumulative result of all your income and expenditures. Once you are clear on your current reality, you can start coming up with concrete goals. Now, no one can tell you exactly what path you will take to arrive at those goals. But what is practically guaranteed is that there will be ups and downs along the way. When you hit the downs, it’s important to keep them in context. Down from yesterday may still be up from last year. Focus on the big picture. As long as the average of your ups and downs is a clear path to your goals, you’ve got nothing to worry about. 

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