We do not need intelligence to make money. We do need the smarts to make money. We need clarity, discipline, confidence, or conviction to stay the course.
Today we have many free and paid materials on managing our money. One could learn to DIY from scratch without professional financial advice. However, very few are successful. Why?
A single question or statement like, “why did you choose this fund/stock?”, “Do not invest Rs. 1.5 lakhs a year in PPF” etc., is enough to shatter their wafer-thin confidence in their choices. Why?
Lack of clarity. Many investors manage their money with no clear plan or, worse, a clear goal in mind. Here is an example of an exchange I have been part of several times in the last decade in the Facebook group Asan Ideas for Wealth.
- Q: “Can I invest in funds X, Y and Z for five years?”
- A: “None of the funds is suitable for five years”.
- Q: “So how about seven years then?”
- A: “Still not suitable.”
- Q: “Ok then, ten years”!!
How can a need suddenly jump from five years away to seven years to ten years away?!
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Lack of confidence. Even those who have a plan do not have confidence in their choices. “I have selected these funds with this asset allocation. Am I on the right path?”
Any article/video that says anything other than “their choices are good” is enough to upset the apple cart. The portfolio is churned, funds or added, and soon it is back to square one.
Why does this happen? The more useful question is, can we do something about it?
The answer is to appreciate some ground realities of investing.
- Q: How much return will I get from this fund after 15 years?
- A: We don’t know. We can’t know. The good news, however, is we don’t need to know!
- Q: Is my selection of funds right?
- A: There are a zillion ways to combine mutual funds. All of them, in principle, are “right”. What matter is our ability to track the progress of our goals and course-correct as necessary.
The problem is investors believe that some magical mix of assets or instruments out there is guaranteed to bring them success. No such thing. We all make a choice, a leap of faith and see how it goes. We live and learn. The sooner we realise this, we can be confident that we can never be confident!
Financial planning is a good extent, a journey into the unknown. It need not be a terrifying journey if we learn the basics of goal-based portfolio management.
We build the confidence that any number of choices can be turned into successful ones if we focus on the essentials – when we need the money, realistic inflation, realistic risk, and return expectations.
Building confidence will take time, and we will make mistakes while learning the essentials. The problem is, Are investors refusing to graduate beyond the basics? Most investors invest based on hope and refuse to learn anything more. Their confidence can only be weak, if not non-existent.
As coach beard from the Apple TV show Ted Lassowould say, we all must do better. Our money deserves better respect.