Why we struggle to invest & manage money prudently and how to fix it

Published: April 29, 2022 at 6:00 am

Last Updated on April 29, 2022 at 11:21 am

Personal money management steps are simple to appreciate but hard to implement. These are some of our behavioural finance learnings on why investors struggle to invest and manage money prudently.

1 We often forget that personal finance is personal. Every move that we make ideally should be tailored to our needs. Right or wrong decisions should be defined from a personal viewpoint.

Instead, we allow influencers to sway our thoughts. We follow popular choices and define news media to define right and wrong. We buy because something is popular and not because something is suitable.

Ashal Jauhari holding just one equity fund for all his needs is his definition of simplicity. Not the definition of simplicity. Yes, as a piece of general advice on keeping it simple it works great for beginners but that is usually not enough to satisfy everyone or shape existing portfolios.

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We will have to find and implement what we are comfortable with. Problem is, we seek random opinions about what will work for us, we must anticipate diverse responses (and therefore never ask!).

If personal finance is primarily personal (it is) then there can be no definitions of right and wrong paths. Only suitable and unsuitable paths.

We never find what works for us because we do not look within. Money management is a curable problem. Sadly we are constantly trying to only treat it with over-the-counter superficial suggestions

2 We want to feel superior about our choices: We want to choose something that is better than others. For example the best health insurance or the best mutual funds.   These don’t exist!

Once we choose, we defend our choices by claiming other choices are inferior. Both the active and passive investing camps are guilty of this.

No plan or no strategy however well it worked in the past comes with no guarantee to work after you start following it. The sooner we appreciate this reality, the lesser the chances of getting hoodwinked.

3 We want guarantees before we begin and continuous “motivation” afterwards: So many readers and viewers on YouTube have accused freefincal of demotivating them because they did not like seeing facts about risks in equity investing. Truth is often inconvenient.

There are no guarantees for anything in life, so why should investing be any different? We will need to course-correct as per the needs of the situation and change plans without hesitation.

Constantly seeking reassurance if we are on the right path from random people is useless because no one understands our circumstances like we do (if we tried).

Sadly, one quick glance at the Facebook group Asan Ideas for Wealth is enough to understand that most people do not appreciate their own circumstances. They would like to crowdsource “solutions” without the necessary context. If we don’t care about the context of our problems, why would anyone else?

4 We are emotional about the present but not about the future. We seek instant gratification in the form of tax savings and tax-free returns. We are impatient if equity funds do not deliver or slip in returns. In our opinion, the only way to keep calm and invest through market ups and downs is to be emotional about the future.

The prospect of not beating inflation after retirement and not being financially independent is reason enough to avoid going overboard on “safe” fixed income and chasing after-tax savings every year.

5 We refuse to take action even though we know what to do: The fear of choosing wrongly, of making a mistake pushes us to make the greatest mistake in money management: inaction. There is no way except to take a leap of faith and course-correct along the way. Every day not accepting this inevitability is a day lost forever.

6 We refuse to graduate beyond the basics: If we stop and look around personal finance content, almost all of it (ahem hopefully we are an exception) revolve around the basics: the power of compounding; beating inflation with equity etc. Most investors even after years and years of investing are happy to reside at that level.

Very few graduate to the notion of portfolio management: rebalancing, systematic de-risking, security review etc.  This is equivalent to leaving the fate of our hard-earned money to luck.

The solution is easier said than done. For what it is worth it is:

  1. Understand the basics. This free e-book may be useful: Re-assemble Step by step money management basics
  2. Implement! One step mentioned above per week. In about two months, you will have a firm foundation (but only if you implement them!)
  3. Review your portfolio once a year (will not take more than 30 mins). Write an audit for other DIY investors to benefit and send it to us. Check out our reader stories.
  4. Learn how to manage risk in your portfolio so that regardless of market movements, you always inch closer to your goals.
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About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
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