Financial Health by Raj Shah, director and principal of Blue Wealth Capital
The financial planner says understanding human behaviour will always pay off
DON’T JUST DO SOMETHING, STAND THERE!
In my last article, I talked about preparing to move into what I like to call the next phase of life (note I didn’t say retirement) with a sense of purpose and the ability to maintain one’s independence and dignity.
When you are no longer drawing a wage, it is important to preserve the capital that you have built up during the long working phase of your life to see you through until you die and, depending on your circumstances and wishes, to leave a legacy. It is equally important, however, to be mindful and stay ahead of the ever-rising cost of living.
Retirement only has two possible financial outcomes, which are mutually exclusive. Everyone who doesn’t die before retiring ultimately gets one or the other of these two outcomes.
Outcome # 1 : the money outlives the people.
Outcome # 2 : the people outlive the money.
It is commonly known that the government aims to keep inflation at around 2%, however if we look at the cost of an everyday item, the stamp, we can see that the cost of “living” since 1989 has actually risen at a rate of c6% per annum. In 1989 the cost of a first class stamp was twenty pence. Now, it will cost you seventy pence. Your hard-earned capital therefore needs to be earning you a very healthy rate of growing return. In fact, simply investing in the Great Companies of the World over the same term (and just leaving it) would have produced almost 10% pa*.
According to Nobel Laureate Daniel Kahneman, by nature human beings are ‘failed investors’, meaning that when investing in the stock market they have a tendency to ‘buy high sell low’. Conversely, when shopping in a supermarket for example, if their favourite brand of chocolate has fifty percent off, they will probably buy two packs! As human beings we are led by emotion and, as such, we are susceptible to making mistakes.
This is where a high quality financial planner who understands human behaviour comes in. Behavioural coaching stops us from exiting the market at the first sign of a downturn, when it may actually be better to sit tight. Or over-estimating our abilities when it comes to managing our own money. Or thinking that trying to time the markets is a good idea.
But eliminating mistakes is only half the story. We have got to make sure they stay eliminated by encouraging good financial behaviour going forward. A high quality financial planner must help clients recognise when they are about to make an error and stop them before they choose a path that is not in their best interests.
Your financial planner should be sitting down with you, really getting to know you and your family and truly understanding what your goals are in order to produce a live, collaborative financial plan just for you, tailored to your circumstances and goals.
Crucially, your financial planner will ensure that you stick to the plan. This is where the coaching happens, which is the most challenging bit. It is a simple idea, but not easy to implement.
Stress testing the plan and being prepared is vital – one of the World’s largest fund managers, Vanguard (c£4 trillion under management) asked me to write an article for them on the importance of these “fire drills” we do with our clients.
The right thing to do is often not the comfortable thing to do.
*source annualised return of the S&P 500 1/10/89 to 31/10/2019