Why Do People Need A Financial Planner? Because They’re Human.
If everyone always acted rationally in matters of business and finance, life would be so much easier. But human beings fail to do this as behavioural economics has taught us.
In actuality, even the brightest individuals are susceptible to self destructive tendencies.
The majority of individuals are better off, if they can afford it, having a financial planner they can turn to, regardless of how many books they may have read on investing and personal finance.
Ideal vs Reality
The fact that so few economists predicted the 2007–2008 financial crisis is only one example of how the gap between the ivory tower ideal of human conduct and reality explains a great deal of the issues the field of economics has faced recently.
One of the pioneers of behavioural economics, a part of the science that examines human behaviour as it actually occurs rather than how it is imagined in textbooks, is Richard H. Thaler, who is a professor at the University of Chicago Booth School of Business. Thaler once said, “Humans do a lot of misbehaving, and that means that economic models make a lot of bad predictions,” which confirms the reality that economic models frequently make incorrect forecasts, which can have severe repercussions on society.
For starters, we don’t always behave in our own best interests. As buyers, we frequently go to great efforts to save a few dollars on a purchase, then have no qualms about blowing more money than we did saving by travelling around town to check costs.
We will spend thousands of dollars on unused gym memberships, sit through boring movies because we believe that since we paid for the ticket, we should watch it through to the finish, or skip an expensive dinner in favour of bingeing on cashew nuts.
We are all capable of being irrational investors too. When prices are high, we have a tendency to buy and when they’re low, we sell. We continually trade and routinely second-guess the market with little regard for the costs involved in trading. Despite overwhelming evidence that a diversified portfolio makes greater sense, we place bets on particular businesses and industries.
Recognising the Gap
Since we are fallible beings who don’t always optimise the financial outcome of each opportunity or think logically, it should be obvious that a sound theory of consumer or investment conduct should start by acknowledging this.
It is generally known that there is a discrepancy between the opportunities open to us and what we really get. A qualified financial planner named Carl Richards has created a whole website of conceptual drawings based on this topic, which he refers to as the Behaviour Gap.
Carl provides powerful illustrations of ideas like the cycle of greed/buying and fear/selling, the necessity of taking tiny, manageable steps, or the need to concentrate on the meeting point between things that matter and things we can control.
The annual Dalbar Quantitative Analysis of Investor Behaviour documents the costs of ignoring these behavioural issues, with many investors falling far short of where they would have been, had they simply bought the market and held due to impulsive trading, a lack of cost awareness, and concentrated portfolios.
Accepting Our Differences
Of course, there may also be perfectly valid explanations for why we act in ways that are inconsistent with pure economic theory. The author Morgan Housel discusses a number of these in his most recent book The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness.
Our formative experiences are one of them. It’s safe to assume that if your parents or grandparents were raised during the Great Depression, for example, their attitudes towards spending money, stock investing, and obtaining and retaining employment will be different from yours.
“The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty,” Housel writes. “I can read about what it was like to lose everything during the Great Depression. But I don’t have the emotional scars of those who actually experienced it.”
(Although it’s too soon to say for sure, it appears likely that people who established small businesses during the pandemic of the past years will view risk very differently from people who started enterprises before the crisis.)
To put it another way, our opinions on money and risk are frequently subjective and are the product of our own varied experiences.
Why Advice Matters
This is why tidy, cookie-cutter notions of “how to invest” need to be adapted to reality. There are general guidelines for discipline, diversity, keeping costs low, and maintaining your preferred asset allocation, but there isn’t a one-size-fits-all ideal portfolio.
The fact that we are all flawed and unique is due to the fact that we are human. Although we have a lot in common, none of us have the same perspective on the world. Although we might deceive others and ourselves, our feelings about risk and uncertainty are real.
And for that reason, a bespoke and personal financial planning approach is crucial. At Pyrmont, we examine how our concerns, uncertainties, and hopes can be shaped to fit some established long-term ideals. We also make changes to your plans as we go and a sound financial strategy will always take into account our own actions.
Next Steps
So why not get in touch if you want a financial planner to assist you on your journey?
Pyrmont’s LifePlan and evidence-based investment approach can help you reach your goals and provide some guardrails for a brighter financial future.
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