In the previous post, we looked at understanding behavioural finance and everything you need to know about it. This time, we'll look at what you need to do.
Everything You Need to DO
1. Read Ego is the Enemy, by Ryan Holiday
Seriously, it’s the book of the decade for me. It’ll help you get out of your own way, not just when it comes to your finances, but in all spheres of life. You can find it here (affiliate link). The audiobook is read by Ryan Holiday himself – highly recommended.
2. Continually Remind Yourself That Money is a Means to an End, Never an End in Itself
Money is far less important than you, your family and your future plans. Indeed, money is subservient to these while at the same time being a contributing factor. If you define your sense of worth in financial terms, you'll never be happy.
Don't make money the end goal. Instead define your hopes and dreams in terms of people, relationships, events and experiences and only then sit down to work out the cost of these ambitions. If money is relegated to the position of a tool then it won't weigh so heavily on you.
3. Process the Past, Live in the Present, Keep an Eye on the Future
I do think it is important to understand your own money story. The way your parents spoke about money and your own experiences to this point will all have a bearing on how you feel about it. Process your financial past, come to terms with it and seek to understand its present-day impac
But we mustn't dwell in the past. Decisions need to be made today which will bear out in the future. A healthy view of who we are, and an awareness of the biases will help us to process the information we need today so that we can make good decisions.
As we grind day-to-day in the present, we need to keep our eyes on the future so we know what it is we are aiming for. Decisions can be made today in light of one day. By having a clear vision of the future, we can retain our excitement and inspiration, even when it feels like a slog.
4. Set Things up Tight
There is a weight of research behind multi-asset investing. Whether you approach this using off-the-shelf funds or build a multi-asset portfolio yourself doesn't really matter. Once you set up such a portfolio and put in place a system to review it regularly, then much of the hard work is done for you and you’re removing some of the opportunity to apply your biases.
Being deliberate about setting things up correctly rather than creating a hodgepodge of accounts and funds will stand you in very good stead. Listen to my episode on how to set up a multi-asset fund here.
5. Build a Framework
Once things are set up correctly, we also need to build a framework for future financial decision-making. In my conversation with Greg Davies (Part One and Part Two), a behavioural finance consultant working with Oxford Risk he talked about never making investment decisions during the work week.
The reason for this was when he worked at Barclays, he was always surrounded by screens showing financial news and markets around the world. It would be too easy to make a snap decision in the heat of the moment rather than in a careful considered way. He decided always to make decisions on a weekend when he could process that information in his own time.
Building a framework will look different for each of us. A large part of it should be automation, whether that applies to rebalancing our portfolio or increasing our savings rate each year. A formal review process, say once a year, will also help, and needn't be an ordeal.
Like most things, financial management gets easier with practice. It also gets refined through learning from mistakes. Be intentional in every aspect of your finances. Don't be reactive; instead be considered in all that you do.
It’s a lifelong mission to get to grips with our own behaviour and how it applies to our money. My new course is a great place to start, or check out The Financial Wellbeing Podcast from Chris Budd, and for more information about behavioural finance application, the Maven Money Podcast with Andy Hart.
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