While we have looked at the individual components which contribute to financial planning success, on their own they are of limited use. Only when conflated into a cohesive plan of action does the magic really happen.
Everything You Need to KNOW
1. The Whole is Greater Than the Sum of its Parts
Each of our eight component first principles has its own power. But when they're blended together, the combined impact is profound. If you took the information about compounding and put it into practice, you would make significant progress towards your financial goals.
But, when you combine this with an understanding of risk and timescale, the impact of inflation, an understanding and application of equity investing, all while keeping close rein on your own behaviour, the possibilities are endless.
Keeping your costs under control will have an impact, but if you embed good financial control to enable you to consistently invest over time, and increase your savings rate while working towards your definition of what it means to be wealthy, then things get exciting.
The more we understand about money and personal finance, the simpler it gets. There really is nothing new under the sun, no current trick or modern method to supercharge your wealth. The same rules that have always applied continue to do so, and I imagine always will.
2. Of all the Principles, Behaviour is the Most Important and the Most Challenging
It probably is no surprise that our behaviour really can make or break our financial future.
We can have everything else down: a good grasp of how investments work, clear time scale and a flawless asset allocation, but if we panic at the first signs of a market crash, and sell out at the wrong time, all is lost.
Annoyingly, this aspect of our financial planning is also the most difficult to get under control. You see, we have a habit of lying to ourselves, glossing over our worst traits and telling ourselves that we’ll change before too long. But this stops us addressing the behavioural traits which threaten to derail us.
We are thinking, feeling, organic beings, blown about by external inputs and internal chemical imbalances. Overlaying this onto the calculating certainty of financial mathematics is a challenge to say the least.
We can never hope to behave perfectly when it comes to our money. The best we can hope for is to do a little better next time. We need to understand and accept our humanity and build a framework for decision-making which makes our own lives as easy as possible.
Everything You Need to DO
1. Focus on What you can Control, and Don’t Sweat What you Can’t
Control is everything, but there are many aspects of the financial planning process that you cannot control. For example, compounding is a mathematical process that works whether you understand it or not. You can't control inflation.
You can't control the behaviour of the markets from one day to the next; there are simply too many factors at play for you to begin to understand them let alone bring any influence to bear.
But you can control some things, and these are the things to concentrate on. For example, you can control your asset allocation in order to apply an acceptable level of risk to your investments. And you can rebalance your portfolio back to that asset allocation to keep things in check as time goes on.
You can control the costs of your portfolio by ensuring that you are receiving value at every level and of course you can control yourself There is nothing to be gained by worrying about the things that you can't control. Those things will happen anyway so why waste the time and energy?
Even if you're not a worrier by nature, it is just as unfruitful to spend any time thinking or obsessing about the things which are outside your control. Let them do what they will do, and instead focus on the levers you can pull.
In the next post, we'll look further at what you need to do to make the first principles work for you. Or, if you missed the previous post, find it here.
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