I was listening to a financial podcast recently on the psychology of investing, and the statement was made that financial success is more about behaviour than intelligence. This is a provocative statement and raises a number of questions.
Is success the attainment of an objective or is it about maximising your financial worth when it comes to investing? Then we need to define what behaviours lead to success and if they are followed, we can offer the retort that perhaps it is not that behaviour beats intelligence, but that certain behaviour is intelligence.
When you start considering these questions, you may want to delve more deeply into the fundamental question of why we invest. There may be many reasons why people want to invest. It may be to attain a quantified goal, or more vaguely to achieve a concept of financial freedom, or it may be a desire to address an earlier life experience that has shaped our perspective on, and relationship with, money.
At this time of year, when you may be considering your objectives for the year ahead, it is good to consider the why. It can help you to distil the essence of what is most important to you. This becomes your objective, your target. Understanding the why is what drives our investment philosophy. Our clients will have heard us state that we are not interested in chasing the next hot thing, or the loudest supposed guru. In fact, we often advocate moving against the crowd. More to the point, we follow the principle of being objectives based. This means being able to articulate the purpose of why you are investing. A good financial plan interrogates why you want to invest, what you want to achieve and when. What the end goal looks like- for example, how much income is to be generated, or a wealth accrual target- and in what time period- when do you want to get there.
Spend time thinking about your why. This has a connection with the opening comments about intelligence and behaviours, because, by understanding your goal, you can remain focused on that target, be less impacted by short term market noise, and instead concentrate on what is most important. Good behaviours that are intelligent.
This is a neat segue into the other important question: how. Not necessarily how you invest in terms of asset classes, different investment strategies such as active, growth, value, passive etc- these are just a means to an end to get you to your why. How is more profound. How you invest, and how we advise our clients to manage their money goes beyond the investment portfolio. It incorporates all aspects of your financial life and should aim to embed what author Nassim Nicholas Taleb calls ‘Anti-fragility’. Another word for this is resilience.
Taleb was the author of “The Black Swan”, an economic analysis that shapes our approach to financial planning and after which we are named.
When we are talking about resilience or anti-fragility, it is really about contingencies for the unexpected, or managing risk. Carl Richards from https://behaviorgap.com defines risk in investing as “what’s left over after you think you have thought of everything.”
How to manage your financial life, including your investments requires an understanding of these concepts. We cannot remove the risk entirely, and it should not be the objective. After all, when it comes to investment markets, it is often true that a higher potential risk can lead to higher returns over time. So it is how you manage the risk that matters.
The way we apply this for our clients– the Black Swan Capital ‘how’– is to recognise that in the future there will likely be unexpected events; we don’t know what, when or the magnitude, that is their nature, but they will likely occur, and probably at a time we least want them to. Therefore, we need to build resilience, and anti-fragility into financial plans. This may be ensuring you have cash reserves should you not be able to generate income for a period of time. It can include prudent and well-thought-out cash flow management or diversification in how you manage your money. It can also include building resilience into targets. You may wish to plan to retire at 65, but what if you are forced to retire at 60? Having contingencies built in for risks can give you the security that is core to a good plan. That, by our definition, is good behaviour being intelligent.
We encourage you to think about what is most important for you in your life- the why you invest. And then to look at the how, to consider how plans are constructed, implemented, and managed over time and how effective they are at navigating the unexpected.
If you would like to have this discussion with us, you can contact us directly at [email protected], or find more information on our website www.blaclswancapital.eu.