JASON Zweig, a well-known financial columnist, described his job as follows:
“My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.”
In my years of writing financial columns, I’ve found myself in a similar situation. Financial principles remain steadfast while markets are ever-changing. I recall someone persistently seeking my opinion on a stock they held, despite recently hearing it. Instead of cutting losses and exploring better options, they sought validation. We often seek advice that confirms our biases, ignoring conflicting facts and data.
Here are insights gleaned from experience and others on finance:
Power of compounding. If you have studied the power of compounding, you will have the following conclusions: The earlier you start the better. It works both ways, it can work against you if you borrow and default or work for you when you invest. An average of 9-percent return a year doubles your money every eight years. P100,000 invested turns to well over P3 million after 40 years.
Diversification. There are not often sure things in life. Diversification is key to safer and more consistent returns. You can see how diversified your portfolio is by looking at correlation of each component with each other over long periods of time.
Risk and return. Do not forget that returns come with risks. Look at the possible risks first before the potential returns. Most investors only look at the returns.
Time period. The longer the time you are allowed to invest the more volatility and risk you might be able to take. Match your investment horizon with goals. A mismatch of timing spells troubles not only for individuals but also for institutions.
Financial goal setting. Start with a goal. Write it if you must. Focus on your own goals. Your own journey is unique. Compare your progress with yourself and not with others.
Read more financial history than economic forecasts. Learn what happened before. It could happen again. History may not repeat but rhymes. You will soon learn that panics are time for buying and bubbles are time for selling, and it’s hard to perfectly time the bottom and the top.
Tendency of regression to the mean. Excessively high returns do not go on forever. Extreme prices do not last long. They eventually regress to the average. So do not let booms or busts sway you that much. You are running a marathon not a sprint.
Learn behavioral finance. Realizing human tendencies hopefully limits the potential behavioral pitfalls we might commit. Humans are social creatures of habits and emotions. We tend to repeat our own behavioral mistakes.
It’s not easy to teach finance but not impossible to learn for those who want to. Some people learn from studying and observation. Some needed to learn from their own experiences. Financial education is not often taught in high school or even college. It is not easy to teach because everybody is different. Each person’s background, goals, priorities and values are different.
We are our own worst enemy. A financial plan is easy to create. Following it is another matter altogether. We must understand our own weaknesses and strengths to create the financial plan that would suit us and make it easier for us to follow.
Know yourself. Maximize your strengths and accept your flaws, and build your financial plan around them. If you can’t control your spending, avoid using cards. Bring cash instead. If it is hard for you to save regularly, or you are forgetful, apply for auto debit. If you are risk-averse, have more diversification. If you are easily influenced, don’t watch the news or join investment forums.
Thinking rationally is easier said than done. Emotions may override any level of financial intelligence. Having patience, being levelheaded and having a low ego are good traits in investing. Being patient allows us to avoid FOMO (fear of missing out) and gives us the power to buy only when the price is right. Being levelheaded allows us to do the right thing at the right time to produce the right result. Having a low ego allows us to admit and correct mistakes sooner rather than later.
Investing is simple but not easy. There are only a few key investment topics, but they are crucial and merit deep discussion. I hope I’ve accomplished my goals: Clarify basic but important financial ideas. Ensure understanding and relevance. Do these without sounding repetitive.
Josefino Gomez is a registered financial planner of RFP Philippines. To learn more about personal-financial planning, attend the 109th RFP program this September 2024. To inquire, email [email protected] or text at 0917-9689774.
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