This article explores five ways to manage your financial behaviour more effectively, inspired by a guest on The Australian Finance Podcast, Dr Daniel Crosby.
Talking to psychologist and behavioural finance expert, Dr Daniel Crosby, on The Australian Finance Podcast last week was a breath of fresh air.
Even as someone that spends every day thinking about personal finance and investing, having someone remind you of just how fallible we are to our emotions is a much-needed reminder (especially when it can affect your financial future).
Keeping your head in an information age designed to help you lose it is the never-ending task of the behavioural investor.Dr Daniel Crosby
In this article I’m going to unpack some of Daniel’s best suggestions, so you too can manage your own financial behaviour like an expert (one can but try). I’d also highly recommend giving this episode a listen, I’d rank it as a pretty good financial decision!
#1) Understand that your behaviour and emotions impact your financial decisions
First things first, you need to understand that your behaviour and emotions play a massive role in your financial decision-making process.
We often blame the reason we don’t hit our financial goals on factors such as our salary, investment returns and missing out on the next big thing…but in reality, it often comes down to our behaviour (think greed, impatience, fear).
So what can we do about it?
Unfortunately, even the experts can’t tell you when the market’s going to crash or which stocks are the next sure thing (well at least the good ones won’t).
However, there are many fundamentals of investing that you can apply (think regular investing, long-term horizons and low-cost ETFs), that will pave a slow and steady path to wealth creation.
Plus, not catastrophising when the market crashes (as it inevitably will) and viewing it as an opportunity, rather than a time to make rash decisions that will hurt you financially over the long run.
#2) Become an informed consumer of investment media
The next hack, and such an essential one at that, is making sure you don’t let your decisions be driven by news headlines and clickbait.
Financial media is the source of much confusion and misdirection. However, it’s essentially anything we consume online that has something to do with finance and may be used to inform and guide our financial decisions.
Financial news is designed for clicks and eyeballs, not dollars and cents.Dr Daniel Crosby
Everyone has an angle or bias (conscious or unconscious) when they speak, write or print information, so pay attention and don’t consume media passively.
Some of Daniel’s suggestions when it comes to financial media include:
- Evaluate the source – does this speaker/author have the appropriate qualifications and experience to speak about this topic or were they chosen for other reasons such as celebrity status, appearance or extreme opinions?
- Question the melodrama – chaos and uncertainty are a great news story to media outlets hungry for clicks and views. Think twice before clicking on these overly dramatic headlines!
- Examine the tone – does the report use loaded language or make ad hominem attacks? These are more indicative of an agenda than an actual story.
- Consider motive – news outlets are not charitable organisations and need to keep the lights on. How might the media item benefit their financial needs, over yours as a consumer and decision-maker?
- Check the facts – are the things being presented consistent with the research and opinions of other experts in the field? If facts or opinions are being expressed, in what research are they grounded?
As the great Morgan Housel once said, “read stuff you disagree with, written by people you respect. Charlie Munger says a prerequisite to having an opinion is stating the opposing side’s view as well as they can”.
Action This: An important question to ask yourself is whether you have formulated a particular view yourself after reading and listening to a variety of sources, or are you just parroting the views and opinions of one particular person or publication?
#3) Education, Environment and Encouragement
When I asked about the best ways for people to identify and improve on the ways their behaviour is impacting their decisions with money, Daniel shared with me the three E’s: Education, Environment and Encouragement.
Let’s explore each of them further…
Education: You need to know the basic language of finance and investing. This doesn’t mean doing a PhD, it just means understanding some basic concepts like the sharemarket, risk, compound interest and diversification. Luckily for you, we’ve got plenty of free courses on Rask Education to help you.
Environment: When you start to learn about your behaviour, you start to understand (sometimes disconcertingly) that we don’t have as much free will as we thought. Most of us are as good or as bad as the situation we find ourselves in.
What should your environment look like as an investor? Consider whether your portfolio is diversified and measured enough that you can live with its ups and downs. Ask yourself whether you’re surrounding yourself with the right voices.
If we’re immersed in an environment of negativity, that’s going to start to erode our thinking and our willpower. This may consequently lead us to making the wrong decision at the wrong time.
Encouragement: This will look different for everyone, but it could be through a financial adviser, coach or accountability partner. Essentially someone who’s going to make you stop and pause before making emotion driven decisions.
According to Daniel, even if you’re educated, and even if you’re in the right environment, all the research shows that these factors are actually quite a weak predictor of behaviour. When you look back on some of the studies, it’s called the knowing-doing gap – essentially the gap between what we know we’re supposed to do and what we actually do. So it can help to have someone on your team giving you a nudge along!
Action Tip: Think about who can act as a roadblock between you and a poor decision, at the moment when you’re feeling scared, greedy, or thinking of doing something rash with your money.
#4) Minimise the unimportant decisions in your daily life
One of the crazy stats that Daniel dropped on us, was that the average person makes roughly 35,000 micro decisions per day, which equates to 13 million per year. I mean what even?!
There’s no way you can make every decision well at that level, so it’s important to streamline as many of them as possible.
Whether that looks like building routines, meal planning, delegating, saying no, it’s important that you leave yourself room to prioritise thinking through the important decisions, especially the financial ones.
#5) Keep your ego in check
According to Daniel, ego takes a few forms, but broadly it’s overconfidence. It’s thinking that we are smarter than the next person, luckier and more able to predict the future.
Overconfident people (which is just about all of us) think we’re luckier than average and know what’s coming down the road, which causes us to do things like overtrade, under diversify or invest way beyond our risk tolerance.
There’s a million ways you can make poor financial decisions, and ego is often the main player in them. Take time to really think through your next financial decision, and whether you really have done the work required.
Well that’s a wrap folks, I hope these five strategies have given you a starting point to open an internal conversation about your financial behaviour, and begin the journey to becoming a better investor.