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  • Writer's pictureAkshay Nayak

Walking The Talk

When we initiate the financial planning exercise and begin our journey to financial independence, we all create the most meticulous and well thought out financial plans. And yet, very few of us make it to our desired destinations. This is because most of us pause or delay the execution of our plans for various reasons along the way. Pausing or delaying the execution of our financial plans takes all the purpose and efficacy out of our plans. And this is more than enough to produce undesired adverse results. It is therefore important for us to identify the reasons that cause us to drift away from sticking to our financial plans and correct them at the earliest. Therefore in today's post I'm going to talk about the most common reasons why we drift away from our financial plans and suggest corrective measures for each of them. This would allow us to stick to our financial plans at all times and ensure that we achieve the results we desire.

One of the foremost reasons why we fail to stick to our financial plans for long periods of time is due to too much importance being given to market commentary that is relayed publicly. Listening to market commentary on business news channels and various forms of social media is completely fine as long as we don't allow ourselves to be emotionally affected by what we hear. But this is easier said than done. It is extremely easy to make human psychology tend towards the extremes even with the slightest bit of instigation. And when we are emotionally instigated, it becomes extremely difficult for us to remain rational and stick to our financial plans. Paying heed to market commentary would only overload us with information and make it hard for us to be decisive. It is therefore better for us to completely block out market commentary in all it's forms. We must remember that our financial plans are contextually created keeping all of our needs in mind. This means that our financial plans give us the best chance to achieve the results we desire with both our money and our lives. Therefore we would be much better served religiously sticking to our financial plans rather than following market commentary for validation of our actions.

The information overload that comes with focusing too much on market commentary also gives rise to another major problem that inhibits us from sticking to our financial plans. Some investors may wait for the perfect time to begin investing, or resume investing after a long pause. Those who do this are simply left waiting in most cases, since the perfect moment arrives and passes them by. We must remember that investing is an art that is highly experiential in nature. The only way to holistically pick up the trade of investing and get better at it is to actually begin investing without worrying about the conditions around us. Therefore creating and sticking to a well designed monthly investment plan is the best way to overcome this issue. Investing on a monthly basis would automatically mean that we would get to derive the benefits of all the best moments of the markets, regardless of whether they are at the upper extreme or the lower extreme. And this in turn would allow our financial plans to deliver performance that is both optimal and sustainable over the long term. So regardless of what the markets are doing, we would always be happy with how our money is doing, like the man in the picture below, who is happy with his money despite all the volatility.

Market extremes sometimes create problems that are similar to the one discussed above for investors. Most investors set themselves an annual investment target for every single year. But later, they hesitate to follow through on those targets during periods where markets fall steeply and stay there for a considerable span of time. Such a problem is majorly indicative of investors being highly risk averse. Risk aversion is highly detrimental to our financial plans since it causes us to completely stop our investments for long periods of time and miss out on the golden opportunities provided to us by the markets. Moreover, making up for lost time once we resume investing after a long pause becomes highly difficult. Therefore, when we find it hard to meet our annual investment targets during hard times for the markets, we may begin by investing small amounts to gain confidence and later gradually increase our investments as and when our confidence returns. This would allow us to overcome our risk aversion and follow through on our investment plans in a timely manner.

Risk aversion sometimes manifests itself in a different manner among some investors. They may become too eager to book profits when their investments rise steadily over a period of time. They do this because they do not want to risk a steep fall in the value of their investments after a steady rise. While this is a valid contention, booking profits too early from our investments would not allow them to perform to their full potential. And this would set us back a long way on the path to achieve our financial goals and financial independence. Therefore, our decisions to sell our investments must be purely based on fundamentals rather than valuations or the speed of the upward move. As long as the fundamentals remain in place or keep improving, we must look to hold on to our investments regardless of other factors. Therefore it is important for us to devote time to understanding the fundamentals of our investments at regular intervals. Those of us who are incapable of doing this ourselves may explore the option of employing professional help.

To sum up, creating the best possible financial plans and not following them meticulously would ultimately be useless. Listening to market commentary would be absolutely fine as long as we don't allow it to affect our emotions enough to drift away from our financial plans, since they give us the best chance of achieving our financial goals and financial independence. Instead of waiting for the perfect moment to begin investing or resume after a gap, we would be much better served sticking to a well structured monthly investment plan and initiating our investment journeys immediately. During sober periods for the markets, it is better to invest in gradual increments rather than to pause our investments altogether. Pausing our investments would make it extremely tough to make up for the time that we lose. We also must not look to book profits from our investments too early after a sudden or sustained upward move and remain invested as long as the fundamentals of our investments remain intact. And finally when working in collaboration with advisors on our financial plans, we must judge the advice based on the soundness of logic given our needs, not based on whether or not the advice that is imparted is what we want to hear. It is therefore completely possible and within our control to be able to stick to our financial plans and use whatever conditions we have on hand to mould our Futures financially and achieve everything that we desire and much more. All that we need to do is to put our plans into action and see our plans through to a conclusive and rewarding finish.

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