Managing money is simple, but not easy

By managing money, I mean the broad gamut of personal finance i.e. budgeting/saving, calculating the cost of goals, protecting health and life, buying a home, writing wills etc, as well as the narrow definition of investments.

Now here is my assertion. Yes, it’s possible to manage our own money, because the underlying principles are simple. We simply need to save in our earning years for our retirement years, we simply need to start investing early to make compounding work for us, we simply need to invest wisely and protect our assets. Investing can also sound deceptively simple – we just need to find opportunities that have high chance of success at a good price. Technically, anyone can invest – you don’t need a degree. And at any age – the world’s richest investor, Warren Buffett, started at age 11 and is over 85 now.

All this may sound simple, but it's not easy. Here's why -

To err is human

We, humans, are just not as rational as we think we are. We suffer from all sorts of cognitive biases such as overconfidence, hindsight, availability, anchoring etc outlined in the behavioural finance literature. We also have money scripts in our head, basically attitudes towards money that are shaped by our experiences.

Understanding humans, especially ourselves, is not easy.

Investing may be more art than science

Economics and finance are simply not the same as physics. The ‘laws’ are not absolute like gravity, the predictions are not black or white but carry probabilities, and some assumptions are obviously not true. Experts are still debating whether it’s possible to statistically model the unpredictability of managements in corporate finance, of heads of state or central banks in political economics or of masses that change the demand of entire markets. Diversification works as a concept, but sometimes fails in reality because the definitions of asset classes are arbitrary and it’s hard to predict how assets move relative to each other.

The 2008 global financial crisis was called a black swan event – an unpredictable event that changes the course of an economy and that is wrongly rationalized after it occurs. It triggered a debate of not only the behaviour of the financial services industry, but that of finance theory itself. The evidence so far is that investing may be as much art as science.

Yes, economics and finance have lots of numbers, but it’s as much about understanding human behaviour – the way we behave and why. As someone put it, 'we’re not simple, so why should economics be?... The lack of definitive conclusions isn’t a weakness in the field, it’s what’s interesting about it.’

Economics and finance are interesting and challenging, not easy.

What we can do about it

Therein, lies the problem. In my experience, non-finance professionals don’t understand how difficult the field really is. They don’t know what they don’t know.

Hence, firstly, I believe paying a good financial adviser is worth it. He or she should be able to give us feedback on any cognitive errors, and help us select other product and service providers (like mutual funds).

Of course, a good adviser would be well qualified, experienced and ethical, disclosing all potential conflicts of interest. I would be wary of professionals who are highly confident of achieving results without highlighting the risks. I prefer those who admit that they don’t know where the economy or markets are likely to be at the end of the year but have a good and well-documented research process that is likely to work in the long term. In this field, it’s better to be vaguely right rather than precisely wrong.

Secondly, I feel we need to teach everyone some basic economics and finance, so people appreciate its imprecise nature. People have to realise that money experts are lousy at predicting market crashes, or picking the 'best' mutual fund.

The question is how to do this. I know the evidence on financial education is not encouraging, but I think it’s not been done right. The content and delivery tend to be boring, complicated and intimidating. I think we should be a lot more creative, especially since we are finally realising that it’s not about the numbers anyway. Creativity could be in the form of storytelling, as we can see in the Hollywood movies on the topic (such as The Big Short and Money Monster). Or it could be in the form of humour. I haven’t seen many examples of humour being used to explain finance, but I think it's worth a try.

 I launched TheMoneyHans.com to provide financial education in a fun and engaging way, starting with simple articles and then adding videos. Hope it helps.

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