Aligning finances to one’s responses is how one manages risk, and one can only learn it over time


The stock market let me down, he said. Just when I hoped to cash out on my profits and use that money to pay my son’s tuition fees for higher education, the Ukrainian attack began and everything went downhill. Of what use is expert advice if it cannot protect small investors from losing money for no fault of theirs, he lamented.

It is tough to speak or offer solace after the event. The damage has been done. But the lessons should not be missed. Many assume that the primary purpose of planning and advice is to forecast the future course of markets and returns. They don’t demand it in so many words, but they come to expect it.

What is the return I can expect? Is this a good time to invest? When should I book my profits? How long should I stay invested? Is this the right stocks or funds to buy? Will it behave as well as it did in the past? Should I invest a lump sum or should I invest in installments? These questions are routinely asked.

It would seem that these are innocuous questions that an investor must ask. How would one take action without knowing all this? An exact answer is not needed but why can’t someone provide a range or a possible set of outcomes? Isn’t that fair to expect? Not really.

In planning, not just financial planning, we are not solving for outcomes. It takes some time and some years of experiencing investment decisions to get to that point. We are solving for our responses, reactions and our choices. We deal with uncertainties because we are prepared, not because we are able to forecast the events accurately.

Getting stuck in traffic is a routine problem we face in our cities. We choose when to hit the road based on our experiences, we choose a route that has worked at that time, and we snatch every opportunity and gap to get ahead. But none of this planning can help in completely avoiding being stuck in traffic.

We make sure the phone is charged and that we haven’t removed the chargers from the car; we keep a snack and water in the car; we make sure that the playlist and podcasts we want to hear are in the queue to play; and be tactically prepared. We take a longer term call if this persists to affect our life and word and we choose to stay away from the wheel and engage a driver or use a pooled or public transport.

Our planning, resources and energies are utilised primarily for our responses to the situation. We would love it if there were no traffic jams at all; we could curse and wring our hands in anger and despair; and we could lament the waste of time on the roads. But these are not problems we control and getting upset helps nothing. So is it with financial planning. We prepare for our responses to an event; we don’t hope to forecast or control it.

We associate trust and dependability with outcomes that we can define in advance. A flight that takes off and lands on time gains credibility; a friend that completes a task as promised is appreciated; a service provider that turns up to work as committed is considered dependable. Our lives are easier, smoother and problems occupy lesser mind space when things happen as expected. It would be extremely stressful if our days were only filled with unexpected events.

We also see the benefits to planning and take pride in being prepared for events in our life. We pack our bags with great care; we time ourselves to reach without delay; we sequence our tasks so we can complete them without stress. We spend a considerable amount of time and energy to plan ahead and many of us are quite contemptuous of people caught unprepared in an event.

But all this prep cannot lull us into the complacency that things will happen as predicted. We do see how a completely planned and prepared person can also become paralysed when something goes wrong. Some of those that scream at airline counters when a flight has been inordinately delayed are arguing how they hate it when something is not on time, and how this delay has affected other plans they had for the day.

How an unexpected event affects us is indicative of how we deal with risks and what our attitudes and preferences for risk are. That is why a backpacking nomadic traveller seems to be having a good time, while an elaborately packed and planned traveller is miserable when the unexpected happens. It takes a great deal of self awareness to pack and plan for our response and not pack and plan for an event.

The responses of people to any event, irrespective of their level of planning and preparedness, will be different. These differences matter as they indicate their unique ability and willingness to deal with a given situation. We can mock someone who reaches the airport too early for a flight, but that action is in alignment with their own understanding of how they would like to prepare for being in time for a flight.

We cannot generalise or make rules when it comes to money decisions either. Someone who spends lavishly is responding to their incomes in a way that makes them happy. Someone who saves too much is preparing for an unexpected event in a way that makes them feel secure.

When we speak of investing rules, we are guided by the most commonly encountered responses to some of the most commonly seen events. Make sure you have enough money in lower risk income oriented products, if you need that money in the short or medium term, one would tell the friend that was dismayed by the market crash. That is so conservative, he would lament. Why should one keep the money in a low return high liquidity product? What if the stock markets rise up and deliver great returns while I do that?

That is how we focus on the outcome and miss the response. If there are other sources to tap, the market crash won’t affect the financial goal. But if this was all one had, being angry and dismayed that the market crash, won’t help. Aligning finances to one’s responses is how one manages risk, and one can only learn it over time.

(
The author is chairperson, Centre for Investment Education and Learning)



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