Creating Wealth Starts With Financial Health

Our behavioral tendencies affect all aspects of our lives, especially our financial decision-making process. Managing money can be a stressful endeavor at times. The best way to ensure you’re making the right financial decisions is to start by better understanding your innate behavior and how you cope with pressure.

Amongst the many financial literacy resources available to the public, the FinWizdom podcast is one of our personal favorites. In the latest episode, podcast host Joel discusses ways to improve our financial wisdom through behavioral insights. Such a great listen!

Know Thy Investments

The primary foundations of Financial DNA are “Know Thyself” and Know Thy Client”. However, what I have not spoken up much before about is “Know Thy Investments”. For both the advisor and the client this is absolutely critical to successful investing. Who at some point has been caught in an investment they did not fully understand and lost money? Usually, they are the “smart” investments that offer lucrative returns and/or tax breaks.

In recent times, I have had discussions with many advisors and investors who have been caught with an investment that they did not fully understand. You should forgive yourself because even the best investors have been caught at some point. This point is not just about “ponzi schemes” but also bona fide investments.

Market declines like we have had in the past year usually expose the cracks. When the market is going up the holes can often be covered up. Some of these investments are so complex that not even the creator or manager even understands them fully, let alone the advisor recommending it.

I have always said to my clients: “If you do not know what is inside the sausage do not invest”. Until a year or so ago, I did have some doubts as to whether I had been too conservative and that I was the fool for not riding the trend. Well now I am very relieved. A good example of this advice was 5 years ago when I told a very wealthy retired couple not to invest in a hedge fund that they had been offered by someone who was trying to impress them.

I do not believe most people know what they have invested in other than the belief they will make a lot of money. Many hedge funds rely on very complex models and very fine margins. Also, many change their strategy after you have invested. So that what you have invested in is not underneath the same investment as what you exit. I also know that many investors and advisors did not understand how leveraged with debt our financial markets were. All of these complex products usually have a lot of debt in them. So when the market declines, the fall can be accelerated because everyone has to get out quickly.

If you are an investor, now is a great time to review all of the investments in your portfolio and check that you truly understand them. Also, does your advisor understand your investments? Can your questions be confidently answered? I also think advisors need to take stock and totally understand what they are offering their clients. You really need to get behind the “research” reports.

Knowing Self Increases Financial Capability

Core to my passion is seeing people take more personal responsibility for their financial decisions. In the end this is actually key to your financial success, and overall quality life. To take more personal responsibility means increasing your financial capability. I believe there is an obligation on yourself to get the right financial education and also on your financial advisors to help you by providing it and guiding you. In the end, you need to be able to make more informed choices about the products and solutions you are buying, and not just rely on others to decide for you.

At the moment the regulators in the countries which lead financial planning such as the USA, Australia, the Netherlands, Singapore and Ireland are pushing the consumer financial capability point hard. Just recently, the Irish Financial Regulator released a “Preliminary Report on Financial Capability in Ireland June 2008” based on extensive consumer research.

The key point that is coming out of the Irish report is that you as the consumer must develop your skills, knowledge, attitudes and behavior. To me this goes to the very core of the Financial DNA Discovery Process. To educate you about your financial behavior and to provide a framework for your financial advisor to guide you. What you will find is that when you go through Financial DNA the increased knowledge and emotional comfort will make you more confident in the decisions made. As you make better decisions success will build more success.

There is interesting research from the University of San Diego which says: 5% of your wealth comes from investments and 95% from your behavior. So what should be the core of your financial education? Learning more about products or yourself?

If you would like to see what you can learn about your financial behavior then click here. Also, you can participate in Financial DNA by clicking here.