From Smart to Dumb
The more time I spend working with people as a Wealth Coach and Financial Planner, the more I come to realize that each of us (myself included) really can't manage our own money on our own. We aren't hard-wired to go it alone and our society has done a great job at teaching us the very things we need to know to screw up even more.
The Money Paradox
Martin Conrad wrote a guest article for Barron's this past week called "The Money Paradox." In the article he outlines the same behavioral science studies we've mentioned here in the past including the Dalbar studies which show that over 20-year periods, the average investor gets returns of 6-7% per year less than the market over the long run. "With compounding, the difference was about ninefold (402% vs. 46%)." Yuch!
Another quote - "85% of sell or exchange decisions are wrong!" Pure chance has a 50% chance of being right, not 15%.
Big = Bad
You might think that because these decisions are so important (and ALL money decisions are very important), that they would be better. In fact, the opposite is true, leading to what Conrad calls the "Money Paradox." The larger the incentive for a good result, the more likely that the decision associated with that result will be flat-out wrong.
Why? The main culprit is stress!
Stress Kills
Stress "impairs cognitive skills and warps decision making. Under pressure our instincts expressed through our emotions distort our reasoning and tend to push us toward wishful thinking and mass conformity."
Neither of these instincts (wishful thinking or mass conformity) serves you well with your money ... and here I'm talking not just about investing, but EVERY money decision you make. Add the fact that these instincts are actually drilled into us at a very early age in our competitive, grade-based education environment and it's any wonder that we aren't all broke.
Wait a minute. We ARE all broke (except for the rare few) - our government, the states, the poor and the middle class.
The Viscious Cycle
The more stressed we are about how bad our current position is, the worse decisions we make which leads to even worse results and more stress. Something needs to come along and break that cycle or it will continue to amplify in a feedback loop into a death spiral.
I doubt any of us want what naturally follows a death spiral. We must all collectively make the consious decision to break this viscious cycle.
Solutions
What's the solution? I'll tell you what it isn't first. It isn't having somebody else tell you what to do, whether that someone else is the government, an advisor or the popular majority. Command and control goes against the very nature of human life and free will. You are still the best person to make your own decisions, you just want to be sure you are seeing things as they really are, not how you wish they could be.
I believe that having others to guide and coach you is part of that solution. Don't try to "go it alone." Human beings are social and collaborative creatures. Find a way to work with that natural state.
I also believe that much has to change in the "lenses" that we use to view our world. Whether it is through honest conversations with friends and family, working with fiduciary third-party professionals, a conscious effort to cut back on media consumption (along with more active involvement in working with others) ... or using structured tools like our Cash Flow Hydrant™ cash management tool; the solutions lie in a process that is about collaboration, participation and strategic thinking, not going solo, burying your head in the sand or (worse) reactive, fear based thinking.
In short ... I believe it has to do with GIVING more and being willing to GET less. In the long run, we'll all end up with more of what matters, even if that isn't intuitively obviously at first glance.