Behavioral Finance

What is the Key to Effectively Managing Personal Finances?

The key to effectively managing your personal finances is to have a positive attitude. The foundation of having a positive attitude is having clarity of your financial goals and who you are, in particular the level of risk that you can take, and having the right advice from a professional advisor.

It is all about having the right balance of these elements. How one perceives money will be a big driver of their attitude. Therefore, having clarity about your perceptions of money is critical to living a happy life.

On May 27, 2013 a great article was written by Ranjeet Mudholkar, CFPVice Chairman & CEO at (Financial Planning Standards Board India) FPSB India Mumbai on this topic.

You can read it in full at: http://www.firstpost.com/investing/how-positive-attitude-will-help-you-manage-personal-finances-effectively-818053.html

In particular, the article highlights some interesting research conducted in post 2007-09 Financial Crisis by MFS Investment Management, a US-based global asset manager, which throws light on the effect the market movement has on people’s attitude. The survey found that 43 percent of respondents said their risk tolerance had decreased while 14 percent said it had increased. Before the economic downturn, 14 percent of the investors said their primary goal was protecting principal and not losing money. Now, the figure is 36 percent.

“Investors are exhibiting this behavior at a time when investing in equities could be to their potential long-term advantage,” the report states. “Before the downturn, 50 percent of investors were generally willing to take substantial risk for substantial returns; today, it’s 23 percent.”

What’s surprising, the survey notes, is that while investors have become more protective of their assets, only 37 percent have rebalanced their portfolio; 44 percent of investors using an advisor have rebalanced, the survey found. Further confounding results, MFS says, show that 68 percent of investors claim to be making decisions on their own with minimal input from an advisor. However, more than 60 percent of respondents are less than “very” confident that their assets are appropriately allocated. The economic crisis has only lead 30 percent of respondents to seek professional financial advice.

Clearly, the “loss aversion” behavioral bias is being exhibited where people are far more concerned about what they may lose than what they can gain. Therefore, they are not making healthy financial choices which is detrimental to the overall quality of their life.

To learn more about effectively managing personal finances, please visit the Financial DNA website.


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