How to Select Effective Financial Planning Strategies (part 2)

As we have discussed on the basic of financial planning strategies in How to Select Effective Financial Planning Strategies (part 1), here are some more strategies available for you to choose and implement.

 

Consider psychology and behavioral finance


People are usually influenced by strong decision-making patterns. Most people's beliefs are inclined towards optimism. Optimistic investors tend to exaggerate their talents and labor under the illusion of being more in control than they really are. They tend to misread their success in the game of chance as success in a game of skill. In short, they are overconfident and start to look for scapegoats when their investments fail.
 

This was clearly seen in the bull market of the 1990s. Getting great returns on your investments looked relatively easy -- at least on paper. Many people began to think they could get such returns or more every year. Hence when the market started going up by 60, 70 and 80 per cent, they "saw" the obvious -- that their portfolio should hold technology stocks.


The smart investor must make sure that he has identified and understood the assumptions -- what needs to go right and what may go wrong -- if he insists on constructing a portfolio using this decision-making pattern. Diehard optimists are likely to think, "I acted on the wrong rumor. I just need to get another set of positive news and everything will be fine" -- and they continue with their plan, only to wonder at its failure later.

 

Hindsight promotes overconfidence


Optimistic investors who overstate the degree to which they control their own fate are often exposed to such statistical surprises. When they fail to predict events, they are not as surprised as they should be. The deadly perception of hindsight often promotes overconfidence. It fosters the illusion that the world is a more predictable place than it really is. Everything becomes obvious and easy in retrospect.

 

Realize when enough is enough


A simple rule to remember: If you have the opportunity to become financially independent for the rest of your life, take it. If you have achieved your target, it is time to change focus. Recognize that beyond that certain amount of money, more of it is almost unnecessary.

 

Take your focus off the short term


Focus more on what happened in your past (over your lifetime) than what happened last quarter. Look at where you are between points A and Z on the path to your goal. If you are on target, you have done well. Very often, we may talk long term but are tempted to act short term, which is why it is important to focus on what you have done in the past rather than saying what you will do in the future. If you are developing a long-term plan but your investments in the past have been "stocks one month and funds the next", then you are exhibiting a pattern of scattered investment behavior. Your long-term plan is not likely to be successful.
 

Don't expect to be surprised if you do not carry out or deviate significantly from your plan; although that does not mean your plan has to be so rigid that there is no room for change. The foundation may be fixed but the final shape and colour are subject to your moulding. If you understand what sort of outcome you expect of your plan, you are already on the way to successful financial planning.

 

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