By Kendrick Chua
The 7 Deadly Sins of Financial Planning
Fear and greed are the two most talked emotions at the heat of the financial crisis. After all, it was the world’s richest man and greatest investor Warren Buffett who famously said these words: “Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Although they are considered as the cardinal sins of investing, there are still other financial sins we are committing on a regular basis which are oblivious to us and these could cause our financial dreams to crumble.
An envious person constantly compares himself with others whether it is his salary, financial status, or possessions. Now, envy itself is not bad as long as the emotions are channeled into positive actions. However, it becomes a sin if this person can’t stand others getting ahead of him and if he were to be surpassed, say a friend made a killing at FX trading, he tries to justify why he was able to do so or simply rationalizes it as plain luck. He may congratulate his friend but deep inside, it’s eating him alive. Before he knows it, he is also trying his hand in FX trading with little or no knowledge at all, hoping to have the luck his friend had, but ends up with undesirable results.
A proud person feels he is superior to everyone. Hubris is how the Greeks call it. He believes he knows more about financial planning than anyone else and would refuse to heed the advice of others and shoots down all other ideas presented to him. Often, this person criticizes even the most respected advisers saying that their theories are flawed And even if he clearly made a mistake, he would never revised his ways for a person inflicted with this sin will never admit he made one.
The sin lust differs greatly from being in love. Lust is an irrational attachment or commitment to a particular system, investment, or company. A lustful person is head-over-heels over the things cited and would encourage others to also be lustful over them! In early 2000 some people were deeply in love with a particular multi-level-marketing company. Despite the tell-tale signs of it being a pyramiding scheme, they just wouldn’t listen and would continue to plow in money after money in hopes of theirs earnings growing bigger and bigger. Lo and behold, this company eventually closed down and left with the members’ hard-earned money and leaving them broke, broken-hearted, or both
There is a thin line between being greedy and wanting to earn more money. For instance, if you have constantly parked your cash in conservative time deposits and special depository accounts, your hard-earned money would just be eaten away by inflation. Therefore there is nothing wrong looking for a higher yielding instrument to have a positive net real return on your investments, so don’t consider yourself greedy…not just yet.
It becomes a sin for everyone if the objective is to make the biggest returns at the shortest possible time. High-Yielding Investment Programs (HYIP) and get-rich-quick schemes are example of these. Greedy people follow the herd and invest where everyone else is investing, hoping to make a killing. And when they have made a killing, they’d wish they had invested some more to earn more or they’d hold on longer hoping for another round of easy money.
Anger, unlike the other deadly sins, always has a recipient. The rage is always directed towards something or someone. Now, anger itself is not a sin when it is manifested occasionally and with valid reason. It becomes one, however, when the anger clouds up our judgment causing us to lose our cool and make irrational decision based on the emotion.
At one point in time of our financial planning process, we have experienced anger in one way or another. A typical example would be investing in mutual funds today only to discover that the net asset value plunges drastically the next day. What do we do? The ordinary angry person will be upset but will stick to the objective and listen to his adviser no matter how painful the loss maybe. The sinful angry one will bail out immediately, fire his adviser, and spend the rest of the day cursing and complaining of how the market is out to get him. He forgets that the market discriminates no one. The anger blinded him, causing him not to see the long-term outlook.
The adage “too much of a good thing becomes bad” is the best description for this sin. Gluttony is the most difficult to discern because of its similarity with greed. Gluttony can exist in different areas simultaneously or one at a time. For instance, gluttons gobble up news information like gobbling food. But like food, gluttons only select the good ones and pig out on these while ignoring the bad. This already leads them to false optimism and hope. In financial planning, we know we have to be realistic about situations and to incorporate the best and worst case scenario into our projections.
Another thing about gluttons is that they want to have as many different investments as possible and the more complex it sounds, the better it is. They hoard up on these investments which they hardly understand and most don’t fit any of their financial objectives at all. They simply want to have them. While it is suggested in prudent financial planning to diversify your holdings, again, too much diversification can be dangerous to one’s financial health and it may be wise to remove some of the eggs from those baskets before they crack, not hatch.
Sloth by far is the most dangerous sin of all and why wouldn’t it be? Sloth causes people to ignore their financial future all along. They couldn’t care less about the uncertainty of the future. They find it a big hassle to start setting up a budgeting system to manage their personal expenditures or they find the needs analysis survey done by their life underwriter too complex to start reviewing. Slothful people can come up with every reason to justify their slothfulness. Another reason why this sin is the deadliest is that it not only jeopardizes your personal financial dreams but the dreams of your love ones as well.
However, don’t be deceived. Sloth can disguise itself and attack us differently. Doing little research on a particular investment or company we want to invest in because of too much work is one example. Not participating actively enough in our financial program because we feel our adviser is more qualified to do is also another sign of sloth.
The scenarios presented above are very prevalent and we have to admit that all of us are sinners. However, despite that financial salvation can still be achieved. Here’s how:
1. Know which sin or sins you are committing now. It is important to note that if those sins are not addressed immediately, other sins will gradually manifest themselves. It’s the case of a sin leading to another sin.
2. Accept the fact that we all don’t have the same risk profile. Others may have a higher-level of risk tolerance and therefore may have invested in instruments that generate higher yields.
3. Learn to filter the noise from the useful information. Not all information is applicable to all. React only to the news that are relevant to you and calm your heart first before making any decision. Do not make any move at the heat of the emotions.
4. Don’t be too attached to a particular theory, system, or investment and don’t be enamored by financial gurus. Always keep an open mind and accept that others have their own flaws and yours is not an exception. Learn to be flexible too.
5. Regularly evaluate your financial plan with your adviser and make sure the fund allocations are diversified enough to let you achieve your financial goals. And if you still can’t resist speculate investing, invest only the money you can afford to lose. That way, you won’t be devastated in case this fund goes ka-poof!
The seven deadly sins do not discriminate in a bullish economy or a bearish one. Sins will be committed in either situation. Mustering the steps above may take time but don’t get frustrated. The key here is the less sin we commit, the better it is for us and our loved ones. In the end, we can all hold on to the promise of prosperity by the Lord and surely, we will reach our financial paradise someday.
Sloth by far is the most dangerous sin of all and why wouldn’t it be? Sloth causes people to ignore their financial future all along.
Kendrick Chua started his career as a life insurance underwriter and licensed mutual fund representative for one of the leading financial institutions in the country three years ago. He also contributes to Income-Tacts (www.income-tacts.com), a fast-growing financial e-group that has close to two thousand members. A marketing management graduate from De La Salle University in 2005, he has always shown strong interest and enthusiasm in financial planning and investment management. Comments and suggestions may be sent to firstname.lastname@example.org.