To ensure that you are doing justice to your many years of hard work, it is crucial that you critically evaluate the conventional wisdom around managing your personal finances.
By independent financial planner Tim Mackay.
Myth #1: All profesisonals are good at investing
There is an unspoken expectation placed upon all professionals that they all understand and should be good at investing. This conventional wisdom (and pressure) comes from friends, family and, perhaps surprisingly, from professionals themselves. At its heart there is an element of truth underlying the expectation. Professionals (such as accountants, engineers, doctors), with their extensive numerical training, are better placed than most others to become truly good investors.
However, while professionals are smart and highly trained in their area of expertise, this doesn’t automatically translate into understanding about finance. Investing confuses and intimidates many people (including accountants) and, if you’re among them, don’t feel alone. Unless you don’t have a job, family, friends or hobbies then recognise that finance is only ever going to be a part-time subject for you.
Myth #2: General knowledge equates to investing knowledge
There is a significant body of theory underpinning finance. While our professional backgrounds gave us a great grounding in numbers, in truth few of us know much of Harry Markowitz, the efficient frontier, asset allocation or modern portfolio theory. Such knowledge is crucial in optimising your asset allocation and selecting the best potential investments in your portfolio and superannuation fund.
Most professionals would not dream of working in any specialised areas without a deep and thorough knowledge of the relevant theory, research and standards. Yet when many professionals put on their personal investing hats and make crucial decisions impacting their own financial future, they neglect their analytical and theoretical based training. Instead they resort to gut feel, hot tips from friends or their stockbroker, or even worse, what they read in the paper or see on the TV.
Myth #3: The media is a good source of financial research
Journalists aren’t trained or paid to provide you with sound investment advice. Their goal is to sell their publication and the easiest way to do this is by playing upon your emotions. The media has perfected what some call ‘financial pornography’ – the depiction of finance in a sensational manner so as to arouse a quick intense emotional reaction from investors. It titillates and excites but gives you no lasting pleasure. Give in to the temptation and it could actually harm your financial health.
Furthermore, the finance industry is expert at feeding the media with sensational content by appealing to investors’ fear or greed, furthering its endless need to have investors in a constant state of buying and selling.
Myth #4: Your income is the most important driver of your wealth
Undoubtedly for all professionals their income is a key driver of their wealth. However, more important than the size of your income is how much of it you save each year. Professionals with a moderate income and a strict savings plan will be far wealthier over time than high earning executives who neglect to save. Don’t focus on what you make, focus on what you keep.
Myth #5: Your goal is to not pay taxes
Professionals all too often seek to minimise tax ahead of earning returns, which is a case of the tail wagging the dog. If you really want to minimise tax then continually make losses (which is clearly nonsensical). Don’t get me wrong, as an accountant I’m keen not to pay a cent more tax than I have to but this comes only after focusing on maximising investing returns.
Myth #6: You need professional help
While many professionals have the intelligence and time to manage their own finances, others seek to hire finance professionals. If you do it yourself, it is crucial that you are interested in managing your finances. This is no different to any pursuit – if you’re not interested in gardening then more than likely you won’t be any good at it. Unfortunately, many people enjoy finance as much as they do having a tooth pulled or being subject to an ATO audit.
If managing your own finances is fun and interesting and you have the time, right skill set and knowledge, then that’s great – go for it! If it’s not, then realise a poor result is almost inevitable – instead hire a professional you trust to do it for you.