Atul Sethi from Farnam Tree gives his insight.
A BRIEF SUMMARY:
•Creating some rules to govern your financial life will serve you well. It does no matter what stage of life you are in.
•Can you explain what you are buying to a five-year-old? One rule I like to use is to not buy anything you do not understand and can’t explain to a child.
•Sometimes, third parties will try to make rules for you. Banks will approve you for a certain amount you can afford on a mortgage. Do your own maths.
•You may have had or will have uncomfortable encounters with salespeople. Tell them you never give a, “yes” answer on the spot to take the pressure off.
RULES WILL HELP YOU IN THE LONG RUN
Establishing some rules and boundaries for your financial and investing life will pay off greatly. Having some guidelines helps to create a framework that has many benefits. Approaching decision making in a disciplined manner can mitigate the emotional rollercoaster that can happen when something unexpected takes place. This can be something as simple as setting a rule to save a part of your pay check. Having a rule in place will make it more likely that you will maintain consistency and achieve your long-term goals. Here are some examples of simple rules that you can consider implementing as they are relevant to you:
FORCE YOURSELF TO KEEP IT SIMPLE
One of the most effective strategies for making better financial decision is to only do things that you can explain to a five-year-old. Having this approach encourages understanding and ensures that you can grasp the fundamentals of what you are investing in. If you are unable to simplify the concept, the investment may be too complex or risky. This will not only help you make informed decisions, it will also reduce the power of hype or fanciful jargon that you encounter. Does this mean that you will have to pass on exotic opportunities that can earn you 10x your money? Perhaps. Those same exotic investments are the ones that can also go down to zero.
MAKE YOUR OWN RULES (DO NOT OUTSOURCE THEM TO BANKS)
Let us consider the example of taking out a mortgage, although this can apply to other situations as well. If you apply for a mortgage, the bank will approve a certain limit based on your income. Do not use this as the amount that you should be spending on your mortgage. The bank knows nothing about your lifestyle, future expenses and financial goals. Do your own budgeting work and arrive at an amount that makes sense for you. Better yet, if you can make a purchase considerably lower than what the bank will approve for you, that is money saved!
HAVE A PLAN FOR SIGNIFICANT MARKET MOVES
If you have investments in assets that can go up and down in price, having a plan for extreme environments will serve you well. Financial markets are unpredictable, and can change at a moment’s notice. Having a plan in place beforehand can help you greatly. When security prices plummet, there are sometimes great deals on offer. If you can take advantage of these situations, figure out how you’ll do so before the mayhem hits.
NEVER GIVE ANSWERS ON THE SPOT TO SALESPEOPLE
Having a rule to avoid giving commitments to salespeople will only benefit you. High pressure tactics can cloud your judgment and may lead to decisions that do not align with your goals. Salespeople often ask for feedback in lieu of an answer from you. This is often used by them to sell more, and harder. If you do not wish to engage in dialogue, just tell them that you need time to think and review before giving more information.
Atul Sethi is the founder and CEO of Farnam Tree, a licensed boutique investment firm based in Bangkok. Atul has over twelve years’ experience working in investment banking and as a research analyst, prior to starting Farnam Tree.
