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Financial planning basics

Posted on February 2, 2011 by Kim Stephenson

I’ve been asked about my “recipe” for successful financial planning. I don’t have one – in the sense of “ten top tips” that work for everybody. People, you, are unique and there isn’t a one size fits all solution. Anybody who says there is, is an idiot or a liar.

But based on a degree and a half plus 14 years as a financial advisor and degree, masters and a doctoral level qualification and 12 years as an occupational psychologist, here’s what I suggest you think about.

Start with your life values or purpose.

What do you really value? That usually takes some thinking about. It’s more than “a mansion” or “a flashy car” – it’s about what are you on the planet for? Some people will claim that they can talk to you for five minutes and ask you a couple of “key questions”, and determine it for you – but they can’t. It requires you to think about it and maybe enlist the help of your partner, family, friends etc. to get a really clear picture of what would make your life a really worthwhile one in your own eyes.

Then think about what money symbolises for you,

Are you chasing things because your friends or family have got them, or because you really value them? It’s something that people often do, confuse a symbol like a big income, a yacht, power etc. with something that will actually make them happy. Then if they do manage to get the symbol, they aren’t happy, they just crave another symbol and become yet another rich, unhappy person.

When you’ve done these, set your goals

There are various ways to set goals to help you achieve your real values. I’ve set out what I use with clients in my book, but a big point is that the goals need to lead you to your values, not away from them. One problem I have with the idea that SMART goals are enough is that SMART doesn’t mention that you need both short-term exciting and long-term linked-to-your-values goals, and that both need to point the same way!

Then set out the plan to achieve the goals!

When you’re doing that, there are some things to keep in mind.

Understand your own thinking. There is no point following a plan that requires you to be a Vulcan, you’re not, you’re human. You need to understand what is easy for you, what is hard but possible, and what is impossible.

Accept the world as it is. The future is uncertain. We want to control things, but usually we can’t, and we forget that chance plays a big part.

Work with your mind, not against it. When you know how you think (you don’t try to pretend to be a totally different person than you are) and you accept reality (you don’t make plans that would work on another planet, but not this one), your human “weaknesses” can be strengths. There’s more about doing that in my book, but a lot of “bad money habits” can work to your advantage if you think about things in a way that is helpful.

Finally, get help if you need it. It’s OK for John Wayne to be tough and do “what a man’s gotta do”, but that was in films and in real life it is just stupid! There are no prizes for struggling on alone (unless you think being unhappy is a prize you want to win) so if you feel you can’t deal with your money and you won’t find a way to be happy – get help.

Posted in Basic concepts, Values | Leave a comment

Live radio 2/2/11

Posted on January 30, 2011 by Kim Stephenson

If you are up and about at 10:00 PM GMT, (5PM Eastern Standard Time in the USA), I’m talking to Lillian Ogbogoh, host of the Waking Passions Show.

Here’s the link to the show outline.

If you missed the show, you can listen to it again via that link.

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Economise on economics

Posted on January 27, 2011 by Kim Stephenson

I saw Paul Lewis from MoneyBox (a generally good guy, with a good programme) on the BBC morning programme today. He “couldn’t believe” that the Governor of the Bank of England said that he (the Governor) couldn’t control the economy. I wasn’t sure whether Mr Lewis meant he thought the Governor could control it (so Mr Lewis was admitting that he was labouring under a misapprehension) or he couldn’t believe that the Governor would admit it. Since nobody can control the economy, I think he meant either that he couldn’t believe the Governor of the Bank of England would know the real facts about economic theory being nonsense, or couldn’t believe he would tell the truth if he did!

Later on I realised that his point was about having no scope to raise interest rates and other schemes beloved of economists. Since nobody actually knows what is going on or what effect past actions would have, I’m not sure that matters, but he went on to say that “nobody expected it”. I refer the learned gentlemen to the articles linked above written, in one case, in September last year. There are unexpected events all the time, nobody has a clue what impact different changes will have, big changes might make no difference and tiny things (a butterfly flapping its wings, for example, may have global consequences).

Mr Lewis also said that economists had “never seen anything like it”. Of course, since the economy is a complex adaptive system on the edge of chaos, is non-linear and is therefore very sensitive to initial conditions:

1) Nobody has ever seen anything exactly like any other situation before, it is all unique and,

2) Nobody knows whether a “very similar” situation will have an end result even remotely like the previous one, and

3) Nobody knows whether a completely different situation will have an end result that looks (but actually is not) exactly the same and,

4) Nobody knows what any action will do, what any prior action has done or indeed whether there is any effect at all of any action (like pumping in billions in quantitative easing).

Nobody knows. If economists think that “something like” the situation, in a complex adaptive system is equivalent to “exactly the same”, they are wrong. If they think they can have anything more than nominal control over the system, and can be sure what effect their actions have, they are equally wrong.

So the Governor is right, he has little or no control, and I applaud him for admitting it. Maybe now we’ll start to get some common sense into the economy instead of theory that is frankly, more like medieval superstition than science.

Finaly, we got away from the delusions of grandeur of politicians, economists and bankers, and got to the interesting bit – a “mail in” for people about money saving ideas. Great idea. If you’ve got useful ideas, put them on the BBC site, the MoneyBox site, Money Savings Expert, here – everywhere you can think of. Just sort out what your values are first, before budgeting or you might save money only to waste it on trash and still not have the money for the things you really want.

And if you don’t know how to sort out values, try this.

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Changing markets

Posted on January 25, 2011 by Kim Stephenson

Everybody seems to accept that we’re in a period of change. Nobody knows what the housing market will do, what the stock market will do, how the economy as a whole will react to “necessary cuts” – but everybody seems to agree that we are in for change and the “old truths” aren’t necessarily going to work.

I’ve said before that those who make predictions and ignore the implications of living in a “complex adaptive system” (like an economy – or like a human being, as we are all complex adaptive systems) on the edge of chaos, are going to look foolish. In hindsight, people think they can see “the truth“. But of course, they can’t.

Ask yourself – if I’m faced with change, with a new environment, with new challenges that I haven’t faced before, do I want to:

a) think creatively, innovate, deal with the new situation in new ways?

b) stick to what I did before that I know didn’t work?

c) take what I know didn’t work, but do it better, by being more regimented, more strict about following the processes that didn’t work before, much more uptight and avoid anything new?

a) which is what I do with my clients, seems sensible. But most people do b) and the regulators of the finance industry and the Government do c).

If you doubt it, think about people who lose money in markets. Do they think – “maybe obsessing about making ‘loadsamoney’ is a losing proposition. Perhaps I need to think about my values, and what money actually means for me, then think about what I want to do with it.” Probably not – they think “I need to learn about money, and understand what is going on”. They don’t reason that if the people who work in the markets full-time (like bankers and regulators) didn’t know what was going on well enough to avoid disaster, what chance has the individual who is doing it part-time with no education in finance and no experience?

Or finance industry regulators. Do they think, “this obsession with hedge funds and technicalities hasn’t actually worked, maybe we need to change our thinking in order to avoid problems”? Probably not – they think, “we need to have more regulation, more controls, more paperwork, more computer power, more analysis”. They don’t reason that they are stifling any chance of innovation, they are gambling that they can predict what will go wrong next time and legislate against it, when they don’t have the faintest idea what will go wrong, when it will go wrong or why it will go wrong and in fact don’t even know what happened already, let alone what is going to happen.

I’d got some intuitive ideas why people do such crazy things; they want to predict the future, which they know is impossible, and they want to control that future so that they can remove the uncertainty. I could see it, but I didn’t have a good scientific reason for it, it just seems stupid to me.

But I’ve been looking at the brain (in abstract, I haven’t cut anybody open) particularly an area called Neuroleadership. One of the models they use to look at human motivation (based on scans of the brain) is the sCARF model. I won’t try to steal David Rock’s thunder, but the C and A are interesting to me. They mean that people want Certainty – they want to predict the future. And they want Autonomy – to have control over the future.

If those scans are meaningful, I was right, there is evidence from brain activity that we have a desire to predict and to control our future. But in a chaotic system, we can’t do either unless we do something different to what we did before that didn’t work, and that doesn’t depend on doing things that are impossible.

So what do you want to do? Do you want to think about something different, like your values, the way you think about money and to loosen up your thinking to be more creative? Or do you want to tighten up, stifle creativity, and learn more and more about things that you know won’t help?

It’s your money.

Posted in Basic concepts, Current financial events, Values | Leave a comment

BBC and the happiness index

Posted on January 20, 2011 by Kim Stephenson

I said before that I suspected the Government would call in their version of Tony’s cronies to run the happiness index.

The BBC have just had debate on the point on the moral maze. So far so good. They included a psychotherapist, who is actually a senior person in the BACP which – as I’ve also mentioned elsewhere is a great organisation and well informed on mental issues such as depression. But that is, to an extent, the reverse of happiness. The movement towards positive psychology started by Martin Seligman has been looking at actual happiness for about 40 years – as I mentioned in the resources page, in the section on values and symbols. But a BACP member is a good start, at least it is somebody who has a clear picture of what happiness is not.

Then there is a teacher, involved in trying to bring “happiness” and the study of it to students. Again, good, it’s not expert comment, but it is a programme about morals not necessarily expertise and the concept of “what do we tell the children about life” is important. There’s a philosopher, and that makes sense from the point of view of “what is happiness” in abstract and in terms of ethics. And there’s an economist.

I’m not sure why there is an economist, except that the Government likes economists. There isn’t a psychologist who specialises in the study of happiness. Why not, there are plenty available?

The justification is, presumably, that it is a moral argument, they aren’t discussing whether you can measure happiness, but whether you should. But surely that means you have to know what happiness is and isn’t. You also need to have an idea of the meanings happiness has for different people. One element of psychology is an interest in individual differences, so what is “happiness” for one is misery for another. Economics doesn’t really have the tools to look at that, psychology does.

And to quote the programme blurb “Life, liberty and the pursuit of happiness is all very well, but should happiness be an end in itself? Shouldn’t we be asking what we as individuals can to do make other people’s lives better, rather than asking what the state can do to make us happier?” Of course, if they actually looked at the happiness literature, they’d have seen that a big point about happiness is that it arises from altruistic behaviour, doing things for others, and that selfishness doesn’t lead to happiness any more than materialistic values do.

So, perhaps you, the reader would like to make the point to the BBC that, just like the Government they have fallen into the trap of assuming that all this is new and that we have to ask economists how to think about it and measure it. In fact, psychology has already asked a lot of the questions that the Government and BBC are just realising are questions, and even has some of the answers.

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Taming the pound workshop 26th March 2011

Posted on January 20, 2011 by Kim Stephenson

If you want to learn more about handling your money, come along to the British Psychological Society Psychology For All Event, 26th March, in London.

As part of the day, I’m running an 80 minute workshop to show you how you can use your thinking to make and save you money.

The workshop is running from 2PM to 3.25, it’s entitled “Taming the pound: Using psychology to manage your money”, and you can register for a place via the above link to the BPS site. The numbers are limited because it will be interactive, so you’ll be involved in doing things, rather than simply being talked at.

We’ll be looking at four common “faults” that we all have in our thinking. These are:

framing effects and loss aversion,
mental accounts,
status quo preference and
bigness bias.

They are all behaviours that we have, that can cost us a lot of money, but that we can’t “not do”, because they are human behaviours and we are humans. What we can do is learn to use them to our benefit – which is quite satisfying anyway, and which makes a lot of difference to your money when you stop fighting with yourself and learn to use your thinking to your own advantage.

I hope to see you there.

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Going to university

Posted on January 14, 2011 by Kim Stephenson

It’s going to get more expensive to go to university.

Having designed a lot of selection systems and coached quite a few people to “pass” systems other people have designed, I’ll give you the benefit of that experience in a couple of questions to consider.

The first, one I often ask employers who want me to design a “graduate recruitment system”, is – why do you want a graduate?

The answer that usually gets is “we need intelligent people”, but when I ask whether that means they think everybody who leaves school at 16 (like, say, Alan Sugar) is an idiot and everybody who goes to University (like most politicians) is a genius, they usually (if they are intelligent!) start to wonder what they do want.

Maybe they have to have somebody with a relevant qualification. If that is the case, then obviously, a degree or a similar level professional qualification is a must. And some people simply can’t deal with the intellectual demands of (say) a management role and those who do struggle are more common among non-graduates than graduates. So sometimes, the certificate is important and the employer is wise to set the criteria to insist on relevance (or a certain intellectual level) of degree.

But possibly what they need is a keen A-level student who didn’t know what they wanted to do at university so went out to work instead, rather than somebody who is the same intelligence and who didn’t know what they want to do either, but wanted 3 years to think about it. So they may be better off keeping a more open mind, checking that people have the intellectual ability (be it the ability to read and write, or to do calculus in their heads), and focussing more on motivation, aptitude and personality than certificates.

So, from the employers side, it is more about what is actually needed to do the job than a “degree”.

From the parent/student side, the question is, – why do you (or your offspring) want to go?

Is it to get a qualification for the sake of it? Is it because you are really interested in that area? Is it because you don’t know what else to do? Is it because you want to experience that lifestyle, get away from home, be your own person?

They can all be reasonable reasons (with the possible exception of not knowing what else to do, it’s becoming a bit of an expensive luxury for that). But think about what you really value in life. What do you enjoy? If you can get a place to do something that really interests you, think you’ll enjoy the experience and want to make the most of it, why not? If it will lead to something that you’ll enjoy doing as a career, although it will be a really tough three (or more) years, why not?

But if it is to do a job that will earn you lots of money, but that you already think is boring before you start, how much work are you realistically going to put into the degree, and how well will that get you into the job that you don’t want to do anyway? If you are looking at a “useful” but boring degree or one that will be interesting but less practical – what do you really value?

Thinking about what you want from university (and life) and why you want to go, rather than do all the other things that you could do, is usually a good move.

Posted in Children, Values | Leave a comment

Regulation, regulation, regulation

Posted on January 11, 2011 by Kim Stephenson

There’s still lots of huff and puff about bank bonus going on. I see today that “reluctantly” it has been agreed they can pay themselves what they want.

Mathematically and economically, I don’t think the arguments for paying unlimited bonus are valid, but then despite my A-level I don’t claim to be an economist – particularly since it appears to me to be a particularly nasty term of abuse bearing in mind what “economists” have achieved over the last few years!

But I am a psychologist, and psychologically, the current type of regulation and control is a complete waste of time. Take banning or limiting “bonuses”.

Imagine you’re a banker. Bonuses are banned. No problem, you just call the bonus something else. As a fee-based IFA I found it irritating that Equitable Life was called a “non-commission paying office”. They had dozens of people who were not Directors who were paid more than five times the national average wage – they might not be paid “commission” (maybe, “volume business override”), but the effect was the same and the “don’t pay commission” claim is no more convincing than the “non-bonus” argument. If you call it, “excellent service award”, “productivity related payment” or, indeed “backhander for being greedy”, it isn’t a bonus is it? What’s in a name?

Of course, the argument is that the regulators will be wise to this. That rests on the assumption that the regulators are smarter than the bankers (the justification Lord Turner gave for bonuses for FSA staff – he needs the best). Unfortunately, the initiative is with the poachers, not the gamekeepers. Even if the regulators are smarter (although the good ones will be tempted to the “dark side” by the offer of a “non bonus” of billions instead of a salary), it is the bankers who get to plan to avoid the regulations, and the regulators have to react after it has happened.

So we had regulation in banking that was supposed to stop too much risk being taken. Fine, said the bankers, we’ll call the securitised junk loans triple-A rated investments – and the regulators won’t catch on until it is too late. Obviously, it will be something else next time because the junk gate is closed. But the same thing will apply with bonus, at some point the regulators will realise that big payments are being made, risks are being taken etc., but it will be after the event, because the initiative is with the banks to subvert the rules.

Mind you, regulators probably won’t want to catch bankers anyway. It’s a tribal alliance issue. You might have heard of “Six degrees of separation”. Among the US Fortune 1000 there were, in 2003 an average of 4.5 people between any two Directors and 3.5 between any two Boards. The UK financial community is a lot smaller and more tribe-like. Any “worth-a-bonus” regulator from the industry is likely to be connected, on average, by less than 3 steps to any banker. So the best golfing buddy of one will know the best golfing buddy of the other. They’ll deny it affects their judgment, but as a psychologist I’d say that their denial is about as realistic as their chance of controlling big bonuses with the current system.

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Chaos

Posted on January 5, 2011 by Kim Stephenson

I recently mentioned (in relation to property) that “experts” sometimes think they can predict the future.

This seems to be very prevalent in economics, which I thought was odd because other sciences have come up to date and recognised the existence of chaos and complexity. When we handle money we do it in a real world, in which chaos operates. But the rules of handling money are set by politicians advised by economists, whose rules don’t seem to include chaos and work on the basis that the future is predictable if you can measure enough things accurately enough.

I thought that maybe I’d misunderstood, and that perhaps the world was predictable. Then this documentary on chaos turned up on the BBC and confirmed,

chaos is part of life,

the future is unpredictable

scientists have all accepted these facts, and actually have forgotten that they ever believed the Newtonian idea that you could predict the future.

But for some reason, economists are stuck in a time warp!

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Healthy, wealthy and happy?

Posted on January 5, 2011 by Kim Stephenson

I got referred to a lovely video on the links between health and wealth recently. This isn’t the same thing as saying wealth buys happiness, or even that health is equal to happiness – even if wealth helps with health it doesn’t necessarily mean that health causes happiness, since people who suffer awful ill-health can be perfectly happy and many who commit suicide are perfectly healthy.

But there is clearly a link of some sort, as I’ve mentioned in the comments about the book “The blue zones” that is in the values and symbols section of the resources page.

If you watch the video, you might like to think about the answers to the three questions I’d like to pose to Hans Rosling (who presents it).

What does it look like if you take away mortality in the first 5 years – since the data I’ve seen indicate that in the UK life expectancy at age 5 was rising up to the mid 19th Century, fell as a consequence of the industrial revolution and the change in diet and sanitation consequent on city living and has only recently got back to a similar point it was over 130 years ago – the rise in most countries in life expectancy at birth is a direct consequence of reduced infant mortality, so what does it look like if you take that out?
Do the “wealth” figures include inflation, and if so relative to what – a loaf of bread, a house, a bar of gold?
Are the individual disparities that he identifies in health and wealth within countries correlated by direction – in other words have they trended in the same direction although at different speeds, or are they moving in different directions?

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