Decision Making: Finance by Design
Published in Bradenton Herald: March 3, 2015
By GARDNER SHERRILL |Investor’s Column
March 3, 2015
Decision making: Finance by design
In the age of information you would expect that we would be great at analyzing problems and making good choices. Unfortunately many studies suggest the contrary. As we get into 2015 and pursue our goals there are some considerations I feel can help you make the most of this year.
Busy vs Productive
Americans took in five times as much information every day in 2011 as they did in 1986. We try and solve this problem through multi-tasking which often doesn’t work or causes us to focus on the easier tasks which have the least impact on our ultimate goals. In order to address the larger issues we need time to focus without distraction. If I ask you what 2+2 is you can easily answer the question and move on. If I ask you what 124 x 36 is you need to draw on a different part of your brain which requires more concentration. If the answer was important enough you might decide to put it off for later.
Unfortunately we get interrupted and trying to go back to the problem at hand is like jumping back into a cold pool. It’s not hard but it requires some discipline and is easy to put off. We get to the end of the day and we know we were busy but often not sufficiently productive.
As it pertains to your financial life, ask yourself: knowing that someday you will die, what are you willing to leave undone? Make a list of the issues you are unwilling to leave to your spouse or heirs and focus on addressing your top 5 issues. Procrastination can be beaten back by putting specific steps on your calendar as to when and where you will take action.
Outcomes vs Process
Once action has begun a common error is focusing on the outcome at the expense of a good process. In a 12/31/13 Bradenton Herald article I wrote about process and Nick Saban. Nick’s paradox: "The more one emphasizes winning, the less he or she is able to concentrate on what actually causes success."
Outcome-based thinking can lead to soothsayers and short cuts. Phil Tetlock and Nate Silver have written extensively on the inability of experts to make accurate forecasts and how increased data after a point incrementally reduces accuracy. Behavioral economists speak to our inherent biases and assumptions that lead to “behavior gap” that can undermine our efforts. Google the Dalbar study: Quantitative Analysis of Investor Behavior to illustrate further.
The issue with outcomes is that they are largely outside our control, whereas procedure is well within our control. Stephen Covey speaks to Circles of Influence and Concern. To focus on our concerns is a reactive process that may lessen our ability to influence outcomes. By focusing in on our influence we are more proactive and have the greatest impact on things within our control. Run the numbers, play out what if scenarios, do emergency drills, create repeatable processes that allow you to follow steps that can increase the likelihood of better outcomes.
When it comes to your finances create processes designed to work towards building, preserving and transferring your wealth. Building your wealth should entail goals, personal benchmarks, risk management, and tax efficiency. Preservation of wealth should identify risks that you want to manage and contingency planning. Lastly, transferring wealth should consider who you want it to go to, how they will get it, and processes for helping to ensure a successful transfer.
As we get into 2015, it’s a good time to re-evaluate your priorities and to organize your affairs so as to make a most productive year. Focus on what you can control and measure your progress.
Gardner Sherrill, CFP, MBA, is an independent financial advisor with Sherrill Wealth Management. To learn more visit sherrillwealth.com. The opinions expressed in this material are not intended to provide specific advice or recommendations for any individual. Securities and advisory services offered through LPL Financial a registered investment advisor. Member FINRA/SIPC.