Words on Wealth: Let common sense guide you in managing money

Financial advisers are very useful, but they aren’t essential if you are sensible with money.

Financial advisers are very useful, but they aren’t essential if you are sensible with money.

Published Mar 30, 2024


Managing your finances is not rocket science. Financial advisers are very useful, but they aren’t essential if you are sensible with money and have a basic knowledge of the different financial services and products.

It is said that common sense is not all that common. I believe we all have access to the still, small voice of reason within us, but don’t give it more attention because it is so often drowned out by our attitudes and emotions.

Unfortunately, when it comes to money, those attitudes and emotions can be very powerful indeed. Greed and fear are probably the top two contenders for silencing common sense, but hubris comes a close third.

Morgan Housel, a partner at hedge fund firm The Collaborative Fund in the US, blogger and author of the best-selling “The Psychology of Money”, is a great champion of the common-sense approach to personal finance, especially investing. The approach is epitomised by investment guru Warren Buffett, who has been guided throughout his long and successful career by that still, small voice, which, if nurtured, begets wisdom.

Why, if Buffett is so revered by the investment industry, have more investment experts not enjoyed similar success? The reason, Housel reckons, is that their “smartness” and elevated sense of importance have acted against them.

In an excellent blog, “The Dumber Side of Smart People” (which you can read in full at https://collabfund.com/blog/the-dumber-side-of-smart-people), Housel lists three reasons investment managers (and other smart people in high-flying jobs) are often not as successful as one would expect from someone in their position.

1. “They can fool themselves with elaborate stories about why something happened.” They lack the humility to accept that some things are unexplainable while other things can have a relatively simple explanation.

2. “Being very smart makes it harder to listen to people who are less credentialled than you, even when they might have the right answer.” History books abound with stories of how a junior employee came up with a brilliant invention or discovery only to have it rejected or suppressed by a superior.

3. “Having an intellectual reputation to maintain can make it difficult to change your mind when you need to.” Not many people in high positions have the attitude of the great economist John Maynard Keynes, who may or may not have said, “When the facts change, I change my mind”. He did certainly pen the following line: “The investor who takes up an obstinate attitude about his holdings and refuses to change his opinion merely because facts and circumstances have changed is the one who in the long run comes to grievous loss.”

To remind you, in case your still, small voice has been stifled for so long it has atrophied, the essentials to common-sense financial management are:

• Moderation and balance trump excess and extremes. This involves moderating both risks and expectations. For example, diversification is a way of reducing risk across your investments. Buffett famously said diversification is only for ignorant investors. Well, unless you’re prepared methodically to research the companies you want to invest in, consider yourself an ignorant investor.

• Forget the Joneses. Continually measuring yourself against other people is not only exhausting, it is futile, because everyone in this world carries a unique set of baggage and is presented with a unique set of opportunities. To quote American singer Matty Mullins: “The only person you should try to be better than is the person you were yesterday.”

• Protect against calamitous risks. Some risks, though highly improbable, can be financially devastating. Like smashing into the back of a Ferrari. And, if you have a family, there’s your earning power to protect. That’s why we have insurance.

• KISS (Keep it simple, stupid). This aphorism, which applies to journalists, applies equally to investors. Buffett is spot on in this quote: “I never invest in anything I don’t understand.”

• Recognise mistakes early. We all make mistakes. Wise people who obey their common sense admit to them early, rectify them and learn from them. The sunk-cost fallacy refers to pouring good money after bad, where you hold on to an underperforming investment in an attempt to recover losses.

• Keep your emotions in check. Easier said than done, here’s where a good financial adviser or planner really does come in handy – to keep you on course and prevent you from over-reacting to the market’s ups (emotion to be controlled: greed) and downs (emotion to be controlled: fear).

* Hesse is the former editor of Personal Finance