Financial Planning" is a process that emanates from our concerns for our financial future. We all need to plan a safe and sound financial future so that our family can continue to lead a desired life style. It helps create and preserve wealth for the generation next. Financial planning involves investing in the right mix of wealth enhancing asset classes so as to meet the financial needs of the future. The question that arises is what is investing all about?
Investing is part science, part math, part art, part luck and part intuition. The common thread running through all investors is the urge and need to outperformeither the markets or other individuals or both.
Markets are not efficient most of the time. It is naive to believe that all market players have the same information and that even if they have the same information, they will react in a similar fashion. There are far too many variables playing in the markets that make it impossible to anticipate, factor and discount information. Uncertainty is the only constant factor of the capital markets.
Markets see crazy mood swings, where one day they ramp up the price of a stock as if there is no tomorrow, while some other time, in a mood of frustration, the same darling stock is dumped into a trash can and into oblivion. How are you going to manage these mood swings, volatility and uncertainty of `Mr. Market'? Well, as investors, we all need to have nerves of steel. The ability to manage the emotions that engulf us when buying, analyzing or selling investments helps us take more balanced and rational decisions.
In its emphasis on the careful analysis of facts, Finance enters the realm of Psychology creating a new entity called Behavioral Finance. The traditional Economic Theory states that markets are always efficient and that investors make rational decisions. According to Behavioral Finance (BF) theory, the markets are inefficient and investors frequently make irrational decisions. This is the reason why even smart people make big mistakes relating to money. And, that is also the reason why when investments do well, investors have performed poorly.
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