Financial Planning Is More Than Spreadsheet Formulas

“You’re not a spreadsheet. You’re a person. A screwed up, emotional person.” These words start the chapter titled Reasonable > Rational in Morgan Housel’s best-selling book The Psychology of Money.

The sooner that you can accept the emotional nature of your decisions, the better. It’s nearly impossible to approach your financial life in a coldly rational manner. 

Some financial advisors present you with reams of data including highly detailed spreadsheets purporting to show how to optimize your investment strategy. Academic models say this can be a good way to align risk and reward. However, in reality, you need an investment strategy that helps you accomplish what’s most important in your life without spiking your anxiety level.

WHY HUMAN BEHAVIOR MATTERS MOST

When the market is up, you likely want to be fully invested; when it’s down, you might prefer to be on the sidelines. You’re just being human. You’re trying to minimize future regret.

In reality, financial markets always move up and down. To achieve your most important long-term goals, you have to stay invested and endure the inevitable bad periods so that you can benefit from the good times. Without endurance, you’ll be covered up with future regret.

Staying in your seat during down periods in the market may not match the rationality of a spreadsheet, but it’s a reasonable strategy with proven results over the long-term. 

Complicated spreadsheets can’t help you “feel” wealth. The feeling of wealth comes from your personal experiences with money. These experiences form a baseline for what you expect. Anxiety occurs when there’s a gap between what you expect and reality.

HOW TO PLAN FOR CHANGES IN YOUR LIFE

Life is dynamic and ever-changing. Your goals and aspirations change over time. The world around you changes. No matter how careful you are with projecting the future, things will work out differently than you planned.

Spreadsheets often show easy-to-comprehend linear changes from one period to the next. Life is messy however and usually doesn’t conform to the neat spreadsheet rules. Your desires and priorities will change many times in the future, just as they have in the past. Accept the reality that you will simply change your mind.

Financial spreadsheet projections usually rely on a combination of past history and what you might expect in the future. While long-term financial market results are reliable, the precise ordering of yearly returns can vary widely from what occurred in the past.

Life is a combination of the mundane and surprising events. Many things in life can’t be predicted. What’s happened before gives you a frame of reference for what you might expect in the future, but that’s all.

Financial planning is more than spreadsheet formulas. It’s about how you react to the surprises and changes in your life. Your preferences and priorities are ultimately reflected in what you do and what you choose not to do. Start there. Ready for a real conversation?

Related: Give Thanks for Volatile Markets