BUSINESS NEWS - Humans are a species of incredible innovation. Yet, in all the things we are brilliant at, investing isn’t one of them.

Why? Well, we tend to get excited about the wrong things. We focus on what just happened instead of considering what could happen next. We're not great at understanding math, and we despise delaying gratification. 

Add in a bit of overconfidence, and it's no wonder our investment decisions often underperform. As it turns out, we’re just not naturally wired for successful investing.

So, how do we become more systematic and rules-based in managing our money?

Let’s start with the basic idea—why is a rules-based approach to managing money so important? One reason is that rules work.

Dr. Daniel Crosby, the Chief Behavioral Officer at Orion Advisor Solutions in the US, wrote the book The Laws of Wealth: Psychology and the Secret to Investing Success. In it, he does a meta-analysis—a study that aggregates the results of multiple studies—that shows simple rules can match or beat expert-level decision-making 94% of the time. That's staggering.

And we see this across many fields, from medical diagnoses to stock picking and financial planning.

A great example comes from prison recidivism studies, one of my favourites. Instead of soul-searching interviews with prisoners, the study showed that using just two variables—what the prisoners were in for and their behaviour while incarcerated—increased the accuracy of predictions by nearly 400%.

Rules work, and they don’t cost an arm and a leg. A checklist of simple rules is far less costly than hiring a team of experts to get it right.

The power of a checklist

I love the idea of a checklist because it forces investors to focus on what they can control. Investors often obsess over things outside their control—like what the Federal Reserve will do, the outcome of the US election, what will happen with the war, or the next market crash—while ignoring the things they can control. 

A checklist helps refocus on the controllable factors: fees, diversification, taxes, estate planning, and whether to work with a professional.

These factors are much more predictive of achieving your financial goals than obsessing over market movements. Take the story from Michael Lewis's book about Sam Bankman-Fried of FTX and Jane Street Trading. 

They correctly predicted the 2016 election result but failed to anticipate the market’s reaction. No one thought Trump would win, and most folks who thought Trump would win believed it would tank the market. Both things were proven wrong.

Even when you get the facts right, predicting how millions of traders will react is nearly impossible.

The house always wins

Let’s bring this back to the investment decision-making process. What’s the takeaway? It’s that the process is so much more important than market movements.

It’s about being the house, not the degenerate gambler. In Las Vegas, all those bright lights and fountains are paid for by tilting the probability slightly in the house's favour. Even with a small edge, over time, the house wins because it controls what it can—odds and probabilities. 

That’s all we’re trying to do with investing: control what we can, tilt the probabilities in our favour, and stay in the game.

You won't always get it right, but you’ll always be steering the ship, not caught up in a storm of things you can't control. A part of this is to show how hard it is to do this alone and why you should seek professional support if for no other reason than to regulate your biases and emotions.

How to regulate emotional biases

Daniel Kahneman, a Nobel Prize-winning psychologist, has talked extensively about the futility of trying to manage these biases on your own. The two best strategies we have against emotional biases are automation and working with a professional. The data is clear now: people who work with a professional tend to do better than those who don’t.

A 2016 Merrill Lynch study found that advisors add value in several ways—asset allocation, tax strategies, estate planning strategies, etc. Interestingly, the most significant impact comes from the coaching and emotional management around decision-making that keeps you from investing in your son-in-law's dumb business.

Having this kind of guidance at these pivotal moments in your life adds about four times as much value as all the technical advice combined.

In conclusion

Humans excel in many areas, but we come with a lot of evolutionary baggage that doesn’t serve us well in investing. We’re easily excitable, overconfident, and prone to making poor decisions under stress. 

We’re far better off with a rules-based, systematic approach to managing risk and investing for the future. This approach helps you think about what will yield the best results over the long haul, rather than making spur-of-the-moment decisions.

Matthew Matthee has a wealth management business that specialises in retirement planning and investments. He writes about financial markets, investments, and investor psychology. He holds a Masters Degree in Economics from Stellenbosch University and a Post Graduate Diploma in Financial Planning from UFS. I have created an online blog to host all my newsletters. Check it out here - mattfinancial.co.za.

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