I received an email from a client (dentist, Dr Michael – surname withheld) approximately a month ago suggesting that I write an article about how much financial knowledge you need. Should you endeavour to know as much as you can so you don’t need any advisors or should you have a little bit of knowledge and rely on the experts?
Here’s his question:
I suspect that you’re on the lookout for new ideas for articles/blogs, and I have one you might want to write about, and certainly one I think that your clients will be interested in. Specialisation is very important in society. As a dentist I have a special skill and interest in teeth. You have a special interest and skill base in financial management. But my question to you (which you might want to expand on for a blog or article) is how much knowledge should we have of our financial situation, and how much should we “have faith” in specialists such as yourself? How much is too much, and how much is not enough? Obviously we need some knowledge, but at the same time if we knew as much as our financial advisers, then we would have no need for them. So where to draw the line on how much interest/knowledge we should have on our financial situation and the options available to us, and how much should we leave it to specialists and advisers such as yourself to handle this on our behalf, in the same way as a patient will leave me to specialise in the treatment of his/her teeth.
I think it’s a great question and one (of course) I’m happy to share my thoughts on. By the way, if you have an article idea, I’d love to hear from you – just drop me an email.
Information versus experience
The first distinction I would like to make is that we need to be careful with what we mean when we refer to “knowledge”. Albert Einstein was quoted saying “information is not knowledge”. Information is usually acquired via studying, training and education whereas knowledge is typically only acquired via experience. Information is relatively easy to acquire (particularly today) but there are no shortcuts or substitutes for experience. There’s a saying that most people learn from their own mistakes, smart people learn from other people’s mistakes and stupid people never learn! I heard a short anecdote that makes this point really well:
A man’s car breaks down and he calls a mechanic as he his stuck on a busy highway and causing traffic problems. The man begs the mechanic to come to his rescue quickly as he has no idea what is wrong with his car. The mechanic drives to the man immediately – only taking 15 minutes to get there. He spends 5 minutes inspecting the car and asking a few questions. The mechanic then grabs a hammer from his tool box, leans over the engine and hits the engine with the hammer. The car starts immediately. The mechanic then hands the guy a bill for $500. The guy immediately says; “$500!!! What for? You took less than 30 minutes including travel?”. The mechanic answers “Yes, I am charging you $50 for my time and $450 for knowing what part of the engine to hit with the hammer”.
Having advised clients every single day for the past decade I have been fortunate to experience both good and bad decisions and the consequences thereof. I have undertaken a lot of study to become a qualified and licensed financial planner, accountant and mortgage broker. However, by far, I have learnt significantly move through experience.
10,000 hour Rule
The 10,000-Hour Rule was cited in Malcolm Gladwell’s book, Outliers. It proposes that you need to practise a task for at least 10,000 hours before you can become an expert at it. For example, Bill Gates met the 10,000-Hour Rule when he gained access to a high school computer in 1968 at the age of 13, and spent 10,000 hours programming on it. Therefore, if you want to become an expert in financial services it will take you about 10 years (assuming you provide advice to people at least 4 hours each business day).
Information without experience… proceed with caution
You’ve probably heard people say that a little bit of knowledge can be dangerous. It becomes dangerous when amateurs (people that haven’t clocked up 10,000 hours) think they are just as good as experts. The problem is that you don’t know what you don’t know until you know it.
But have I answered the question?
Ok, so far I have made the point that whilst you (a non-financial services professional) can theoretically acquire the amount of information I have, its unlikely that you’ll acquire the same amount of experience and there’s no substitute for experience (arguably its more important than information). However, I probably still haven’t answered Dr Michael’s question – which is how much knowledge do you need.
You just need enough to make sense of it
Albert Einstein was quoted as saying: “if you can’t explain it simply, you don’t understand it well enough.” Our focus at ProSolution is for simple advice. That is, keep our (advice) solutions as simple as possible. Simple solutions are easier to understand, they are often less risky, less costly and safer. The solution to the “how much knowledge” question is to find an advisor that explains things simply and do enough reading (if any) to ensure that you fully understand your advisor’s simple explanations. Nothing in financial services is that complex that it can’t be simplified. If you don’t understand it, don’t do it.
Keep your approach to managing your money simple – don’t unnecessarily over think/complicate it. For example, spending less than you earn is a simple (time-tested) concept. Invest in quality assets – i.e. the quality of your investments will determine 90% of the outcomes – just like the quality of a car’s engine will determine its performance. These concepts are logical and simple to understand. It doesn’t need to be complicated. Simple concepts need to be the foundation of every investment strategy.
It’s your money and it’s your responsibility
You have to take an interest in your money. It is your money, you probably worked hard for it and no one will look after your money like you do. Therefore, I believe that you can’t delegate the responsibility to look after your own money. You can delegate a lot of the work, take advice from trusted advisors and so on. The only thing you need to do is understand the advice. This might involve asking questions, studying the advice, reading and learning or whatever. You don’t need to know as much as your advisor or spend as many hours reading and studying (of course you can if you want to). You just need to take enough of an interest that you understand what you’re doing with your money.
If you have any comments or questions about this article, you can post them below. Maybe share your experiences?
Any other article ideas?
I enjoyed writing my answer to this question. If you have any other article ideas, I’d love to hear from you – just drop me an email.