The Human Brain’s quirkiness

Affirmative action, compounding, Financial Independence, Human Brain

Dr. Peter Diamandis and Steven Kotler recently released their new book The Future is Faster Than you Think. Being a voracious reader I have been devouring this book as well. We will keep the details of the book out of this post.

This book is part of a trilogy. Their earlier books Abundance and BOLD were amazing and really make you think that we are living in a world which is much better and safer than what our forefathers ever got. If you have not read these books, I would highly recommend you reading them first before you read this one, because it will give you a context to this book. I read their books also when I am feeling low. These books show you that the world is moving in the right direction and human beings have an ability to bounce back and always pivot to a higher level in life.

What I wanted to share from this new book, The Future is Faster Than you Think, was content of two paras which the authors used and which has stuck to me.

They talk about the medial prefrontal cortex which is the part of the brain which gets activated when we think of ourselves. As per them it gets deactivated when we think of others. Surprisingly whenever we think of our future selves it gets deactivated. And the further you project into the future, the more it switches off. Which is why people are not able to save for their retirement because for your brain (medial prefrontal cortex) the person who will benefit from the tough choices you make today is different from you. Now you see the quirkiness even within our own brain. What is supposed to actually get functional when you have to think about yourself, switches off, when you project yourself into the future

The other issue is that our brain does not have the capability to think in exponential and global terms. Due to this anything which is depicted by an exponential equation is difficult for the brain to comprehend.

Which brings me to my fascination with compounding. Compounding in its very nature is exponential in nature. And therefore even though I keep talking about compounding in almost every post, I still find most people read what I write but don’t take action.

Coupled with what I have written earlier about habits, I think that is one of the key reasons why more people are not financially free. They sell time for money and because their brains don’t comprehend compounding they don’t let money work for them.

I once read money is a good “servant” and a bad “master”. So if you can make money work for you by using the laws of compounding, you can aspire for a Future which is much bigger and better than your past.

Till next time then

Carpe Diem!!!

Decide – You want to have financial independence

Affirmative action, compounding, Financial Independence

The word decide has origins from the Latin word caedere, which in English has the last four words “cide”. It means to cut off or to kill or equivalent. So all the words with the word “cide” in them have some relation to the word to die or to cut off. As an example sui-cide, homi-cide, are also words which mean to cut off or kill or die.

So why start this blog post with such dreary thoughts about cutting off. Its because when you DECIDE some thing, you cut off other things as possible action items. So I have seven items on my plate which I need to finish before the end of the day. But I DECIDE that I will write this blog post first. The moment I decide to write this blog post, I am therefore cutting of other things to be done at this time. I went to the Webster dictionary’s site and then I did a search on google to ensure that I was getting my facts right about the history of the word. But I kept doing things to help me write this blog post and not anything else at this time. I had cut off the other 6 things. After I finish writing this post, I will then have ti Decide which of the remaining 6 things I choose to do next.

So what has this got to do with attaining financial independence.

Well the day you Decide you want to have financial independence ( again I am not talking about being wealthy) you will take steps to invest money. Like the first step I took in 2013 of starting to invest in SIPs of Mutual Funds. There were a lot of other things I could have used that money, but I took that decision and have stuck to the decision ever since.

Similarly, I can keep talking about how compounding can help you grow, how Asset allocation needs to be done or how you should ensure your student loan gets cleared out at the earliest. But till the day you decide to do something about it, it’s all talk no action. You need to take action and decide to walk the talk.

The decision is the first step you take to move forward. Not deciding on something is also deciding to let others or circumstances to take the decision on your behalf. Life suddenly passes by and you think back and see so many forks in the road, where if you had taken the decisions life would have gone in a totally different orbit.

While I speak, I have had my own share of being indecisive and I have shared a lot of those instances with you in the blog. But as I have learnt more and more from my experiences, I have stopped talking about the experiences but more about the learning I picked up. In these blog posts I try to share those learnings with you so that you can have a bigger future compared to mine.

There’s no doubt a lot of decisions that you take (or let others take for you) do go wrong. But from each of those which went wrong you could learn something. Once you learn something, it stays with you and you make better decisions in the future.

So decide today that you want to be financially free. And then take actions with small steps by starting some regular systematic investment and in a few years the exponential nature of compounding will help you become financially free.

To your future.

Carpe Diem!!!

Asset Allocation – key to balancing your investments

Affirmative action, asset allocation, compounding, Financial Independence

Yesterday I wrote about continuing with your Systematic Investment Plans if you have your job and avoind encashing your investments.

My wife and I were discussing on our own situation given that the market has gone down substantially and she was bothered her own investments would be totally messed up.

That’s when I explained to her the philosophy of Asset Allocation and why she need not be so worried about her investments.

While you will see that most of the articles I write are about investments in some form of equity where you own part of business, especially if don’t have one of your own. However I have mentioned this earlier and I will mention again that the way to financial freedom has to do with an asset allocation based on your risk profile.

In simple terms asset allocation is distribution of your investments in such a way that irrespective of the direction the equity markets take or the interest rates take you have your principal amount protected and growing at a steady state. In the picture above if the lady in the picture happens to see a dog come at her suddenly and drops the basket, all her eggs will break and all her effort in building her dish would get destroyed

So if you have $100 to invest and you have put all the money in equity, while in the long run it may give you around 12% or so, in the short run – like it happened in the last 3 months – it would have gone negative by more than 30%. By putting some of your $100 in term deposits of even 5% you would have ensured that your overall hit was averaged better. Its all about ensuring that “all your eggs are not in the same basket”.

No doubt that equity gives the nest returns in the long run and is also the most tax efficient in most countries, however not everyone has the risk profile to do the roller coaster ride that the equity markets go through. This would be true whether you have invested directly in stock yourself or if you have invested via ETFs or mutual funds. With mutual funds and ETFs the ride down could be less severe while the rise upwards could also be slower.

Its always better to have some amount of allocation of your money in debt like in term deposits or bonds. How much can better be judged by your personal financial advisor but have some portion of your total investments in some kind of debt. Fixed term bonds or deposits will ensure that you get a fixed return on the money invested irrespective of the situation in the equity markets. Even though the returns will be lower, an it may not be so tax efficient, the fact that it is a guaranteed amount makes your portfolio a lot more resilient.

There is a very good explanation on Asset Management in the book Money Master the Game by Tony Robbins. He has interviewed multiple fund managers on how they do the fund management of billions of dollars. Some of them also invest in things like commodities and precious metals and real estate. So its always better to consult a financial advisor before deciding on the type of asset allocation you want to do and the risk profile you have.

Yes bond markets also go through tough times and the bank, in which you had your term deposit, can also shut down, but the probability that all the things will go wrong at the same time is remote. Hence the concept of asset allocation becomes even more critical.

Government owned securities obviously are the most secure but they give the lowest interest, then come the bank term deposits and the highest would be the bonds in terms of interest rates. However as the interest rates climb, the risk also goes up.

Spread your risk by consulting with your financial advisor and move towrds your financial independence.

Till next time.

Carpe Diem!!!

Law of compounding – for real life improvement

Affirmative action, compounding, Human Brain

I read – maybe 10 years back – Delivering Happiness by the CEO of Zappos – Tony Hsieh. I don’t quite remember everything in the book except that it was the journey of Zappos. However there is one statement from the book which Hsieh makes, which has remained with me since then, if you can improve even 1% everyday, imagine the improvement you will have at the end of the year – 367%. However inspite of having read it and also put it on a board where I could see it everyday, I have not improved 3670% in the last 10 years. The idea is simple I understand it but I still don’t go about achieving it.

The Japanese have a incremental improvement method called Kaizen which is about bringing about small incremental improvements continuously resulting in massive improvements over a period of time.

Both seem to be very simple concepts but we don’t end up following them. If you have been following my blog for sometime you would have noticed that as I am getting more experienced at writing things I am also questioning things about how I can be improving myself. Right now I am working on improving my reading capabilities. I have an agenda to read at least 3 books every week, consistently over the next few months, inspite of all the extended working hours we are having due to the lockdown. I want to check if I can improve my reading, which means I gather more knowledge, which then I try to put into action and therefore improve myself on a regular basis.

Yesterday however I was watching a YouTube video of Dan Sullivan of Strategic coach and he explained a very simple concept because of which I may not be achieving our goals for real life improvement. His logic is that there are no impossible goals, there are only impossible timelines. And because we give impossible timelines to ourselves, we end up messing up on achieving our goals. In case you are interested you can watch the video here.

As per him if we were to give ourselves long enough timelines, then our brain will not put barriers. The timelines he talks about doing a 10X is 25 years and breaks it down into quarters. So in 25 years there will be 100 quarters. If we were to use our compounding equation S=P*(1+r/100)^n. So if we put P=X and S=10X and “n” =100 then “r” turns out to be just 2.5% growth per quarter.

Is it feasible to improve 2.5% per quarter or less than 1% per month. Should be possible. If we were to break down our improvement points into clear bite sized goals then 1% per month should be very feasible and 10X in 10 years should also be feasible.

The reason this compounding works is because as a human being when you improve the first time, the next improvement is over the previous improvement and this cycle can continue forever. This is exactly how compounding works on your money and this how compounding works in real life as well. However our brain is conditioned to think in terms of linear activities. It is just not capable of comprehending non-linear equations like compounding and therefore whether it comes to money or self improvement our brain plays games with us.

Its one of those laws which are universal in nature and should apply to me as well. If I can improve by more than 1% every month in different areas of my life, based on the knowledge I acquire by reading the books and taking action, I should be able to grow. Let me see how this goes. Just to share the progress in the last 3weeks I have been able to complete 8 books. All non fiction books. These include Crushing It by Gary Vaynerchuk, Bold by Peter Diamandis, Attackers Advantage by Ram Charan, Triggers By Marshall Goldsmith etc. All these books are quite dense, as you will see in the picture, but I am trying to keep to my target.

Let me know if you also see Compounding in other areas of your life. I will be very interested in hearing your story.

Till next time.

Carpe Diem!!!