The Art and Science of Financial Planning: Gleaning Wisdom from Iain McGilchrist

Introduction

At first glance, financial planning, with its focus on numbers and logic, may seem worlds apart from the realm of cognitive neuroscience and the study of brain hemispheres. However, the work of esteemed psychiatrist and author Iain McGilchrist offers a fascinating bridge between these two seemingly unrelated fields. Renowned for his examination of the distinctions between the left and right hemispheres of the brain, McGilchrist’s ideas provide an intriguing framework for understanding and approaching financial planning.

McGilchrist’s Brain Hemispheres: A Fresh Take on Financial Planning

In his groundbreaking work, “The Master and His Emissary,” McGilchrist delves into the contrasting ways the left and right hemispheres perceive the world. The left hemisphere is detail-oriented, focusing on individual elements rather than the entire picture, while the right hemisphere adopts a wider view, bringing together diverse aspects to form a coherent whole. By applying these insights to financial planning, we can gain a more nuanced understanding of money’s role in our lives and develop a balanced approach to managing it.

The Science of Finance: Left Hemisphere’s

The left hemisphere excels in its analytical, logical, and detail-oriented abilities. Through this lens, financial planning becomes a methodical process involving meticulous calculations of income and expenses, strategic resource allocation, and the pursuit of financial objectives. The left hemisphere prizes accuracy, objectivity, and predictability. It perceives money as a tool – a means of exchange that enables transactions and facilitates the acquisition of material needs and desires. It emphasizes savings, investments, and insurance as crucial components for reducing risk and ensuring financial security.

The Art of Finance: The Right Hemisphere’s Approach

In contrast, the right hemisphere’s strength lies in its capacity for holistic understanding and context-based thinking. It appreciates money’s role in enabling life experiences, allowing us to interact with the world in meaningful ways, and creating opportunities for personal growth and development. The right hemisphere acknowledges the subjective, emotional, and often unpredictable aspects of financial decision-making, recognizing that our financial behaviors are deeply connected to our values, relationships, and life goals. Furthermore, it is attuned to the social and ethical dimensions of financial planning, raising questions about the equity of economic systems, wealth distribution, and the consequences of our financial decisions on society and the environment.

Striking a Balance: Harmonizing Perspectives in Financial Planning

In the spirit of McGilchrist’s insights, effective financial planning should strive to achieve a balance between the left and right hemispheres’ approaches. The left hemisphere’s analytical prowess is vital for competently managing finances, making informed financial decisions, and navigating the intricacies of economic systems. Without these skills, our financial plans would be directionless and disorganized.

On the other hand, the right hemisphere’s broader perspective is essential for reminding us that money is a means to a fulfilling life rather than an end in itself. It prevents us from becoming consumed by the details of financial planning and helps us maintain focus on the larger picture – our life goals, our relationships, and our values.

Conclusion

By integrating Iain McGilchrist’s insights into our approach to financial planning, we can move beyond a strictly numbers-driven viewpoint. Instead, we can embrace a more balanced, holistic approach, where analytical precision is accompanied by ethical considerations and a comprehensive view of our life goals. This marriage of art and science in financial planning cultivates a more thorough understanding of our relationship with money, promoting not only financial health but also overall well-being. In the end, it’s about finding harmony between the two hemispheres and using their combined wisdom to navigate the complex world of personal finance.

Disclaimer
The content on this site, provided by Able Wealth Management, is purely informational. While we aim for accuracy and completeness, we cannot guarantee the exactness of the information presented. The views and analyses expressed in this blog represent those of the authors at Able Wealth Management. They should not be considered as investment advice or endorsement of any particular financial instrument or strategy. Any references to specific securities and their performance are purely informational and should not be taken as advice to buy or sell.Before implementing any information or ideas presented, we strongly advise consulting with a financial advisor, accountant, or legal counsel. Investing carries inherent risks, including potential capital loss. Asset values can fluctuate over time and may be worth more or less than the original investment. Past performance does not guarantee future results, and Able Wealth Management cannot ensure that your financial goals will be achieved. Information from third-party sources has not been independently verified by Able Wealth Management. Although we trust these sources, we cannot assure their accuracy or completeness.

Schedule an appointment

Volatility Drag

Volatility drag, often unnoticed by many investors, plays a significant role in the performance of investment portfolios, especially in markets characterized by high volatility. Understanding volatility drag is crucial for making informed investment decisions and managing long-term investment performance.

Understanding Volatility Drag

Volatility drag refers to the negative effect of investment volatility on compound returns over time. It occurs because losses have a more significant impact on portfolio value than gains of the same magnitude. For example, if an investment loses 10% one year and gains 10% the next, the investment will not return to its starting value due to the mathematical asymmetry between gains and losses. This phenomenon underscores the importance of minimizing large fluctuations in investment value to protect long-term returns.

The Mathematics Behind Volatility Drag

The mathematical principle underlying volatility drag is relatively straightforward but profound in its implications for investors. The key concept is that percentage gains and losses are not symmetrical. A 50% loss requires a 100% gain to break even, not a 50% gain. This asymmetry means that volatility (up and down movements in price) can erode the compound growth rate of an investment, even if the arithmetic mean of the returns seems healthy.

Example of Volatility Drag

Consider an investment with the following annual returns: +20%, -15%, +10%, and -5%. While the arithmetic mean of these returns might suggest a modest positive performance, the compound annual growth rate (CAGR) would tell a different story, factoring in the volatility drag and showing a lower effective return than the arithmetic mean would suggest.

Implications for Investors

  • Risk Management: Understanding volatility drag emphasizes the importance of risk management strategies, such as diversification and the use of derivatives for hedging, to minimize significant downturns in portfolio value.
  • Investment Strategy: Investors might consider investment strategies that aim for steady, consistent returns over those with potentially higher but more volatile returns. Such strategies might include investing in low-volatility stocks, index funds, or using dollar-cost averaging to mitigate the impact of market fluctuations.
  • Psychological Aspects: Volatility drag also highlights the psychological challenge for investors who may overreact to short-term market movements. A long-term perspective is crucial for successful investing, as frequent trading in response to volatility can exacerbate the drag on returns.
  • Performance Evaluation: When assessing investment performance, considering both the arithmetic mean return and the compound annual growth rate (CAGR) can provide a more comprehensive view of an investment’s performance, factoring in the effect of volatility.

Financial Planning Fees












  • Fees can be paid monthly, quarterly or semi annually
  • Actual fee will be determined on complexity and scope after an initial consultation
Investment Advisory Fees


Fee Rate: %

Annual Fee: $

  • Fee charged on a percentage-tiered rate
  • Fee based on total assets managed
  • Fee covers services such as portfolio design, continuous monitoring, rebalancing, and personalized guidance

Join Our Mailing List