Are Personal Finance and Personal Fitness related?

There are stark similarities between personal finance and personal fitness and drawing parallels between the two could help improve the overall outcome and also the quality of the decision making process as well.

Some of the important components of physical fitness are: muscle strength, muscle endurance, flexibility, cardiovascular endurance, among others.

Muscle strength improves the intensity of the performance (how hard a muscle can perform over and above its average performance). Without muscular strength your body would be weak and unable to keep up with the demands placed upon it. In investing parlance this is akin to ‘Alpha generation’ or the ability of the portfolio to outperform (over the chosen benchmark/ inflation). Portfolio outperformance is a function of the composition of ‘risk’ assets in the portfolio. Well managed exposure to ‘risk’ assets, like equities and real estate is highly critical to generate superior returns. High concentration to ‘risk-free’ assets like fixed income, could impede the ability of the portfolio to generate higher ‘real’ returns (inflation-adjusted, benchmark-beating). 

Muscle endurance improves the length of the performance (how long a muscle can perform over and above its average performance). Without muscular endurance your body would not be able to perform for extended periods of time. In investing terms, this could be compared to the ‘Risk mitigation’ or the ability of the investor to identify, enumerate and manage the risks involved. This ensures preservation of capital over a long period of time by managing risks, such that capital is conserved while pursuing growth. This approach makes the portfolio resistant to external shocks and helps it sustain and keeping it relevant in evolving market conditions.

Cardiovascular endurance is the ability of your cardiovascular system (lungs, heart, blood vessels) to work for extended periods of time, thereby fueling your body with oxygen, needed by your muscles during their performance. In investing this is equivalent to ‘Liquidity’, or the ability of the investor to convert its portfolio (partially or fully) into cash or cash equivalent. Higher amount of illiquidity in the portfolio is a sign of caution and needs to be dealt with appropriately.  

Flexibility is essential so that your body can move through its entire range of motion without pain and stiffness, thereby facilitating free movement. In investing, pain is caused due to unwarranted volatility and that can be addressed through ‘Asset allocation’. A portfolio created in line with the investor’s risk profile will offer an asset allocation which is commensurate with his/ her risk tolerance, thereby ensuring a ‘painless’ experience, over a long period of time. Although volatility cannot be done away with completely if the investor intends to pursue inflation-adjusted, benchmark-beating returns, but it can be greatly reduced.

At a behavioural level, decisions regarding both personal finance and personal fitness are governed by the human traits of Cognition (ability to reason) and Emotion. Both play a vital and definitive role in our decision making process and their impact is especially stronger in decisions pertaining to aspects like personal relationships, health (physical fitness), wealth (personal finance), among others.

Cognition is the hallmark of one’s Intellect whereas Emotions belong to the Mind. Intellect is the capability within us which could propel us in making thoughtful, logical decisions while the Mind (though it’s various emotions) could compel us in taking hurried, quick decisions. Both cognitive and emotive styles of decision making have their importance in the process and help arrive at the most appropriate decision, for an individual. Although the interplay between the Intellect (cognition) and the Mind (emotion) is essential in arriving at ‘balanced’ decisions but it seldom happens that way due to the fact that we could be excessively emotional or overly logical at a point in time.

Lastly, presence of a well-meaning coach can make a significant difference to your pursuit of financial/ physical fitness.

Happy investing!