Hindsight is looking back and understanding a situation or event after it has happened or developed. It involves reviewing what happened and comparing it to plans and expectations.

Hindsight is a valuable tool in personal finance. It allows us to assess which decisions were right and which did not work. We can analyze past data and results (returns, losses, capital growth) to make more informed decisions on asset allocation, diversification, investment choices, etc. We can also track transactions and get a picture of our financial health.

However, relying solely on hindsight may be detrimental to personal finance. Some of us might regret decisions made, leading to inaction, such as not investing in the fear of loss or making sub-optimal choices, such as inaccurate asset allocation. Others may fall into the trap of hindsight bias. It is a psychological phenomenon in which one becomes convinced they accurately predicted an event before it occurred. It causes overconfidence in one’s ability to predict other future events and may lead to unnecessary risks. For instance, in March 2020, the Indian stock markets crashed due to the COVID-19 effect. On March 20, 2020, the Sensex was at 28,460. By January 2021, Sensex and Nifty had increased by more than 50 percent. It was at 48900.31 on January 19, 2021*. Many investors felt they knew they should have increased their equity exposure. They thought they had predicted the right outcome. It is a perfect example of hindsight bias. It distorts our perception of the predictability of financial markets and negatively affects our decision-making.

Insight is the ability to gain an accurate and deep understanding of the matter at hand. It involves critically and objectively analyzing all available and relevant data, whether past data, current trends, or forecasts, to make informed decisions. We can use insights to improve our personal finance situation. For example, by examining the trends and patterns of saving and spending and our current financial state, we can optimize our budget to better suit our needs. We can analyze the performance of the various components of our wealth and make informed decisions on managing our wealth better and maximizing returns.

Foresight is the act of predicting outcomes. It involves perceiving the advantages and disadvantages of a decision before making it. In personal finance, foresight plays a pivotal role in the budgeting and planning process. It helps us anticipate and prepare for future scenarios, based on which we can establish a security net and plan to achieve financial independence. An essential component of the planning process is setting up an emergency fund. It provides a buffer for unexpected events like loss of job. Obtaining life insurance and health insurance offers financial protection from unforeseen adversities or unexpected challenges that life may present.

Together, hindsight, insight, and foresight can provide the foundation for effective financial planning. Hindsight identifies past patterns and what we can learn from them. Looking back at the markets’ performance teaches us that staying invested long-term gives better returns. Insights gained through research and analysis of data on returns, volatility, and other parameters enable us to craft robust strategic asset allocation plans, which, with regular re-balancing, can potentially enhance returns and manage volatility. Foresight helps us identify what we can do to prepare for an uncertain tomorrow. It involves taking proactive financial actions based on strategic insights and current events. It guides us in making deliberate choices today and tweaking financial tactics and strategies as circumstances evolve so that we chart an optimal course to secure our financial tomorrow.

Combining hindsight, insight, and foresight will enable informed decision-making and better financial outcomes.

 

*https://www.bseindia.com/