Why we’re destined to fail and how to fix it

Why we’re destined to fail and how to fix it

Investing is simple but not easy. This is fairly basic and very powerful but underestimated statement. Most people fail at it because investing involves virtues like discipline and patience and find them ‘boring’ or not exciting enough. Every day we are seeking better, attractive, faster ways to accumulate wealth and we’re bombarded with so much noise that it’s almost impossible to stay focused.

The noise comes from various sources: product manufacturers, media (including social media), friends and family and unfortunately also financial professionals.

Humans are not equipped to deal with this noise and we have a proclivity to react to it. And this is where a passionate, tough loving, courageous and truthful financial coach can step in and stop us from taking a bad step.

First, let’s see why we tend to react and why are designed to destroy ourselves financially.

 1.       No appropriate guidance

Most Australians don’t have access to quality financial advice. They either make it a conscious choice not to seek advice, or the advice they receive is inappropriate. Most of advisory firms’ value propositions are performance and product driven.

2.       There is no plan

Plan means a time and dollar specific, written document that can be referred to in order to ensure your train is heading to your station. Remember, it is inevitable to have no plan if you don’t have a financial coach. In fact, it’s the absence of the coach that causes the following implications.

3.       Most valuable asset – time

We’re busy. Even if we had the wisdom and the resources to manage our financial lives, we don’t have time. Society is so dynamic and exhausting that after coming home, the last thing we want to do is making sure we’re on track with our plans. This fact on its own puts even more pressure on us and as a result we become more sensitive to noise.

4.       Financial education

Schools in this country don’t teach practical things about money. People don’t know the difference between stocks and bonds. Instead we tend to inherit the ‘facts’ from our family. We grow up listening to our parents’ conversations. This starts happening from an early age, with the acquisition of language. We then carry this information with us all our lives and consider it to be true.

5.       Flawed definition of risk and safety

'Cash is king'. 'Cash is safe and shares are risky'. 'In retirement, the share market is the last place I will put my money. I prefer to keep it safe in the bank'.
These myths are hardwired in people’s minds and are inevitably responsible for the financial failure of the general public. Cash may be the king today, but not in the long run. Unfortunately our cost of living increases and if we fix our income (which is the net result of investing in cash, TD etc.) we will soon start running out of money. Remember say 30 years ago...how much did the petrol, milk or a postage stamp cost? The answer is – much less than today. But wages have increased, right? Exactly. Imagine your wages staying the same all this time.

If losing money was the dragon we need to fight, than yes, cash would be the king.

However it is the eroding power of inflation and increased cost of living we need to fight. And in that case, we need to accept (often new) reality that it is the shares that are safe in the long run. It’s the shares that will so purely and effortlessly help us protect the purchasing power of our money.

6.       Absence of fundamental principles and practices

This actually applies to the general public as well as the financial advisers. There are fundamental principles in investing that govern and can even guarantee your long term success. Values like optimism and faith in the future, discipline and patience get tested daily. The fact is that advisers don’t spend appropriate time discussing these with their clients.

Practices like right asset allocation, diversification, dollar cost averaging and re-balancing are in every text book but rarely see the light of day. This is especially the case when a high net worth account comes along, for some unknown reasons; the conversations turn the opposite direction.

7.       Emotions and behaviour

As mentioned above, society is bombarding us with noise. There’s manufacturers noise - new funds and platforms, flexible lenders, attractive and promising (out)performance. The economy noise – interest rates, GDP, prices of commodities, (over)analysis of past performance, etc. The crisis noise – there will always be a crisis somewhere in the world – USA, Europe, China, Greece... The market noise – bull markets, bear market, when is the right time to buy/sell...

All these add to confusion, impatience, and indiscipline, fear, under/over diversification, bad leverage, bad decisions and bad behaviour.

A good adviser knows that it is the client’s behaviour that governs their financial outcomes. A good adviser takes time to educate clients. Clients need to understand what they’re doing, why they’re doing it and what it would mean to mess it up.

It is absolutely crucial and necessary to have a good financial advice to guide you and coach you on your way to success. There are a few good advisers out there...and if you want to achieve financial independence and dignity throughout your working life and in retirement, take time and choose wisely. The above article can serve you as a guide. If your adviser spends the majority of the appointment time discussing these topics, you know you have found one.


by Michal Bodi

Please contact me on mbodi@sydneyfinancialplanning.com.au if you wish to chat further.

Six rules for managing uncertainties and successful investing.

Six rules for managing uncertainties and successful investing.

Perception is sometimes 'realer' than reality.

Also, as long as the information is frequently repeated and rotated, the perception doesn’t verify the quality of ‘expertise’ it’s been fed with and created by.

Our lives are saturated with information lava erupted daily by a financial world volcanos with the spotlight on variables beyond our control - platforms, products, investment managers, interest rates, managed funds, direct shares, ETFs, investment performance, share market, Europe, China, Bora Bora...

However, they only cause noise and a blinding perception that they should be the centre of investor's attention and concentration.

  

The truth is that the focus should be somewhere else.

These variables have very little to do with real life investment outcomes. Why?

People simply do not experience the investment returns published in the magazines they read. The dominant determinant of real life investment results is something we can actually control and anticipate (in some people) – their investment behaviour.

A passionate behavioural coach can ensure that they stick to their plan and follow the six below rules.

Six rules for managing uncertainties and successful investing:

v  Invest in your future – have a plan and a hire a coach

v  Believe in the future – things always get better, stay positive

v  Realise your timeframe  – invest for life and think of your legacy

v  Diversify  – never make a killing, never get killed (as boring as it sounds)

v  Look for value – never chase prices, always chase value 

v  Be patient and disciplined – do not react to noise 

Nothing to do with products, trends or financial magazines you read. 

This is where we have to start. Some would say it’s not too exciting, not too much fun. And that they can manage on their own. Well, they can’t. I can't. No one is immune to noise. 

If people want to experience quantum changes in their investment outcomes they need to firstly acknowledge this and secondly hire the objective third party - behavioural coach. 

It's part of the 'zen of investing' and it's to do with your mind, nothing else. The sooner you acknowledge it and accept it, the sooner you progress.

by Michal Bodi

Email me if you want to know more – mbodi@sydneyfinancialplanning.com.au


Photo source: Freedigitalphotos.net and Darren Robertson

Let the seeds grow...

Let the seeds grow...

I opened the paper today...just kidding; I tapped on my Twitter app this morning and went through the financial news section. Even though I kind of know the sort of ‘breaking news’ stories I'm going to find, I still read them. 

Dow Jones is down 12 points over night, EU political pressures on Greece continue, Facebook shares hit (apparently and surprisingly) new lows. I take another bite off my toast and smile...

It’s time to switch the TV on. 'I can’t wait' for the next expert analysis of these stories in the regular money segments. My two year old son screams in my ear, he wants me to change it back to cartoons. How do I explain to him that I simply need to know what is going on in the financial world out there and what impact it has on my money? 

Sounds familiar? I know I am not the only one going through this daily morning routine. In one way or the other, we are all victims of the daily noise surrounding us from the moment we open our eyes. 

It’s the culture we live in. It’s the news, the marketing, the advertising entering our head space without our permission. They use good old fashioned fear, but more recently also frustration, desire and family values – all emotional drivers that stay stored in our memory bank. And they stay there for a long time. Until the right time comes, and a very important and emotional financial decision needs to be made, they reappear. And they subsequently drive the decision process.

In a nutshell, the most people make their important (often life changing) financial decisions based on what they see, read and hear in the media. Permit me to say, that’s why most people are not financially independent and what’s worse, a lot of people become financially destroyed.

Financial independence comes from a thoroughly planned journey, where decisions are not made based on the latest news. 

It's created by a series of sound financial decisions, which are made proactively. It utilises virtues as patience and discipline. It doesn’t chase the latest, hot trends or funds and it doesn’t chase any price movements either. It's shaped by a long term plan and strong fundamentals but it’s flexible enough to adapt to changes in personal circumstances. It's formed by a plan that never changes its course because of variables it cannot control. It only deals with variables that it has some chance of predicting and controlling.

But importantly, it's designed and regularly assessed by a financial coach. He/she  constantly makes sure you are on the right path to maximise the probability of achieving what is important in your life. However, the timing needs to be right in order to hire a financial coach. It requires an acceptance that escaping the noise means gaining focus. It’s hard to gain focus when life sort of happens every day. Without going into expertise and experience of a financial coach, the practical and emotional value added is priceless. 

Once you allow yourself overcome the fear of this new experience you’ll allow yourself plant a seed that will grow into a strong and healthy tree one day.

by Michal Bodi

 

The focus of every successful (real) investor

The focus of every (real) successful investor

Do you want to know what the share market will do over the next 6-12 months? What about next few years or decades? Would you also like to find out about the property market, interest rates and political situation over next few months or years? Wouldn’t that make it easier to invest ? Well, most certainly not...and this is why.

We live in a timing and selection society where the main focus is always on (out)performance.  

"Ordinary people don't concentrate on meeting their financial goals and instead they are in a race to outperform each other."

This is mainly caused by two things: 

- all their investment decisions are driven by the media (tv, press, online)

- they never had a chance to sit down with a good financial coach

An action in the second point would also eliminate the first point. A good financial coach should be able to tell you that a portfolio (and its performance), unless it's a part of a plan, means nothing. If you want to meet your financial goals you need a financial plan. 

A portfolio is certainly a very important element of a plan, but on its own it is not a plan. People with plans make it financially, people chasing performance as a substitute for planning, never make it financially. 

I hope you can see it is a common sense that without a plan you surely will end up somewhere, you just might not like where...


The fact is that nobody can consistently predict future and performance. And if someone will claim to you they can, run and run fast!

For some reason, it doesn’t stop people from making predictions. Look it up... Open any financial/business section of newspapers, financial magazines, or listen to any ‘expert’ media financial commentaries and predictions. Most of them (with unbelievable certainty) talk about what they think is going to happen and how long it is going to take. 

Looking at stories like these, married with a daily focus on the short term volatility and price movements and no wonder the general public is so confused and twisted in all directions when it comes to forming any opinion about investing.

The market is unpredictable. It moves up and down and sideways often for no apparent or logic reasons. And no one can consistently predict when it happens; how long it will continue to happen and when it will finish happening. 

The same goes for the consistency of performance. No expert forecasters, no fund managers can guarantee or outperform in any continual way.  Taking credit for when things work out well occasionally and feeling guilty when they don’t is equally foolish to say the very least.

If you want to be successful when it comes to investing you need to acknowledge and accept that the future cannot be predicted and your investments will not always be returning greatly. As well as no investments or investment managers can be a top performer every year. The sooner you accept this, the sooner you experience the liberation of this wonderful reality.

Once your mind will see the light you can be assured the good news does not end here. In fact, I have even more satisfying and liberating truth for you. The returns your investments produce are irrelevant when you look at the whole picture. The actual returns average people get have very little to do with the returns of the investments they invest in.

We humans are emotional and we act the same way. We are also competitive and greedy. And we certainly act that way too. It is reflected in investment decisions we make. Because these are emotional decisions, they are direct or indirect results of a 'reaction process'. Reacting in investing is in itself a serious mistake.

People make a sequence of all kinds of investment mistakes all the time. They range from under diversification, price chasing, speculating and trying to time the market to panicking thinking it’s the end of the world. The list goes on and on. These are very common but serious mistakes that create a gap between a published return of an average share fund and the real life return of an  average investor.  This gap is over 7 % per annum!*

Compound this over say 20 years and you will get a huge loss of wealth!

Average investor annualised returns compared to SP 500 for 1987-2007

*Dalbar Inc. The Measurement of Success. Quantitative Analysis of Investor Behaviour, 2008

The series of investment decisions average people make cause that they not only end up underperforming the market. They underperform their own investment! All that they would have to do in order to get the performance of their fund is to select a fund (doesn't matter what fund!) and hold it for 20 years. 

As you can see we are suddenly so far from the market predictions, share market volatility, interest rates, past performance comparisons etc, they are so irrelevant... 

The only important thing is how passionate and how persistent your financial coach is in managing your investment behaviour. By the way, you do need one. Please don’t think you can do it all yourself. There is a reason why even top athletes still need a coach.

 If you allow them, they will predict and control your behaviour because this is all they can manage and because it is the dominant determinant that makes all the difference.

I hope you will remember this next time you see funds comparisons and ratings based on past performance in your favourite financial paper - the real investment outcomes are far more dependent on investor behaviour rather than published performance of a fun.


by Michal Bodi



The photo courtesy of freedigitalphotos and smarnad.