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.