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.

End of the Year Myth Busting

End of the year myth busting & putting things in perspective...

We are at the finish line of 2011, a year that will be remembered as volatile, emotional and a year of change. So much has happened this year, in Australia and all over the world. So many of those changes happened because someone finally said stop and questioned the ordinary reality they have lived in. Just because things have always been a certain way doesn’t mean it is the right way. It’s good to question or compare things from time to time, it can give you a different perspective on life and it can improve your level of understanding.

Let’s take a closer look at few misconceptions and myths surrounding us every day. They are used in every day conversations so often that they are considered facts. Not many would question them and unconsciously many have their vision clouded by them. The reason why I am writing about them is that if corrected they could possibly change the perception and improve general knowledge of a few financial concepts. Ok, let’s start our myth busting exercise:

Myth no.1 – Superannuation is a risky investment

Superannuation is not an investment; it is a tax structure or a tax environment. It was designed to offer a tax favourable treatment of assets, used to provide you with benefits in retirement. Also it can considerably increase Centrelink eligibility.

The majority of people’s super money is invested in managed funds within their default employer super funds. These are generally exposed to shares and when the share market is volatile (which happened daily in the last few years) their balances would reflect that. But it has nothing to do with superannuation as the tax concept. Most assets widely held outside super such as cash saving accounts, term deposits, investment properties, direct share portfolios, art work, and commercial properties can be structured within the superannuation environment. It comes with certain restrictions, but also considerable tax and Centrelink benefits. So, next time when you hear someone saying: ‘My super lost money’, you can correct them by saying: ‘No, it can’t’. When you think of super, think of tax and Centrelink, instead of performance and investment returns.

Myth no.2 – Shares are risky investments

The only risk that applies here is the emotional risk associated with these assets. Shares generally carry a certain amount of volatility and that is very normal. The share market moves up and down and sideways on daily basis and no one really knows why, nor can they predict what will happen next. But as long as you stick to the fundamentals of buying quality companies, at good value, apply diversification and remove emotions and allow your investment enough time to perform, you are on track to achieve good growth. Unfortunately, average investors fail to stick to these rules and then subsequently blame the investments, of course! Shares generally offer good liquidity, especially if bought via managed funds. This is one of the great advantages compared to other growth asset like direct property. If you are in an emergency and need to cash in a portion of your portfolio, you can, and it is usually done within a matter of days. With property you simply can’t just sell the kitchen should you need cash quickly.  Additionally, shares can pay meaningful dividends which are often at rates higher than term deposit rates.

You are better off seeking a financial planning professional to help you make the investment decisions with you.

Myth no.3 – I don’t need insurance, they never pay claims anyway

You don’t need insurance, you want it. Ok, this is a tricky one. Because there are so many different types of insurances out there, it is often confusing to distinguish what type of cover people mean. There is insurance for everything these days. However, generally speaking, it is sadly personal insurance (Trauma safety net, Income Protection, Life and Total and Permanent Disablement cover) people opt to ignore.

It comes down to this; when deciding what type of insurance to choose from, consider two criteria – likelihood of a potential claim and the extent of the impact the claim would have on your life. Ask yourself these questions, and be honest. When are you likely to be more affected emotionally? – A. Someone steals your car or B. You are diagnosed with cancer of the liver. What will make a bigger impact on you emotionally? – A. Your house gets flooded or B. Your spouse dies and leaves you with two young children. Which is it going to be a bigger problem going forward? – A. Someone breaks into your house and steals your jewellery or B. You have a car accident and end up in hospital with a spinal injury and you are not able to go back to work anytime soon, your income has stopped and your bills continue to appear in your mailbox (not mentioning extra medical bills).

Your lifestyle today as well as the majority of your plans for the future relies on your regular income. Do not get fooled that you can start making plans with your income without securing it first.

An enormous amount of $3.5 billion ($3,567,649,826 to be exact) was paid in Trauma, TPD, Life and Income Protection claims* just in 2010. That means an average of $14.3 million was paid to 245 Australians every working day in 2010. Yes, it pays to have an appropriate cover in place.

·         Statistics are the aggregate from the following companies – AIA, AMP, Asteron/Suncorp, AXA, BT, CommInsure, OnePath, Macquarie, MLC, Tower and Zurich.

Myth no.4 – Industry funds - all benefits to members

This will come as a surprise to a lot of you. But here’s the real deal.

Industry super funds (ISFs) fall under different legislation than retail super funds and master trusts due to their not for profit status. They don’t have to publish gross/net investment returns, but instead they use what is called a ‘crediting rate’. This  provides them with an advantage to utilise it in their huge advertising campaign.

Tax is the biggest cost in super. When an insurance premium or a management fee is paid from your super balance, these are tax deductible expenses to the fund with tax credits normally applied back to your account. But not with the industry funds, you don’t see a tax credit going back to your account. They pool these credits and include them in the crediting rate and therefore overinflate the fund’s total return. It gets better. These funds are then used for what I think is far from benefits to the members. For example, Australian Super has 1.5 million members and an estimated deductible premium of $200,000,000. At 15%, this would mean a rebate of as much as $30,000,000 that the trustee is using for what? Advertising to non-members (possible breach of the sole purpose test?), subsidizing admin fees so that they look cheaper (transparency issues?) are not my idea of benefiting to members. As far as the facts go, they only benefit to themselves.

There is a long list of issues that an average ISF TV commercial viewer doesn’t realise, and is instead misled by the marketing skills of their sales department.

Oh, and by the way, ISFs refuse to be formally rated by the research houses. Probably due to concerns this would uncover cracks in their deceptive conduct by running their campaign of ‘Industry funds are run only to benefit members’.

Compare the pair? No, thank you.

Myth no. 5 - I don’t need financial advice

Financial advice is available for everyone but not taken by everyone. There are two types of people. The first type always complains about the present and only talks about the future and then there is the other type that does something about their life and plans and controls their destiny.

If you got this far through this blog you are probably in the second group. This is a great start. An ongoing relationship with a financial planning professional will enhance the outcomes you are after. A good planner will stop the information noise around you and keep you focused on your goals. They will simplify the legislative and financial complexities and help you to understand the rules. This considerably eliminates a lot of stress and allows you to get a sense of control, helping you stay confident that you are on track to achieve what is important to you.

Financial advice can end up making a dramatic difference to people’s lives. And it often does. So remember, you always have a choice.

After these holidays, upon returning to work and receiving financial advice, would you rather:

A – Ignore the advice, have no budget, make no extra contributions to your super, pay an extra $175,000 in your mortgage interest, try to time the markets, chase investment returns, and simply miss the best days in the markets and consequently have your super last you only few years into your retirement, pay unnecessary tax after you turn 60 and be at the mercy of government support instead of enjoying your retirement?

Or

B – Implement investment recommendations from your financial planner, get on top of your expenses, pay off your mortgage 12 years earlier allowing you to buy an investment property and increase your overall super benefits in retirement, pay no tax and spend the rest of your life taking trips and enjoying the grandkids?

Would you rather:

B – Ignore the advice, watch your life partner die after not having enough liquid funds to treat his/hers stomach cancer condition, miss the precious last months of their life after having to go back to work to pay the ongoing bills and put food on the table for your children, at the same time have no other option but sell the house you lived in with your family for years and where you were looking forward to raising your grandkids, and abandon the plans to fund your kids’ university studies?

Or

A – Implement lifestyle protection strategies with your financial planner, receive a lump sum when your partner is diagnosed with the disease, allowing you to contact the experts and treat the condition immediately, replace his/her income, take your time off work and spend it by their side and speed up their recovery, maintain all your future plans and together attend your kids’ doctorate graduation?

Merry Christmas and Happy New Year 2012, may it be filled only with the good decisions.

Michal Bodi, Financial Coach

Clarity the key to your success

Clarity the key to your success

Perception really is reality. Someone important once said: Give me the power to control the media and I will take over the world. It is fascinating to watch how the media and our politicians mastered their selling process and how successful they are in altering the reality of every day Australians.

Instant access to information of any kind makes it already more difficult and confusing to make any kind of decision. Therefore it is natural that we automatically delay decision making and throw it in the ‘too hard basket’.

Then, due to relentless lobbying via the media or the next door neighbour, we tend to go back and (without much consideration) opt for the imposed option. Without considering the consequences we then quite happily close the subject. There, the case is closed and filed.

If ever questioned about the decision in the future we often get somewhat defensive. It was us who made it in the first place and therefore we protectively don’t want to re-open the subject and potentially change the outcome. The power of our ego usually works its magic from there.

In various degrees I am confronted with this human behaviour on almost daily basis. I don’t blame anyone for behaving in such way. It doesn’t happen consciously. But let’s think about it. Is an access to information and a little knowledge enough to make a good decision? The difference between knowledge and wisdom is realising that a tomato is a fruit but we cannot add it to a fruit salad. Therefore, we need something else, something or rather someone  that will guide us how to use that knowledge.

The point I am making here is that it is up to a financial professional, to clear the fog. To clear client’s mind from the heavy clouds of too much information noise, advertising and confusion. An experienced adviser can provide CLARITY, look at the bare facts and make a rational decision for our client.

In the past we spent a lot of time on basic client education as the effective tool to raise our client’s awareness, it is no longer necessary. There is plenty of information out there and it is not hard to access it. What is important though is to choose the right information and match it with a quality expertise. Only financial wisdom can provide the right direction, take the burden off client’s shoulders and give them a solution that is right and unique to their situation. Once this happens, the reaction we get is usually quite amazing. Once the client realises that we want what they want and that we are going to make it happen for them and that they don’t have to worry about it anymore...it feels great on both sides.

And that is what I believe the financial planning profession should be about. To be there for our clients, to provide them with leadership and clarity they need, so they can rely on us with any important lifestyle decision. It is a noble profession that deserves this recognition.


by Michal Bodi

The value of financial advice

How can we add value? Why pay for financial advice?

How can you help me? Often I get asked by people enquiring about my role. The answer is always, I don’t know, but if you allow me to find out more about you and your life goals, I will be in a better position to develop life plan guiding you to achieve what is important to you. So... how can I help you?

I take pride in my ability to get the best for our clients.  I am personally confident that I can add value to every single person walking down the street. Of course, not everybody wants to receive advice and that also works for me. It gives me a great deal of satisfaction and a sense of accomplishment to deal with clients who perceive the benefits of quality financial advice. I take pride in my down to earth approach; ability to connect with my clients and years of experience and ongoing personal development and training. Often, after meeting new clients, they comment on how they now actually understand the complex and oftentimes daunting financial issues and jargon.

Our initial meeting is all about getting to know you and seeing how we can add value to your financial position and your life in general.  As a rule, we will only go ahead and formulate a plan if it is clear that we can add value to your life and you clearly understand it and instruct us to do so. This way we are both certain that you will be better off. Then we will agree on flat dollar based, initial and ongoing fee and your preferred method of billing.  I will never receive commissions from your investments.

Everyone has a different reason for coming to see a financial planner, and so success means something different to each client.  But, from my experience, in most cases we add value in these four areas:

Practical Value

My advice will save you time. Recommended strategies will give you a structure to go by and confidence and discipline to succeed.  I will streamline, simplify and manage your finances, and help you to make the right decisions.

Intrinsic Value

My qualifications and ongoing professional development mean that I understand the latest rules and how they work.  My years of experience and expertise mean that I know how to explain all this to you in plain English.

Financial Value

This is the most obvious are where I will save you tax, protect your assets, manage and reduce your debts, help you accumulate wealth and make your money work harder for you.

Emotional Value

Our ongoing relationship means that there will be someone there to take care of it all.  This means less stress, more peace of mind and the knowledge that everything is taken care of. The relief you have taken an action to secure your financial future - priceless.