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Showing posts with label Investments. Show all posts
Showing posts with label Investments. Show all posts
Investing - Why Overpriced May Be Better Than Inexpensive
Are you the type of individual who recognizes you shouldn't trade stocks, mutual funds and ETFs frequently, but simply can't seem to stop? Or are you a financial advisor who trades more often than you would like to? Let me propose an unorthodox solution to provide some negative reinforcement each time you trade.
This is a solution I don't believe many financial advisors would endorse and certainly one I would not use from a pure dollars-and-cents perspective. This is a solution that should only be considered if you have trouble minimizing your trading addiction.
If you are a frequent trader, you are likely using a discount broker who offers trades at very low fees or even no fee in some cases. There is no instant disincentive to trading frequently. When you want to trade, you can do so without giving much pause to the cost of your action.
My solution is the following. Move your investment accounts to an old-fashioned brokerage that charges an arm and a leg for each trade. Instead of looking for the least expensive trading solution, select the most expensive institution that makes the hit you take on each trade as painful as possible. Use this painful, expensive trading expense to make you take pause and think through your trading decision more fully. Allow this pause to give you the time to allow emotion to ebb from your decision-making. Take the time to consider why you think something has changed from your original purchase.
Making good financial decisions is almost entirely about recognizing when our decision-making process runs astray, then putting in place mechanisms and processes to short-circuit those processes. Making trading excessively expensive is one example of doing this and may be a large enough barrier to minimize your trading habit effectively.
Thinking About Money
How often do you think about money? Once a week, once a day, once an hour...even more frequently? Did you know there is often an inverse correlation between how often you think about money and your level of financial well-being? People who think about their money constantly generally have done more poorly with arranging their financial lives than those who think about their money only occasionally.
If you think about, and more specifically worry about, your money frequently you have not put in place processes that allow you to know with confidence how you stand financially. As is so often the case, the most important tool to help you gain this confidence is a formal budget.
Taking the time to put together a solid budget that includes what you value most and your financial goals allows you to stop thinking about money all the time. A budget, which you follow, that really captures what is important to you, gives you the freedom to not have to dwell on and think about each financial decision ad nauseum. You already know your goals are being funded in your budget, other money is designed for other purposes.
A second tool is having an investment portfolio that truly is designed to fund your various financial goals while staying true to your willingness to accept risk. A portfolio that is built to fund your short, medium, and long-term goals allows you to stop worrying about those goals. In fact, with a properly designed portfolio, you may find yourself not paying attention to the stock market at all. Combined with the well-designed budget, financial worries truly begin to melt away.
Other tools that help you think less about your money and focus more on your life include a comprehensive insurance portfolio and estate planning completed to allow you to know those important to you will be provided for.
I don't think there is any magic number for how often to think about your money. The number is likely different for each of us. Certainly it is important to consider your finances occasionally, and to make well-informed financial decisions. But if you find yourself constantly worrying about paying bills or reaching your financial goals or struggling with financial decisions, you are likely thinking about your finances too much.
Are there any additional tools you can think of to help reduce the amount of time needed thinking about money?
A Little Secret About Stocks
Money invested in stocks is not spendable money
What I mean is that, barring true emergencies, you should never look to the value you have in stock investments as money available to support your lifestyle and spending now. You also should not see that money as available for next year or even five years from now. Money invested in stocks is money to be used well down the road...that's why stocks are long-term investments. Stock investments should be allocated for spending 10 or more years down the road. I would even argue for a number greater than 10 as a starting point. Stocks are volatile. Over the long-run, the expectation is that you will be rewarded for accepting that volatility and risk. That means you cannot expect to use that money until you have reached the long-run!
As you approach the need to use some money invested in stocks, that money should move to other investments. Very near term spending should be held in cash or cash-equivalents (money market funds, short-term CDs, etc...) For spending a bit farther out, look to other investments such as bonds and long-term CDs.
Once you have understood this secret and truly believe it, dealing with the volatility we have seen over the past couple years and poor performance over the past decade becomes more palatable. The short- and mid-term stock volatility can be painful to watch; but if you have followed this secret, the impact on your financial well-being should be minimized.
So, let me give you the secret one more time: money invested in stocks is not spendable money.
My Confession: Have I Offered Solutions?
You may be getting sick of my ranting and raving; of my complaining about what the financial advisory industry looks like; and of the lack of value being delivered by financial advisors to you. You may wonder why I bring all this up, but never offer any solutions to the problems. The answer is simple: I do not have any solutions. I do not know what needs to happen in order to truly help you with your financial well-being. I do not know how to get the focus away from chasing overnight wealth and materialism.
This industry is simply chasing the money. What is being offered is what you are willing to pay for. You don't need expensive investment advice; but this is what you continue to ask for, so the industry delivers. You don't need someone to predict the future, but we continue to try (and mostly fail) because this is what you are demanding. The industry has no incentive to change.
I confess, I am frustrated and don't know how this industry and profession move forward. On my other blog, I am putting together a business plan for what my ideal financial planning practice would look like. I am not moving forward very quickly. I sit down to write the business plan, but get nowhere. I have an idea about what I would like to deliver, but have a belief that you won't pay for it. You want investment advice and predicting the future, not help with using your money to reach your goals and understanding the impact money has in your life. I can't deliver what you want, and you don't want what I can deliver and what you really need.
There is so much more that the financial advisory industry and the financial planning profession can provide you. But for the most part you don't want it and we don't deliver yet. How does this change? I don't have any answers, only questions.
Do you have the answer?
Your Financial Advisor Is Human
I don't make many guarantees, but I am going to guarantee you one thing with absolute certainty. This guarantee has tremendous impact on the investment advice you receive from an advisor.
Many financial advisors and investment advisors I have met with seem to believe they are not human. It seems that they believe they are able to make financial decision purely based on rational factors and unaffected by emotion. They are under the impression that they do not fall prey to the same snap reactions when there is a major stock market drop that their clients do. They are wrong.
Financial advisors and investment advisors are human. They experience emotions and react to those emotions just like other humans. Fear and panic cloud rational decision-making for an advisor no differently than for anyone else. These emotions can lead to poor decision and mistakes being made on behalf of clients. You may even have heard your advisor tell you they just had a gut feeling about some investment, either to buy or sell. A gut feeling is not rational, it's emotional. Advisors are also human and therefore prone to make similar errors to other humans.
Your advisor may choose to sell investments at poor times because they watch the markets collapsing. They may become wrapped up in the mania of a strong bull market and buy something as prices are rapidly increasing. They are human and subject to making these same mistakes, particularly if the advisor believes in actively managing your investments.
This emotion is not a bad thing, however. If they were not humans, good financial advisors could not empathize with their clients and could not have genuine interesting and truly care about their clients' well being. You want your advisor to be human, to have emotions and to understand your emotions. It can lead to a deeper and more trusting relationship between you and your advisor.
What is important is that you recognize that your advisor is human and that they can make the same errors you do. Good advisors realize this fact and put in place systems to help prevent them from acting on emotion; they may believe in a passive investment approach which does not react to market movements, they may have a multi-person process to make portfolio changes, or they may employ some other mechanism.
You, as a client, can your advisor recognize their own emotions as well. During the market collapse in the second half of 2008, I worked with a client who would call me almost daily asking if he should make any portfolio changes to some mutual funds we did not manage for him. Each day there was a major market movement (and there were many) he called to discuss, but he clearly had made up his mind before the call. It dawned on me after several calls that he was not really asking for our advice, but was instead gauging our emotions and making sure we were not making drastic changes to his portfolio based on those emotions. He would finish each call by telling me he was happy we were not changing anything and asked that I call him first should we decide to do so.
You can do the same with your advisor. Call and bring up your fear. Listen to your advisor's response and determine if they are trying to make decisions while under the influence of strong emotions. If you think they are, call them on it. Ask them to write out their rationale for their decisions and the impact those have on your long-term financial well-being in an email and send it to you. This will force them to think more rationally and may impact the decision they are making. You are in this together. The advisor should be trying to help you recognize your emotions and the influence this has on your decision-making, and you need to do so on return. You are both humans.
Now, to tell you my guarantee. I guarantee your advisor is human. No matter what they tell you regarding their ability to work rationally and logically, they are human and subject to the same errors that you might make. They need to understand the importance this has and you need to as well. Advisors cannot and will not be perfect. They will make mistakes. But by working closely with clients in an open and trusting manner, many of these mistakes can be avoided.
All Financial Advice Is Wrong - Upset The Industry Series Part 3
Over the past couple blog posts I have spent considerable time attacking the "investment performance" value-proposition many financial advisors offer their clients. In part 3 of my Upset the Industry Series, I am going to discuss where this investment focus comes from along with an insurance focus many financial advisors employ and why I fundamentally believe this needs to change to truly help you as a client. As always, my writing in this series remains a stream-of-consciousness exercise and barely edited.
I believe the focus on investments and insurance in the financial advisory world stems from the history of the industry. Financial advisors and planners evolved out of the insurance and investment world, as a group of stock brokers and insurance salesmen recognized the need to help their clients more fully than simply selling them insurance and investment products. As the financial advisory industry grew, more people bought into the concept of helping clients with more of their financial lives by adding a discussion about goals, taxation, cash flow and estate planning. Ultimately, however, many of these people entered their careers working for insurance and investment firms where their compensation was largely based on the sale of insurance and investment products. This early training in insurance and investments created a memory in financial advisors that these two pieces were more important than other items.
I additionally believe that the focus is created because it is easier to sell insurance and investment products than other elements of the financial planning process. Fear can be used to sell insurance. Greed can be used to sell investments. But selling budgeting services is far more difficult. Convincing someone that there is great power in discussing their deepest goals and crafting a path to reach those seems a bit airy and impractical. So the focus has remained on the easy sale, despite their relative unimportance.
Investments and insurance do have an important place in the financial planning process. Both play a role in helping clients reach their goals and dreams. But they are certainly not the most important elements and do not warrant the significantly overweighted focus they receive in the financial advisory world. In the long-run, poor investment decisions can hurt your financial well-being tremendously, but the likelihood that good investment decisions increase your financial well-being is very low. Insurance plays an important role to transfer some risk you are not willing to bear yourself, but the best result with insurance is that you waste the premiums paid and never need the insurance. Both are important, but neither really moves you forward.
There are elements which do call for a greater focus in the financial planning process. Having a deep understanding of your values and goals leads to planning which you are committed to and want to achieve. Without understanding your values and goals, the financial advice you receive will be wrong. Focusing on how you spend your money and whether your spending matches your values can tremendously improve you financial well-being. The greatest investment ideas will have little impact if you are unable to save money to place in these investments. Understanding your relationship with money (and you do have a relationship with money) will help you understand your financial decision-making process better and allow you to make well-informed decisions in the future. These are the areas where financial advisors should be focusing. They are not sexy and do not offer the hope of becoming wealthy overnight, but they have meaningful and controllable impact on your financial well-being.
As long as investments and insurance remain the primary focus of the financial advisory world, the financial advice you receive will remain wrong. That advice simply cannot be correct without really knowing you. How could anyone offer an appropriate investment portfolio without understanding what you hope to achieve and what type of risk you are willing to accept? They can't! How can insurance products be recommended without knowing what risks you are comfortable living with and which you want to pay money to pass to an insurance company? They can't! If you are offered investment or insurance products without the advisor getting to know you deeply, you are being offered products based on assumptions the advisor is making about you. The most likely investment assumption is that you want to have the highest return possible at any cost. The most likely insurance assumption is that you want to purchase as much insurance and transfer as much risk as you can afford.This may be true for you, but I submit that a financial advisor should know this with certainty before making the assumption. Assumptions have a habit of proving incorrect in the long-run.
All financial advice is wrong.
It bears mentioning that there are already financial advisors who are moving in this direction. They are a part of a movement known as financial life planning. Advisors in this movement are committed to getting to know your values and goals deeply, then helping you craft a path to reach those goals while respecting your values. A couple resources for locating one of these advisors include the Kinder Institute of Life Planning and Money Quotient.
All The Investment Talk Is Really Tiring
I am tired. I woke up at my usual time around 5AM this morning and have felt very tired ever since. As I sat at my desk drinking my coffee, I recognized that while I am physically tired I am also mentally tired of seeing all the wasted time and effort going into investment research. In my Twitter stream, on the television, in the newspaper and in virtually every other form of media I get bombarded with the next big investment or the latest technique for becoming wealthy quickly and with little effort. I see financial advisors and investment advisors discussing technical analysis and fundamental analysis, insurance salespeople discussing ways to guarantee not losing money, and infomercials hawking the next great trading system. It's all such a waste of time, effort and money. My focus is on having a profound, positive impact in people's lives...squeaking out a bit more yield on an investment or savings account, does not do this.
One would think we would have learned by now that this pursuit of overnight wealth has done nothing but lead to bubbles and collapses, has pushed people over the brink of financial ruin, and has only benefited the people selling the systems. Over the past decade we have seen too many bubbles all in this pursuit of wealth. The dot.com bubble, the housing bubble, and now likely the gold bubble? None of this has pushed us forward individually or collectively. Collectively we live in fear of the next major financial collapse, yet we are still looking for a new way to easy wealth. I am tired of it.
Wall Street plays this game, and pushes the "get rich" desire at every turn. A great many financial advisors are accomplices in this, also. These advisors look for ways to increase return on investments, spend time researching the next big thing, and help clients buy more stuff; all without focusing on what is truly important to those clients. Advisors need a major paradigm shift to recognize that we are in the business of helping people live their lives more fully and freely. Worrying about investment return does not accomplish this. I am tired of it
If we could redirect even just a small portion of the vast resources spent on getting rich into financial literacy education, the impact could be tremendous. Helping people understand the fundamentals of budgeting, taxation and investing would impact their financial well-being far more than any brilliant investment idea from Wall Street, a financial advisor, or a slick infomercial played late at night. We are a people who are physically unhealthy and we are a people who are financially unhealthy. We do not accept financial responsibility, we do not understand basic financial truisms, and we have immeasurable dollars being spent perpetuating this lack of education. I am tired of it.
Forget the get-rick quick schemes. Large financial institutions are selling you snake-oil. No matter how much research and insight and technical words used, they are selling you a falsehood. Their schemes will make them wealthier and a few clients will strike it rich, but the vast majority will receive no benefit and likely have their financial well-being hurt. Focus on what you can control (e.g. your spending, focusing on what you truly value, not taking needless investment risk, etc...) and you will be on a much better road to financial well-being than any investment scheme can offer you.
I am really, really tired. I am tired and not editing this post. I am tired.
Seeking Investment Outperformance Is Useless
I enjoy challenging myself and thought I would use my blog as a challenge today. I am a wordy writer, so challenged myself to write a post that uses only one paragraph and less than one hundred words (preamble included) yet sends a valuable, powerful statement. Now let me challenge your thinking. If you are trying to beat the market or strike it rich with your investments...stop! You're playing the lottery and will fail. If you're an advisor selling investment outperformance...stop! You cannot deliver alpha, and can offer so much more. Seeking return is high cost and low probability.
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