Principles over Predictions-Navigating the 21st Century

Fri, 2016-02-26


Principles over Predictions

Navigating the 21st Century

They say the 4 most dangerous words in investing are "this time it's different."  Maybe it truly is although I've yet to find any evidence of that after 15 plus years of searching.  Most of what one requires to be financially self-sufficient is a combination of good habits, common sense and discipline.  Combined with someone with the knowledge, training and tools and you are apt to fare just fine.

The following 20 principles are nothing more than a collection of insight, education and experiences that I know to be true because I've witnessed them time after time.  I won't take credit for creating any of them (for what's really new?) but hope that you find the analogies useful.  At minimum, I hope you gain a new idea or two and perhaps reinforce a couple of ideas you already know.

On Financial Planning

1.       Where would you like to go?  It's not an overly complicated question but it is not so easily answered.  Let me provide an example.  You are lost in the woods.  It's getting dark.  You have been provided only with a map and compass and little survival experience.  Right about now you are wishing you hadn't set out so late in the afternoon on your own without a guide.  What do you do first?  Step #1 is to determine where you are.  In order for you to plot a course to a destination you require a starting point.  Prior to making any investment decision, purchasing any life insurance product or making any financial decision you must spend considerable time to properly assess your current situation, needs, desires, resources and temperament.  Otherwise, stay put.


2.       It's a Marathon not a Sprint   I'm often surprized that many individuals have not contemplated being an investor beyond their retirement date.  It's as if their financial picture changed because they didn't have to punch the clock.  This may be true for someone who has no savings nor retirement income but not you-you are reading this.  With increased life expectancy, rising costs, inflation and strained social programs one is likely to spend far more time in retirement than actual years having worked.  The good news is that it is far easier and less stressful to manage a larger sum than smaller and without all of the competing demands for mortgages, raising a family and getting established.   Granted, your priorities, means and timeframe will change over the years but a plan that evolves from growing capital to providing income, to preserving assets and finally transferring wealth is likely what most are attempting to achieve.


3.       The Best Offence is a Good Defence     Gone are the days of lifetime job security, defined benefit pension plans and unlimited opportunities to make money flipping real estate.  Like it or not this global village we find ourselves in requires us to be both flexible and adaptable. If you are under 30 years of age and raising a family you might first want to consider rightsizing your debt levels, emergency reserves and insurance needs prior to embarking on an aggressive retirement savings strategy.  If you are over 50 and forced to play catch-up you may also want to consider not overreaching for high returns by taking on more risk or using sophisticated leveraging strategies.  Those that peddle them have a massive self-interest in these products and I've witnessed many clients who have come to my counsel trying to exit them.  Only a handful of entrepreneurs and the truly high net worth have the stones (I certainly don't) to play this game and it is a whole bunch easier to succeed if you aren't reliant on next month's income to provide next month's meals.


4.       Budgets are a Bore   But prepare one anyways.  Every successful business has one and you should too.  I've managed them, prepared them for others and occasionally review my own.  It's not important to follow them to the letter but the very act of preparing one is reward in itself and may unlock thousands in savings.  The main benefit of preparing a budget is to see how much you are already paying for something on an annual basis and when it is due.  Surprizing how many people know they are paying $175/mo. for the cable bundle but don't recognize that this means $2100/yr!   If your annual renewals for auto, home insurance and Christmas credit card bills all fall in January you may wish to revisit going forward.  Or, bi-weekly payments on a vehicle or mortgage might be problematic if you get paid twice monthly.  By reviewing line-by-line the question is asked what can be done better, cheaper or does this need to be done at all?  It's your money and you get to decide on what to do with any savings.



5.       Are You Truly Diversified?  I've reviewed accounts for others with as many as a dozen mutual funds (each one containing a hundred or more securities) and thought what the heck was this advisor thinking?  Being diversified financially has less to do with the number of securities you own (although proper diversification should be a goal) and more the possibilities available to you when life changes (and it will).  An RRSP or TFSA at the bank?  Good start.  An emergency fund, TFSA, life insurance, participation in employer matched RRSP contributions, reducing debt and income producing commercial property-a lot better.  Your goal is not simply to protect yourself from what the markets throw your way but what life does.


6.       Money saved is Money Earned    Should you pay down your mortgage or invest?  In my experience people who have a lot of money and security today did (at minimum) 2 things right.  They paid down their debt and they saved money.  The money they actually saved was invested in things with the potential to appreciate.  Cars, boats and RVs do not.  Stock, real estate and commercial property do.  Pay down your debt and save money.  If you can't do both well do both less ambitiously with an aim to improve.



On Financial Advisors


7.       What Language does your Advisor Speak?  The communication style and frequency of your primary advisors will largely dictate how confident you feel about your portfolio.  While it might be impressive to talk alpha, beta and negative correlations I'll assume you are not studying to become a financial analyst for a bank or a government institution.  If you find things too complicated or overwhelming you are not going to enjoy the experience.  Find someone else.


8.       Beware the Jack of All Trades    It's possible that a few situations can be handled by one firm/one person.  However, with the exponential increase in information, education and licensing requirements it's near impossible to stay on top of everything.   Same individual managing your investments and insurance also doing your taxes, mortgage lending and travel insurance?  Not a great idea.  Same person who has relationships with experts in other fields?  Much better.



9.       Too Many Cooks in the Kitchen    While one specialist in a given field is a good idea having multiple is a bad idea.  As they say, "a man with one watch always knows the time, a man with 2 is never quite sure. "  Personally, I tend to avoid starting relationships with clients who have multiple advisors.  It's just not necessary, adds to the confusion and you are likely to end up being a neglected client at multiple institutions.   If you already have more than one choose one and consolidate your money.  In addition to a lot less paperwork the attention, service and respect you will receive should improve.  Further, you won't be caught in that trap of increasing investments in things that are currently in favour with those that aren't.  The purpose of investing is to make money by investing in things that may currently out-of-favour or undervalued.  The easiest way to gain a commission today is to sell you what is currently popular.


10.   Is she Seaworthy?  Perhaps my favorite story of survival is that of Sir Ernest Shackleton's Antarctic expedition of 1914.  Locked solid in pack ice the ship Endurance ultimately gave way succumbing to an icy grave leaving 28 men stranded with no outside lifeline.  With only the absolute resolve of the captain, the ships' stores and 3 life boats their story of survival and self-sufficiency and self-rescue is one of history's great stories.  While not a perfect comparison the relationship you form with your primary advisor is a little bit like choosing the captain of a long and potentially dangerous journey.  It might be a good idea to consider whether the captain has made the journey before and take time to inspect the ship and even talk to a few of the passengers.  With 2 out of 3 new advisors not lasting 3 years in the business and the rate of turnover and acquisitions by larger institutions it might be prudent to consider the prospect for both the captain and the ship to complete the journey with you.



On Fees


11.   Costs do Matter   They always have but with global growth moderating this becomes even more important.  Assuming the same or similar product lower cost is always better.  In addition, there is no evidence I'm aware of that higher costs bring higher returns (plenty of information to support that they do not).  While lower cost should be your goal at minimum one should know what their total cost to operate their account is as a percentage of assets under management.  If you value the advice you get you also need to know how your advisor gets paid as well.


12.   There is No Free Lunch   there is a cost associated with every investment whether it is disclosed or not.   Some of it could be considered the opportunity cost of your alternatives.  Other costs are the emotional toil of taking on risk you are not personally comfortable with.   Finally, there is the financial cost of purchasing, holding or exiting an investment.  Part of your job is to understand the "cost" of the investment.  The "free lunch" simply doesn't exist.


On Investing


13.   Market Timing  Unless the market is so beat up that every business TV channel is bleeding red or so over-valued that even the individual bagging your groceries or taxi driver is giving you advice the future movement of the market is near impossible to predict.  There was a day when hundreds of subscription weekly newsletters rolled off the presses all pretending to foretell the future.  Today?  All gone.  Every one of them.   You may still see interesting pieces, outlooks and picks from various experts.  At the end of day you will realize that they are all using the opportunity to promote their own interests so use the information prudently.


14.   Investment Behaviour Determines Investment Success   The market will go up and down but up over time.  Your response to those ups and downs will largely determine your success and whether you view things as opportunities or setbacks.   Markets plunging and you continue or increase contributions.  Good omen.  Panic, abandon well thought out plans and not contribute until things improve.  Expect a lot less.   Make volatility work for you not against you.


15.   Q + T + D = R/W   I was shown this many years ago and still rely on it for its' sophistication and simplicity.  Q is for Quality.  If you don't buy things of quality at some point you are apt to be very disappointed.  T is for Time.  Nothing happens overnight so be patient - Rome wasn't built in a day.  D is for Diversification and Discipline to stick with the plan.  The formula might not seem necessary a lot of the time but I assure you that it is the only thing when it matters.  R/W is for Rewards/Wealth.  The likely result of following the formula.  Simple but not easy.



16.   Discipline Trumps Smarts   The very process of being human means we are hard-wired for survival.  While this can be a good thing when faced with an imminent fight or flight scenario, it is counter-intuitive to success in investing.  Further, a little information can be a very dangerous thing.  Combined with confidence from initial success this often leads to bigger bets and eventually bigger losses.  The more experience you gain the more likely you are to hedge all of your decision-making.


17.   The Power of Habit The reason that the Canada Pension Plan (CPP) is Canada's largest and most important retirement program is because there is no debate or choice in whether you participate.  Other than a business owner (who makes contributions as both employer and employee) employees rarely see or consider the amount being allocated from every paycheque.   However, all of us manage or adjust our spending to our take home pay.  When you further automate some of your savings and loan repayment goals you will find them easier to achieve.


18.   What is Wealth?  It's having abundance.  What is abundance?  It's having more than you need.  Want to feel wealthy?  Try giving some away.  Choose the less fortunate, your family, your favorite charity or the church.  Don't give more than you can afford but do give.  The very act of doing this (regardless of income or assets) will make you feel wealthier.  It does work.


19.   It's Chess not Checkers   The game of chess demands certain attributes.  Patience in evaluating the different pros and cons of making any move.  Thoughtfulness to what the opposition may do next.  Positioning of your pieces to control the game.  Success in investing and achieving your financial goals is much more like a game of chess than checkers.


20.   Be Careful Where you Get your News   The CBC's the National may be a great source of general information on how the markets performed in the last 24 hours but a rather poor source for what to do about it.  Similarly, if you tune into the business news networks and follow it for several hours you are likely to be more confused than when you turned it on.  The boys in the coffee shop may have some strong opinions on what you should be doing but often lack any objectivity.  Just because you know and trust someone doesn't mean that they are qualified to provide financial advice even if they are doing it for all the right reasons.




Murray Callaghan, CFP


Murray Callaghan has been providing investment and insurance advice in Campbell River for the past 15 years.  He has partnered with a select few external companies to complement the services he provides directly.  He has published in excess of 140 articles on financial topics during his time writing Planning Matter$ for the Courier-Islander and more recently The Business Gazette.