You Suck at Investing – But it’s Not Your Fault.

Think about the last time something bothered you. You may have seen something you didn’t like, or someone may have said something that you didn’t agree with. Chances are you exhibited some sort of eye blocking behaviour, such as covering your eyes, squinting, or lowering your eye lids for a prolonged period of time.

This type of behaviour reveals the human brain is dealing with some sort of stress. How do we know this? In 1974, Joe Navarro studied children who were born blind. During his research he found that when they heard things they didn’t like, they didn’t cover their ears, they covered their eyes. It’s hard wired in us.

The human brain is capable of incredible things, but it’s also extremely flawed at times. When it comes to investing, our brain doesn’t let us off the hook. There are around 188 cognitive biases that can have a profound effect on how we process information and our investment decision making. Whether it’s confirming existing beliefs, extrapolating information from the wrong source, or failing to remember events the way they actually happened.

Here are five common cognitive biases that throw investors:

Here are 18 other biases worth knowing about.

We’re not going to change the way our brain responds to things it’s presented with, it’s just how we’re wired. But we can be aware of our own biases before making an investment decision to help avoid missing out on what the market is offering us.

To illustrate this point, I share with you the results of an annual study undertaken by Dalbar, which highlights the ‘Behaviour Gap’. The chart shows the annual return for the US stock and bond markets, as well as a Balanced Portfolio, and compares this to what the average investor in each of these indexes and portfolio returned for the same period – voilà the Behaviour Gap. According to Dalbar, psychological factors make up at least 50% of the chronic shortfall. But hey, this doesn’t apply to you because you’re above average.

So next time when you ask your colleague, friend or a family a question and they start to cover their eyes, squint, or lower their eye lids for a prolonged period of time, chances are they didn’t like the question you asked. Now that you know, don’t hold it against them – it’s just how they’re wired.

16 Questions You Must Ask Your Financial Adviser

When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear.

– Thomas Sowell

It’s a tough gig for regulators – to try and have all financials advisers acting in the best interests of their clients. As we have all seen the exposé from the Royal Commission into Financial Services, they haven’t done a great job. So as consumers, we need to take it into our our hands and arm ourselves with the right questions (and know what to listen out for) when engaging a financial adviser – an adviser that will put your interests first!

Here are 16 questions to ask your financial adviser – I’ve provided some commentary and/or answers to each question. In fact, you should print these off and don’t be afraid to go down the list, one by one. You’re interviewing them as much as they’re interviewing you.

1. How are you licensed to provide advice?

Some like the comfort of a large institution or institution licensed firm, and others prefer to stay away from them. The key to being licensed by an group that is unaligned, is that their approved product list (APL) is far wider. If you’re meeting with a bank licensed firm, ask what percentage of their clients’ investments, insurance policies, and platforms are placed with related parties. This should tell you what you need to know.

2. How do you charge for your services?

There are many ways advisory firms charge for their service. Hourly, which is not very common. This is good for project based work. Most of the industry charges via a percentage of assets under management (% of AUM). This can be around 1% pa. The incentive for the adviser is to hoard as much of your investments under their management as they can, in turn, maximising fees.

For an ongoing engagement, fixed annual retainer is best and probably far more reflective of the work completed for you throughout the year (no surprises too).

3. Do you have any targets whatsoever set for you and/or your team?

A confident and convincing No.

4. Do you earn a commission/placement fee for placing me into certain products or investments?

A confident and convincing No.

5. Do you pay referral fees to generate new clients, and will you put this in writing?

Some advisers pay their referrers a fee, which needs to be disclosed to you both verbally and in writing. You probably want your adviser be recommended to you on the basis that they are professional, trust worthy, competent, and that you’re going to get along with them, not because someone is receiving a payment from them.

6. Do you earn a referral fee for referring us to other professionals, such as mortgage brokers, solicitors, etc?

You probably want to be introduced to other professionals because they are professional, trust worthy, competent, and you’re going to get along with them, not because your adviser is going to receive a payment.

Ask your adviser if they’ve personally used the services of the people they’re recommending.

7. Do you earn more money by recommending certain products or services?

A confident and convincing No.

8. In what ways are you remunerated?

The only way your adviser should be remunerated is by the fees you pay them.

9. Does anyone else at all, within your firm and/or your licensee, benefit from the advice you provide and/or the products you recommend?

A confident and convincing No.

10. Do you recommend more of certain products than others, and if so, why?

Yes – there should be very good reason for this. Primarily it should be about bringing you the ‘best-in-breed’ solutions. Whether it’s a particular investment, investment/portfolio manager, or custodian/platform, it needs to be because it’s good for you. Secondly, the more efficient your adviser’s firm, the quicker the turn around of your needs, and fees remain competitive.

11. What is your investment philosophy?

There are so many ways to invest. The most important thing is to find someone that has a philosophy (you’d be surprised how many don’t!). Then it’s a matter of ensuring your personal beliefs around investing align with your advisers. Ideally, you’re looking for a philosophy that is evidenced based, and not based on a gut-feel or hunches.

12. Do you believe your investment philosophy can beat the market?

There are roughly 60 billion shares traded each day around the world. It’s a tough ask to expect any one individual to outsmart millions of traders and investors around the world, over long-periods of time, and to do it consistently.

The answer should be No. If it’s a yes, you’re probably taking on more risk than you think.

13. How different do your client’s portfolio’s look to each other?

You probably expect your adviser to tell you that all their clients are unique and each portfolio is hand crafted to reflect their clients’ goals. And this is true. Although most client portfolio’s won’t look identical, a large portion of it should look and feel similar. By that I mean the underlying investments should largely be the same or similar, and that the allocations to those investments will vary.

14. Do you invest in the products you recommend me?

I’m a huge believer in ‘eating your own cooking’. The answer here should be Yes.

15. How often do you change investments or trade my portfolio?

Your adviser should be trading as seldom as possible. Maybe a couple of times a year. High turnover means high transactions fees, which in turn means lower returns. And we all know stockpicking is largely discredited.

16. What is a reasonable estimated return on my portfolio over the long term, after inflation and fees?

Your adviser should be able to provide you with these figures for past returns for a given level of risk (conservative all the way through to aggressive portfolios). You should expect a return of inflation plus 3-7% pa over the long-term. Anyone promising you double digit-returns is either a fool or a crook.




The Art of Discipline

I stopped driving into the CBD for work a little while ago. The traffic, the frustration, the cost of parking, fuel, and ongoing maintenance just didn’t make sense for me anymore. Since then, public transport has been my escape to the wonderful world of reading and listening. I don’t get too much time to do this on my own, with two little kids, and a wife who also runs a business, we have our hands full like most other young families.

The list of people’s work I like to read has grown over time, and with the calibre of work from these folk, it makes it a little harder each time to add a new one to the list.

One of my favourites is Jason Zweig, a personal finance columnist for The Wall Street Journal, editor of Benjamin Graham’s The Intelligent Investor, and author. He’s a great writer and a brilliant thinker.

With all that is going on in markets at the moment, I thought I would share with you his wisdom. Here are Jason’s Statement of Principles, which he does a much better job than I could ever do in helping shape one’s thought process for investing. Enjoy.

Successful investing is about controlling the controllable. You can’t control what the market does, but you can control what you do in response. In the long run, your returns depend less on whether you pick good investments than on whether you are a good investor.

The first step to reaching your financial goals is to make sure you set goals that are reachable. Your expectations must be realistic. The stock market is not going to provide a high return just because you need it to.

The second step is to recognize what you are up against. Despite what all the daily market reports make it sound like, investing is not a game, a sport, a battle, or a war; it is not an endurance contest in a hostile wilderness. Investing is simply the struggle for self-control — the unending effort to keep yourself from becoming your own worst enemy.

The market is not perfectly efficient, but it is mostly efficient most of the time. Attempting to beat the market may often be entertaining, but it is seldom rewarding. There’s nothing wrong with gambling on poor odds, as long as you admit honestly that what you’re doing is gambling and as long as you put only a tiny proportion of your wealth at risk.

The brokers on the floor of the New York Stock Exchange clap and cheer when the closing bell clangs every afternoon because they know that no matter what the market did that day, they will make money — because you tried to. Whenever you buy a stock, someone is selling it; whenever you sell a stock, someone is buying it. Most of the time, the person on the other side of the trade knows more about it than you do.

However, you don’t have to lose just because other people win, and you don’t have to win just because somebody else loses. You win when you stick to your own long-term plan, and you lose only when you let greed or fear goad you into changing that plan.

The right time to buy is whenever you have cash to spare. The right time to sell is when you have an urgent and legitimate need for cash. If you buy because the market has gone up, or sell because it has gone down, you are letting 100 million strangers rule your life with their greed and fear.

Once you lose money by taking too much risk, the only way you can earn it back is by taking still more risk. If you lose 50%, you have to earn 100% just to get back to where you started. And if you lose 95%, you need to earn 1,900% before you break even. You may be able to do that once or twice through sheer luck alone, but the more often you have to try it, the more likely you are to end up broke. All too many people live their investing lives like hamsters on a wheel, running faster and faster and getting absolutely nowhere.

If you want to have more money, save more money. (I don’t 100% agree with this one, because I think if you want to have more money, making more money is also an option).

Investments that outperform in a bull market are certain to underperform in a bear market. There is no such thing as an investment for all seasons. That’s what diversification is for: to protect you against the risk of putting too many eggs in the wrong basket. And buying something that has just doubled, in the belief that it will keep on doubling, is an extremely stupid idea.

Your goals are a function of all your life circumstances: your age, marital status, income, current and future career, housing situation, and how long your children (or parents) will be dependent on you. Risk is a function of probabilities and consequences — not just how likely you are to be right but how badly you will suffer if you turn out to be wrong. Investors tend to be overconfident about the accuracy of their own analysis — and to underestimate how keenly they will kick themselves if that analysis is mistaken. Understanding your own shortcomings as an investor is far more important to your long-term success than analyzing the pros and cons of individual investments.

In the short run, hares have more fun; but in the long run, it’s the tortoises who win the race.

Why Some Succeed & Others Fail

It was 2009, I was sitting at a breakfast at what was the Lexus Centre during the time, and listening to Collingwood FC CEO, Gary Pert, talk about Collingwood’s three year plan. The goal was simple – to win a premiership within the next three years. I guess every team wants to win the premiership, so what makes Gary’s desire more worthy than the 15 other teams? His strategy. Collingwood went on to win the premiership in 2010, and came runner’s up in 2011 after finishing the season with a record 20-2 (wins-losses).

Like Collingwood FC, most investors have goals – whether it’s financial independence, regular travel, helping their children, maintaining a legacy, giving back to their community, or all of the above. Yet most investors don’t have a plan or strategy to achieve their goals.

By failing to plan, you are preparing to fail

– Benjamin Franklin

We’re constantly pushing investors to think strategically. To be clear on their goals, and to design a plan, their game plan. All the market reading and analysis, asset allocation and investment selection decisions are worthless without being able to be put into perspective of an overall plan. When I talk about a planning, I think about it as an ongoing process, not as a one off event.

We generally meet investors who are looking for someone to help them manage their investments. After spending hours getting to know them, their family, their goals, their priorities, their concerns, we generally find that there is a disconnect between what they’re telling us they want, and their investments and their balance sheet. The best investment management in the world won’t be of any use to anyone if it’s not put into context of that person’s life.

In the end, it’s more than investment management these people are looking for. They need help with determining how much risk they can and should take, how sustainable is their retirement income needs, what is the most appropriate mix of investments, and how to protect and transfer their family’s wealth.

They’re looking for a strategy, their looking for guidance, they looking for reassurance that they are on the right track and that they are, and will be okay.

AFL legend and premiership coach Paul Roos, summed it up perfectly when he was asked what he was thinking in the last quarter of the 2006 grand final.

Having a plan and following it is far more important to your success than analysing the pros and cons of individual investments.

So, what’s your game plan?


Can Money Really Buy You Happiness?

I think everybody should get rich and famous and do everything they ever dreamed of so they can see that it’s not the answer.

Jim Carey

We’ve all heard it before – money can’t buy you happiness.

Take three people. Person 1 makes $75,000 a year, Person 2 makes $125,000 a year, and Person 3 makes $200,000 a year. Who do you think is the happiest?

According to a recent study, the two people earning $125,000 and $200,000 are likely to report greater satisfaction with their life when compared to the person earning $75,000. However, the study funds that the person earning $200,000 a year is unlikely to be more happier than the person making $125,000. This is because Person 3 has an income above $125,000, which according to the study is the point at which greater household income in Australia is not associated with greater happiness.

Here’s the global income thresholds, where greater income above these levels doesn’t predict happiness.

Before you give up on money as a source of pleasure, here’s when money can make you happy (according to research):

1. You spend it on time

We’ve all faced this decision: Attend that business function, which kicks off at 5:30 pm, or go home and spend time with your family? Work weekends to build that business that will provide for your children, or spend time with them now?

Given the choice between more time or more money, which would you pick?

In our pursuit of happiness, we are constantly faced with decisions both big and small that force us to pit time against money. Of course, sometimes it’s not a choice at all: We must earn that extra pay to make ends meet. But when it is a choice, the likelihood of choosing more time over more money — despite the widespread tendency to do the opposite — is a good sign you’ll enjoy the happiness you seek.

2. You spend it on a fantastic experience

Cast your mind back to the last ‘thing’ you bought (that new gadget, smart phone, etc), that thing that made you smile then quickly faded into the background. Contrast this to that overseas holiday you took, the one you’d been planning for years, or that cooking class you took in Florence whilst you were over there. You recall it vividly don’t you?

Although experiences don’t last as long, the pleasure and satisfaction lasts a lot longer.

People do not have unlimited money, so buying one thing means not being able to pay for something else. Shifting your focus to not just say ‘let me make more income’ but let me just spend my money in ways that are actually making me happy is a really promising strategy.

Living your life isn’t expensive, showing off is.