Category: MARKET

The fastest way to lose half of your money is not a stock market crash but a divorce, separation or a poor business decision (so it’s a good idea to make sure you’re on the same page with your partner when it comes to joint finances.)

Many have felt disheartened by the stock market in recent times, especially with the historic GameStop trading fiasco. It’s easy to feel confused and assume the market is rigged against the smaller investors.

However, the small-time investor could have a ton of advantages over the pros. They don’t need to pay attention to short-term performance or benchmarks or made-up risk-adjusted return metrics. They can play the long game and not worry about all the stuff professional investors are forced to obsess over.

In Ben Carlson’s book, Everything You Need To Know About Saving For Retirement, he talks about how the stock market works. This is an edited extract from chapter eight.

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After getting engaged my wife and I began having some deeper philosophical conversations about how we would run our joint finances. We were in our mid-to-late 20s at the time so I informed her I would like to put the majority of our retirement savings into the stock market.

My wife, like most normal people, did not know much about the stock market except for what she heard on the news or saw on TV and in the movies. She did not give much thought to investing in stocks. So when I told her we would be saving the bulk of our retirement money in stocks (especially when we were younger) she was initially concerned.

What follows is more or less what I told her (and despite going through this exercise she still agreed to marry me if you can believe it).

The stock market is the only place where anyone can invest in human ingenuity. It is a bet on the future being better than today. Stocks can be thought of as a way to ride the coattails of intelligent people and businesses as they continue to innovate and grow. Short of owning your own business, buying shares in the stock market is the simplest way to own a slice of the business world.

The greatest part about owning shares in the stock market is you can earn money by doing nothing more than holding onto them. When companies pay out dividends to shareholders, you get cold hard cash sent to your brokerage or retirement account which you can choose to either reinvest or spend as you please.

Many people compare the stock market to a casino but in a casino the odds are stacked against you. The longer you play in a casino, the greater the odds you’ll walk away a loser because the house wins based on pure probability. It’s just the opposite in the stock market.

The longer your time horizon, historically, the better your odds are at seeing positive outcomes. Now these positive outcomes don’t guarantee a specific rate of return, even over longer time frames. If the stock market were consistent in the returns it spits out, there would be no risk.

If there were no risk, there would be no wonderful long term returns. And because there is risk involved when owning stocks, your returns can vary widely depending on when you invest in the stock market.

It has been possible to lose money over decade-long periods in the past. Even 20 to 30 year results can see a big spread between the best and worst outcomes. However, it is worth noting that even the worst annual returns over 30 years in the history of the U.S. stock market would have produced a total return of more than 850%. This is the beauty of compounding. The worst 30 year return for the S&P 500 gave you more than 8x your initial investment.

$10,000 dollars invested in the S&P 500 in the year:

• 2010 would be worth $37,600 by September 2020
• 2000 would be worth $34,200 by September 2020
• 1990 would be worth $182,300 by September 2020
• 1980 would be worth $918,500 by September 2020
• 1970 would be worth $1,623,500 by September 2020
• 1960 would be worth $3,445,000 by September 2020

I’m ignoring the effects of fees, taxes, trading costs, etc. here but the point remains that over the long haul, the stock market is unrivaled when it comes to growing money. And the longer you’re in it the better your chances of compounding.

Having said all of that, there is an unfortunate side-effect of this long term compounding machine. Stocks can rip your heart out over the short term. If there is an ironclad rule in the world of investing, it’s that risk and reward are always and forever attached at the hip. You can’t expect to earn outsized gains if you don’t expose yourself to the possibility of outsized losses. The reason that stocks earn higher returns than bonds or cash over time is because there will be periods of excruciating losses.

The stock market is fueled by differences in opinions, goals, time horizons and personalities over the short term and fundamentals over the long term. At times this means stocks overshoot to the upside and go higher than fundamentals would dictate. Other times stocks overshoot to the downside and go lower than fundamentals would dictate. The biggest reason for this is because people can lose their minds when they come together as a group. As long as markets are made up of human decisions it will always be like this. Think about how crazy fans can get when their team wins, loses or gets screwed over by the refs. These same emotions are at work when money is involved.

How you feel about investing in the stock market should have more to do with your place in the investor’s lifecycle than your feelings about volatility.

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Remember, the stock market isn’t the only way to invest money, but it helps us with portfolio diversification, a well-practised strategy for protecting our future wealth.

One of the challenges of financial planning is its complexity. Not only is it mathematically layered, but it’s also fraught with bias and emotional influence. For most of us, we only scratch the surface of about seven areas of financial planning and allow experts to make recommendations and decisions that will hopefully create a better financial position for us in the future.

When it comes to investing (just one area in about seven), there are loads of biases that can either help or hinder the protection and growth of our assets. This makes asset management and investment planning a constantly evolving landscape and requires several types of niche specialists.

Anchoring is a cognitive bias that often comes into play when we are trying to establish the value of something.

This doesn’t only apply to investing – it applies to commodities and services across the board. Every day, we rely on the anchoring bias to help us form a perception of value, from standing in the fresh foods aisle to standing in a second-hand car lot or calling around to find a plumber to fix a leak.

“People make estimates by starting from an initial value that is adjusted to yield the final answer,” explained Amos Tversky and Daniel Kahneman in a 1974 paper. “The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of a partial computation. In either case, adjustments are typically insufficient. That is, different starting points yield different estimates, which are biased toward the initial values.”

This means that we tend to rely too heavily on the very first piece of information we learn, which can seriously impact the decision we end up making. And, living in a world where we have far more access to information than ever before, complicates our decision-making exponentially.

So – can we avoid it? Well, according to Investopedia, not entirely. Here are some ideas they offer to manage our anchoring bias.

Studies have shown that some factors can mitigate anchoring. Still, it is difficult to avoid altogether, even when we are aware of the bias and deliberately try to avoid it. In experimental studies, telling people about anchoring, cautioning them that it can bias their judgment, and even offering them monetary incentives to avoid anchoring can reduce, but not eliminate, the effect of anchoring.

If you are selling something or negotiating a salary, you can start with a higher price than you expect to get as it will set an anchor that will tend to pull the final price up. If you are buying something or a hiring manager, you would instead start with a lowball level to induce the anchoring effect lower.

Ultimately, if we can’t avoid anchoring, we should at least try to use it to our advantage. In financial planning, we have a process called due diligence. This helps us obtain as much relevant information as possible to a specific decision to help us create a close-to-accurate anchor.

One of the early appeals for cryptocurrencies was that they would not be taxed as they are not fiat currencies (yet), in that they are not owned by a country or used for trade inside of geographical tender regulations.

However, as these platforms grow and develop, we are seeing that this is most likely not the case. According to several governments, cryptocurrencies, such as Bitcoin, are classified as “intangible assets” – as opposed to, say, property or currency. 

These definitions differ slightly in different regions, but for the most part, gains or losses related to cryptocurrencies can be classified into three categories or scenarios, each of which could result in different tax consequences:

1. A cryptocurrency can be acquired through so-called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. The “miner” is rewarded with ownership of new coins by verifying these transactions, which become part of the networked ledger. This gives rise to an immediate accrual or receipt on successful mining of the cryptocurrency. This means that until the newly acquired cryptocurrency is sold or exchanged for cash, it is held as trading stock, which can be realised through either a normal cash or barter transaction.

2. Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, which are essentially markets for cryptocurrencies, or through private transactions.

3. Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore the regional barter transaction rules apply. 

While the initial receipt of cryptocurrency from mining is classified as income for tax purposes, revenue services may apply a distinct set of tax rules to the cryptocurrency’s subsequent disposition. Short-term trading to generate daily wages is considered income for tax purposes, but long-term investments (usually exceeding three years) are subject to capital gains tax. 

We are already reading reports of treasuries extending their cryptocurrency audit and detection services by many global media outlets. In addition, some have publicly listed employment opportunities geared explicitly towards cryptocurrency tracking.

According to recommendations, taxpayers who treat cryptocurrency transactions in a way that is inconsistent with their respective tax laws may face penalties. As a result, you must stay up to date on the newest developments in crypto tax legislation if you own crypto.

Dualistic thinking assumes a universe where there are only two opposing, mutually incompatible options or realities. This type of thinking is either/or, good/bad, negative/positive, and has a significant impact on our beliefs and behaviours.

Our development is stymied by dualistic thinking. The sooner we can break free from this either/or mindset, the sooner we can nurture greater success in the workplace and in our personal lives.

This either/or mentality contributes to our fears and concerns by presuming the false restriction that no other choices exist. We might feel confined, perceiving little freedom when we think in this way.

We may feel trapped or powerless in a circumstance when our options, choices, and determination appear to be limited. We tend to react emotionally in such cases, sometimes not even aware of the reasons why. 

Dualistic thinking hinders our personal and professional progress because we rarely allow for a range of options. We rate the situations and people around us on a binary scale. We reduce our capacity to see alternative possibilities by limiting ourselves to only two options.

Our psychological bias is a significant hazard of dualistic thinking. The “snake bite” effect, for example, occurs when an investor has a bad experience with an investment that causes them to be more cautious in future investment decisions, lowering their return potential.

The fear of regret and feeling like we have made a decision that is inherently ‘wrong’ leads to this bias. One way to counter this effect is to adopt a strategy that closely adheres to predetermined investing criteria and eliminates most of the decision-making process on what to purchase, when to purchase, and how much to purchase.

Using rules-based trading techniques decreases the likelihood of an investor making a discretionary decision based on previous investment success.

We create unrealistic expectations when we consider simply “good” and “bad”. Whatever decision you make will have implications, some of which will be unexpected.

Those implications may appear to be a choice between what you leave behind against what you get, or there may be aspects of both that you appreciate. It’s crucial to recognise that it’s often impractical to expect our actions to only have two possible outcomes; we should always look for a third outcome to help balance our expectations.

Once we have realised this, we can concentrate on what appears to be the best course of action for our personal circumstances.

One long-held belief is that lemmings purposefully run off cliffs in their millions. This myth has become a metaphor for the behaviour of crowds of individuals who follow each other blindly, regardless of the consequences. Herd instincts are prevalent in all parts of life, including the financial industry when investors follow what they feel other investors are doing rather than conducting their own research.

A herd instinct is a type of behaviour in which people react to and follow the activities of others. This is comparable to how animal groups react to danger – whether real or imagined.

Following the crowd or herding can lead trends to amplify well beyond fundamentals. Prices can skyrocket when investors flood into ventures for fear of losing out or because they have heard something positive but haven’t done their own due research.

This unreasonable optimism can lead to asset bubbles that eventually burst.

In the opposite direction, sell-offs can lead to market crashes when people rush to sell simply because others are doing so, a phenomenon known as panic selling.

If most people are heading in one direction, an individual may feel as if they are making a mistake by walking in the opposite direction. They may also be afraid of being singled out for refusing to join the bandwagon. Although herding is instinctive, there are strategies to avoid following the mob, especially if you believe you will be making a mistake. It necessitates self-discipline as well as a few considerations:

• Doing your own research is essential; study the facts and data and draw your own conclusions. Once you’ve completed your due diligence, then you can look at other people’s interpretations.

• Inquire about how and why individuals are doing things. Are they making decisions based on the movement of the herd? If you believe it is the wrong decision for you, don’t be afraid to go against the grain.

• If you’re distracted or emotionally charged, whether from stress or external factors, postpone making decisions.

Making investing decisions based on logical, objective criteria and not allowing emotions to take over is a solid strategy to avoid herd instinct. Another option is to use a contrarian approach, in which you purchase when others are panicking, taking advantage of bargains, and selling when excitement leads to overvaluation. As Jonathan Sacks once said, “The wisest rule in investment is: when others are selling, buy. When others are buying, sell.”

At the end of the day, it’s human nature to want to fit in, so resisting the impulse to stray from your plan might be challenging. This is where financial planners step in, serving as a sounding board for your decision-making process.

There’s a story that was told many years ago (it may or may not be true…) about a Microsoft call-centre agent and their call with a deeply irate customer. Having recently purchased a computer that came pre-installed with Windows, the customer called to find out why his computer would not respond.

It goes a little like this:

Call-center Agent (CCA): Thank you for verifying your purchase; how can we help you today?

Customer (C): My computer isn’t responding, and I’ve tried everything!

CCA: Thank you for that feedback. What do you see on your screen?

C: Nothing!! Absolutely nothing!

CCA: Please press control, alt and delete together. Has that helped?

C: No – nothing has happened. I’ve tried all of this already!!

CCA: Is there an error message on your screen?

C: No – the screen is just black.

CCA: Is your screen on? Do you see the power light on in the bottom corner?

C: No – there is no power light on. (becoming more amiable) I don’t think the screen is on.

CCA: Is it plugged into the back of your computer correctly?

C: Hold on, I’ll follow the cable and check. (a few seconds pass) I can’t see behind the computer; it’s too dark.

CCA: Are you able to turn the lights on to check?

C: No, I can’t; we’re currently having load-shedding.

Sometimes, our biggest problems are our most basic problems. And, we can’t always see them ourselves until someone else reminds us. When it comes to financial planning and managing our money, it’s easy to become side-tracked by big ideas, fancy strategies, forecasting and spreadsheets, and overlook the basic starting blocks of budgeting. We miss what’s happening right in front of us.

Budgeting helps us stay connected to what’s happening with our money right now. So – why don’t we do it religiously?

Carl Richards, a regular contributor to the New York Times, shares some reasons for why we allow this to happen.

1- It’s not fun.

True. But remember, as Stephen Covey says, “If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.” Budgeting is how we make sure our spending ladder is leaning against the right wall.

2- I already know where my money is going.

No, you don’t. Sorry. Unless you track your spending, you don’t have a clue where your money goes. Everyone I’ve ever seen go through the process of tracking spending for 30 days usually ends up saying some version of, “I had no idea I was spending that much on X.”

3- I’m not sure I want to know.

I think this is the biggest mental hurdle. The reality is that as we become aware of what and how we’re spending, we’ll find some things that surprise and bother us. Then we have to decide: Do we want to change?

Carl goes on to suggest four ways to get back to the basics of budgeting:

1- Try tracking your spending for 30 days.

2- Don’t stress about what app to use.

3- Just carry around a pen and a little notebook, and each time you make a purchase, write down what you spent and how it made you feel.

4- At the end of the month, go back through your notebook and just notice. Become aware. That’s it.

The glamorous side of managing our money is making purchases that make us feel better – not in tracking our spending. But, the feel-good side of managing our money is in regaining and maintaining control of what we can do with our money, which starts with budgeting.

As Carl said, it’s not about making significant changes. At first, it’s just about becoming more aware and noticing what’s going on, noticing things that we may have missed or overlooked. 

The result is that we will be more mindful and have more control over our money; and that’s worth knowing.

The simple answer is: Yes, we all are!

In a recent blog, we looked at five financial trip-wires and glanced over the term ‘mental accounting.’ Introduced in 1999, it’s a concept that refers to the different values we place on money. These values are often based on subjective criteria; sometimes, this subjectivity benefits us, and sometimes it doesn’t!

Mental accounting enables us to create emotional connections with our financial plan. When we consider investment strategies or risk cover, an emotional connection to the outcome, or the goal, is established and we are more likely to continue contributing money to that account.

The perceived importance of the outcome causes us to view the money involved differently. However, money is the same, no matter where we put it or how we spend it. There is a technical term for this universality of money; it’s called fungibility. Fungibility essentially speaks to the equal value of assets.

We learn about this very early in life – just think about kids in the sandpit who are learning to share. If one has the spade and bucket, and the other has the castle mould, they will very quickly figure out that swapping the mould for only the bucket, or only the spade, is not a fair value exchange. A fair trade would be both the bucket and the spade for the mould. 

As we grow up and start to trade with money, we conform to the commercial conventions of our society. We exchange money for products or services, and if we pay one price for an item in one place, we expect it to be similarly priced everywhere else. If it’s more expensive, we would expect to receive more value for that item.

This is where it gets more complicated, and we learn that value is highly subjective. Something that I consider valuable may not be something that you consider valuable. Mental accounting comes into play, and we assign a different value to inherently fungible items.

In an episode of the hit series Friends, Monica discovers that Chandler (her fiance) has a large amount of money invested that could pay for her dream wedding. Chandler initially refuses to spend all that money on one event because he had other plans for the money, long-term plans that included a family and a home. After sharing these thoughts with Monica, she understands his perspective, and they make a new plan together.

According to Investopedia, mental accounting often leads people to make irrational investment decisions and behave in financially counterproductive or detrimental ways, such as funding a low-interest savings account while carrying large credit card balances.

To avoid the mental accounting bias, individuals should treat money as perfectly fungible when they allocate among different accounts, be it a budget account (everyday living expenses), a discretionary spending account, or a wealth account (savings and investments).

Mental accounting also affects our approach to long-term investing and our risk cover. When we are young, it’s harder to invest for retirement – but as we get older, this becomes a higher priority. When we are healthy and strong, it’s harder to pay for life cover or income insurance because we can’t emotionally connect to the possibility that we will need those products.

There are many other areas where mental accounting skews our perspective, like when we receive a windfall (an inheritance, a tax refund or an unexpected gift) or finish paying off a large debt. The sudden availability of money that ‘we didn’t have to work’ for seems to have a different value than the money we receive through our salary, wages or investment payouts.

It’s not easy to simply say – it’s just money. When we are emotionally engaged in our finances, we need to have the space to talk about our options (like Chandler and Monica and the kids in the sandpit) and have a third party (your financial planner) to help us find a healthy balance.

A rational approach doesn’t mean we don’t enjoy our wealth; it means we can be more intentional with our wealth. If you’re feeling a little money-mental, maybe it’s time we had a chat.

“It’s not in the way that you hold me
It’s not in the way you say you care
It’s not in the way you’ve been treating my friends
It’s not in the way that you stayed till the end
It’s not in the way you look or the things that you say that you’ll do

Hold the line
Love isn’t always on time.”

If you have the tune of Toto’s yacht-rock hit from 1978, Hold the Line, stuck in your head, then you’re welcome! It’s an iconic tune that reminds us that showing love is not in one act or moment – it’s in everything we do.

It also reminds us that we can’t control the timing of events in our life – and this is why financial planning is so important.

From earning to protecting to investing to enduring, most of us want to know that we’re leaving more than just a fleeting memory behind. Most of us want to know that we’ve found meaning and lived a life of purpose, and are leaving our loved ones with means and opportunity.

Creating this opportunity for them is not easy, which is why we need to hold the line. In most financial plans, there are different ways to provide for your family, one of which includes life cover. Even if we have assets and investments that can provide an income after we are gone, expenses and debt need to be paid back first (remember, we can’t control the timing of life events…). 

Taxes and estate costs also eat into these calculations, which is why life cover is beneficial to boost the financial reserves to take care of the responsibilities for which you currently provide.

Holding the line (holding onto your life cover) benefits the integrity of your entire financial plan, but it’s also harder (and sometimes impossible) to replace this cover when you’re older. New risk calculations, amended products, and penalties will have a more significant impact on your net worth should you cancel your life cover early, hoping to start up later in life ‘when things get easier’.

There are a few ways to alleviate financial strain without forsaking this vital product in your portfolio. These have been shared many times before, but it’s always a good reminder to revisit them:

1. Reduce your monthly expenses

Cut back on items that aren’t essential, such as streaming subscriptions and data contracts. Critically evaluate your budget and examine what is needed and what is simply a nice-to-have. Remember, this is not forever; it’s about prioritizing your financial security.

2. Re-negotiate your debts

Try approaching creditors or your bank to negotiate the terms of any repayments. They may be willing to accept smaller sums over a longer period or help you consolidate loan accounts.

3. Negotiate your premium payment pattern

Request to change to an escalating-premium pattern for your life cover, which means your initial premiums will be lower and increase over time. (this could be product provider dependent)

Holding the line includes ‘the way that you stayed till the end’ – and when it comes to life cover, this cannot be more poignant. If you feel like you need some options to release financial tension or want to initiate life cover again, let’s have a chat and see how we can update your financial life plan.

If you’ve ever seen the mayhem from the middle of the trading floor of the New York Stock Exchange (NYSE), you can be forgiven for thinking it’s a warzone! Whilst most stock exchanges around the world now trade electronically, having cleared out their trading floors, NYSE still hosts the traditional tussle of the floor traders’ open outcries.

But this is not the only place where money mayhem can cause a right kerfuffle. Every day, in all our lives, we face financial tripwires that are linked to our choices. Behavioural finance helps us identify and understand these hidden traps. Financial decisions around things like investments, payments, risk, and personal debt, are greatly influenced by our emotions, biases, and cognitive limitations.

There are five ways that our behaviours can hold back the growth of our wealth; call them blindspots or tripwires, they’re often hard to see, and we need to work on them.

Mental accounting

Nobel Prize-winning economist Richard Thaler introduced this idea in 1999. This concept refers to the different values we ascribe to money, based on subjective criteria, that often has detrimental results.

Herd behaviour

This tripwire is easier to understand, but it’s often hard to avoid due to peer pressure. Herd behaviour occurs when we choose to follow the crowd rather than make decisions based on our own analysis. When our friends, family or colleagues are making specific spending and investment choices, it’s not always easy to make a different decision.

Emotional gap

The emotional gap occurs when we allow extreme emotions or emotional strains (such as anxiety, anger, fear, or excitement) to guide our decision-making process. Often our emotions are a prominent reason why we do not make rational choices.

Anchoring

When we create a benchmark in our financial planning that is based on an arbitrary figure or traditional expectations (because it’s what our parents did) and make decisions around that benchmark, we’re anchoring. This is not necessarily negative, but if the benchmark is not realistic for our personal situation or holds us back from reaching our potential – it can be a tripwire for our financial future.

Self-attribution

Self-attribution refers to a tendency to make choices based on overconfidence in our knowledge or skill. Self-attribution usually stems from an intrinsic skill in a particular area. If we are naturally talented or highly skilled in certain areas of life, we can run the risk of thinking our ability to achieve in those areas will flow into other areas. This is seldom the case, which is why we thrive in a community and not in isolation.

Having a financial adviser is a sure way to identify these tripwires in your financial plan and help you navigate them safely to secure a healthier, happier financial future.

When it comes to financial planning, risk planning, estate planning and investing, many of us like to “set and forget”. Our lives are full of things to remember, for work, family and the communities in which we’re involved – often, the last thing we want to review is our financial portfolio.

As a result, it’s easy to forget why we have some of these financial products in the first place. The complexity of financial planning and investing (and the very reason why having a financial adviser helps) means that keeping tabs on changes and updates is nearly impossible for those who don’t work in the industry.

When it comes to short-term insurance, the different product providers are highly competitive and frequently update their rewards or affiliate partners and benefits. This means that comparing one premium with another is not as simple as comparing apples with apples. It also means that if you haven’t checked in on your short-term insurance recently, you could be overpaying, underpaying (and receiving less cover than you need) or simply be paying for a product that is no longer suitable for you.

Whichever situation you find yourself in of these three, it means that your financial portfolio is no longer optimised in your interest. It’s like going to a tailor in your thirties and having your clothes cut and fitted to your measurements, and then thinking those clothes will fit you perfectly for the next thirty years.

We all know that “a penny saved is a penny earned”, and this applies perfectly to the situation of paying insurance premiums that are either too high or not suited to your needs any more. Either – you will be able to save on premiums and invest more now or allocate those saved pennies elsewhere, or – you will be miss-insured and have to pay out more pennies in the event of a claim.

A sure way to reduce the strain on your financial plan is to check in on your short-term insurance at least once a year or whenever there has been a significant global event (like a pandemic or stock-market crash). At these times, changes are made to policies that could affect both the cost and the outcome of your cover. Reviewing them will either free up unnecessary expenses or lock in the benefits that you genuinely need.

Shopping around for better quotes, keeping your credit score in the positive and updating a list of your household items and assets are all good ways to keeping yourself in a stronger financial position. You can easily do this all yourself, but as mentioned above, the complexity of financial planning and related products means that having a financial adviser who can give you independent advice could save you in the long run.