Thursday, October 25, 2018

Take Care of Your Dreams by Taking Care of Your Investments

If there’s ever a time to get down-right personal, it’s when we discuss our investments with our advisor. 


Whether we are a first time investor or a sophisticated one, the document, which is all-telling and all-knowing about us, is the Know-Your-Client (KYC) application form.  Our personal status, investment knowledge, and objectives are revealed in black and white.  We need to take notice.  We need to care about the contents.     We may think it’s acceptable to fudge some of the information.  For example, let’s use our investment knowledge.  Perhaps we like to brag this up from poor to fair.  In all sincerity, being honest about every detail is critical to our investment success.   

When we take investing seriously, we want to make wise decisions about where we invest our money.  Matching the right investments to our purpose and time horizon is like finding the right partner through a dating service.  If we desire a marriage made in heaven with suitable investments that align with our needs, then our financial advisor needs accurate information about us.

This is where it all begins… We have to know our purpose for investing, the length of time before we will require the money, and, of course, the level of risk we are willing to accept.  Open discussions lead to suitable investment recommendations from our advisor. Even though we may begin our investment journey with a meager amount, the point is our baby steps eventually result in whopping savings when we persevere and remain disciplined.

Consequently, the puck doesn’t stop when our accounts are opened, investments are picked, and the automatic contributions are set-up.  We must diligently review our investment decisions at least annually with our investment advisor.  Life happens.  Our personal and financial circumstances will change as time passes.  Our original investment decisions may need to be tweaked with the changing circumstances.

Here’s the best part. Take advantage of these annual meetings. Our advisor is our accountability partner.  We all could use a dose of motivation and confirmation that we are on the right track headed in the right direction.  Who better than our advisor to give us a pat on the back and congratulate us for taking care of our financial future?  Money matters and so do our dreams.  With our advisor’s help, our investments make our dreams a reality.  This reason alone ensures we should willingly commit to the annual appointments.  Also, with our advisors’ help our investment knowledge will likely increase when we commit the time and energy to learn from our conversations. A favorite analogy is relating this experience to starting kindergarten. Remember what that experience was like. A little scary!  A lot of unknowns!   Eventually we maneuvered our way up to high school and some of us eventually moved on to post-secondary programs.  Scaling the investment ladder can be seen as the equivalent. A little scary! A lot of unknowns, especially with the markets! Eventually we will achieve success with the right investment strategy.    

There’s a second layer of confirmation. Security regulators carefully scrutinize recommendations made to investors.  The primary reason for the KYC (Know Your Client) form is to ensure our hand-picked investments are in sync with our objectives.  When we put our signature on the application form we confirm the information is accurate.  We need to ensure we pay attention and do not dismiss significant details with a casual, “whatever”.  These details are important to the outcome of our investments.        

We should not dread the annual meeting with our investment advisor but rather approach these meetings with confidence and assurance.  We are ultimately taking control of our dreams by taking care of our investments decisions.  

Two resources to deepen our understanding are: the Mutual Fund Dealers Association of Canada’s fact sheet which outlines all of the information our advisor needs for opening our accounts and the Investor Centre’s explanation about the Know-Your-Client rule.

Have any concerns or opinions about taking care of your investment decisions? Leave me a comment below!

Thursday, October 11, 2018

What Influences Our Financial Decision-Making?

Are you looking for an intriguing topic?  You might find it in a report prepared by the staff of the Ontario Securities Commission. This detailed and elaborate study was conducted to better understand people’s behaviour when making decisions, primarily financial decisions.  The report elaborates on Behavioural Insights gleaned from psychology, economic and other research and had this to reveal in its executive summary.

There are numerous factors that influence the decisions that people make.  Behavioural insights (BI) recognizes this and, through a combination of psychology, economic and more recently other behavioural research, examines how people are often neither deliberate nor rational in their decisions in the way that traditional models, strategies and policies assume.

We need to ask ourselves these questions:  “Are we like this?  Are we really non-deliberate and irrational with our decisions?

Gaining a Better Understanding

The primary focus for this study was to offer consideration and clarity in the development of new government and regulators’ policies.  When policy makers are able to better understand people’s actions, choices, and thinking, they are more apt to design effective guidelines to protect them.   

This leads to another question: Do we believe we always make the best decisions for ourselves?”

To gain a better understanding of our own actions, choices, and thinking, we could create a flowchart. This method, which offers explanations for our “Yes” and “No” answers, may look like this.   

If the answer is “Yes”, I assume we may do the following to support our decisions. 

  • All the options would be weighed in favor of one direction or the other.  The costs are calculated.  The “what-if’s” are considered: “Can we afford to wait if we don’t do it now?”   Most importantly, have we considered whether this is the right decision for our family? Is this a “gamble” or a “sure thing”?  Here are some examples: moving to a different province, trading a less-than-a-year-old vehicle for a new one because of mechanical issues, or retiring now or waiting two more years to receive the full-retirement benefit.  

If the answer is “No”, I assume we would understand the impact of our decisions.  Perhaps we are not prepared to make the best decisions, when…

  • We are uncertain and a decision needs to be made. We likely could make the wrong choice.  We could also be forced to rely on someone’s expertise but we would need to trust their expertise. 

  • We are rushed and a decision needs to be made.  We might feel backed into a corner and cave into gut instincts. 

  • We are pressured and a decision needs to be made. A deal might be on the line.  Depending on our response the deal may be a “make” or “break” situation…a sale, a commitment, or a partnership agreement.  We may be forced into a “deal” or “no deal”.  

  • We are people pleasers and a decision needs to be made.  We are placed in the worst spot because we are inclined to avoid offending.  For example, we could do the irrational thing and jeopardize our credit by co-signing a loan for a family member.

And of course, we can always stand on middle ground by being indecisive.  This approach really doesn’t get us very far with our decisions.   We may know someone who does this; and we would rather not act or react in the same way.   

When we find ourselves making inappropriate decisions, then we may need to slow down and evaluate our reasons.    If the government and regulators are concerned about people’s behaviour; and experts are digging for explanations to examine and explain how consumers make decisions, then we also need to take notice of how we make decisions.  We need to evaluate…

How do we deliberately and rationally decide to buy a new vehicle or to retire?

How do we deliberately and rationally decide to change careers or build a new home?

How do we deliberately and rationally decide to ___________ (Fill in the blank with a decision you currently face.)

What affects our decisions today that were not present a year ago, a month ago, or even a day ago?

Making Reasonable and Logical Decisions

We may believe we behave rationally until hindsight tells us differently, like my idea for a U-Pick Raspberry Farm which was shared in the blog post, Deliberate Thinking.

Recently, someone pointed out that people often feel judged and criticized for their actions. This negative view could apply to a number of things they do and don’t do.

In all sincerity, we need to notice whether we habitually question others’ behaviour, especially when money is involved yet fail to look are our own shortcomings.

How can they afford to take an expensive holiday?

I can’t believe they traded their just-like-new vehicle for a newer one.

Why are they spending money on new appliances when there is nothing wrong with the ones they have?

From our vantage point, certain decisions may not appear rational.  There have been times as a financial planner, when I tried to convince people not to withdraw money from their Registered Retirement Savings Plan (RRSP) for other purposes than retirement.  No matter what I said, they were determined to do things their way.  Nothing would change their minds.

What does it take to change our minds?  We like to think we are right when it comes to making a decision. The right decision fits our circumstances and feels good. But I can attest there were times when I lacked the confidence to finalize a decision.  I opted to confer with someone who had more expertise. I was grateful for their opinion and help. Would you do the same? Do you trust a professional to help you?

Considering Possible Influencers

Whether we concur with the report that lays claim to how people are often neither deliberate nor rational in their decisions, this report gives us a reason to examine our behaviour involving money. I have observed that our behaviour is driven by many influencers. I would be interested in knowing if you can relate to these seven influencers.     

1. Emotions.  Good, bad, or otherwise.  There are times our decisions are based on fear.  When the markets tumbled in 2007 and 2008, some people were extremely fearful for their investments, especially their retirement funds.  They panicked and transferred their money from a balanced fund to a money market fund where they felt it would be safer.  They believed they were doing the right thing.  Others were afraid but chose to watch and wait for the market to recover.  They expected the value of their pension plan would return to normal.  They believed they were doing the right thing.  Their patience paid off.

2. Substantial Income. When we have a substantial income, we have the ability to spend beyond our basic needs.  We can afford to travel more, buy more, and give more.  We can lavishly spoil ourselves and others.  Our decision to do so is based on our inflow of income.  

3. Social Media.  Through our social media channels, we see what others own, what others do, and where others go. We are inclined to want to keep up with them.  The notion of missing out on what others have and do drives us to make decisions that might be contrary to the level of our income. This peer pressure devises ways for us to find the money even if we revert to using credit. 

4. Financial Products. Sometimes financial products, with their unique features and benefits, can influence our decisions because they seem like simple solutions. The best examples are:  loans set up at 0% for new vehicles, free payments periods for the first three months on appliances and furniture, or the all-inclusive mortgage loans for other purposes than for a new home purchase.  These loan products entice us.  In some cases, they distract us from making the right financial decision.

5. Time.  The practise of shopping around for the best deal doesn’t work if our time is on a budget.  We simply don’t have the time to investigate, probe, and assess whether our potential purchase is necessarily wise.  The need is great and our time is limited. This could be a deciding factor in making a rational decision.   

6. Education. When we come face-to-face with decisions that we don’t have the knowledge or expertise, we rely on experts to help us make the right one.  We need to trust the “sales person” whether we are selecting one mutual fund over another because of its past performance or one television instead of another because of its quality sound and picture.  Trusting someone else’s authority is an important contributor to the decision-making process.   

7. Past experiences.  Our present decisions can be based on our past experiences. We can run into a brick wall and realize we never want to face that situation ever again.  We elect to make smarter decisions based on our encounters.  The ideal example is being laid off because of a shortage of work in any particular industry.  It is never a matter of “if I get laid-off”, it’s a matter of “when I get laid-off”.  One has a tendency then to stockpile money into a savings account to be better prepared for the potential layoff from work.

Assessing Our Actions

Whether we focus on investment or insurance products, purchase our first home or retirement home, opt to travel or buy a new vehicle, money will be required. Over a lifetime we spend a significant amount of money.  Wayne Chirisa provides us with a thought-provoking view, “Money does not dictate your lifestyle, it’s what you do to get it and how you manage your finances that determines your lifestyle.” 

Based on this, what conclusions can you derive from your behaviour and decisions involving money? 

Are you a deliberate and rationale money manager?  Tell me if you struggle with influencers which affect your financial decisions.