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By Aman Raina, Investment Coach, Sage Investors
Special to the Financial Independence Hub
In Part 1, I shared some thoughts on a recent report by the Ontario Securities Commission (OSC) outlining the challenges the financial services industry is having in getting Millennials to invest. The OSC report had a great opportunity to address those investing pain points, but like so many financial literacy initiatives, the messaging is not clear, consistent, and understandable. The report identifies solutions, yet they are separate and not integrated and use a lot of industry jargon that people just won’t connect with. They emphasize processes over results. What is the outcome we want Millennials to achieve with investing?
Another way?
In this post, I’d like to share from my experience as Investment Coach and as someone who works with people to develop their investing competencies, some approaches that I found have better motivated people and not just Millennials into becoming more engaged with investing. They address the pain points people have with expressed about investing which include; being scared of investing, feeling overwhelmed by the process, feeling paralyzed when trying to make a decision, and not knowing how to start and take that first step. These are my takes and perspectives. They are by no means the most definitive and all encompassing.
The First Step: Define the investing path
The OSC report identified taking the first step in investing as a major pain point for people. For most people, after they have the epiphany that they should start growing their savings and invest, the most common series of events that occur include opening a brokerage account, buying some books or researching investing on the Internet or simply doing what their peers are doing. They buy a few stocks and some work out and some don’t and that’s where the fear pain point comes in.
The default for investing seems to be buying stocks, but does this really apply to everyone? In Part 1, I said that investing can be a very boring, repetitive, and time consuming process. Investing in stocks requires a major time commitment to analyze and evaluate stocks and managing the portfolio. For a lot of people, they really couldn’t be bothered to learn about investing because they have other more pressing priorities in their life … and that’s OK.
There are different investing paths we can take but ultimately we want to be on an investing path that compatible our life situation. If I don’t have the time to invest maybe I should consider working with a financial advisor, maybe use a robo-advisor service. Maybe buying a basket of Exchange Traded Funds (ETF’s) is a better path than buying individual stocks.
Why are you investing?
It is critical that at the people define right away the appropriate investing path they want to travel. It begins with defining what the end of the path looks like (Why am investing?) as well how the road will be travelled. Will I travel it alone (Do-It-Yourself) or with someone else?
Once you’ve been able to answer these questions and defined a path, then you will have defined and reduced your scope of investments that you will use and begin work on building your investing competencies. Why learn about investing in stocks when you will be investing in ETFs?
The investment industry doesn’t really take the time to work with people on defining their investing path because they established a default that people that come to them want to invest in stocks when in reality they may have no interest or tolerance for it. The starting point is such a difficult pain point for many because once they begin to follow an investing path that was not compatible with their life and quickly they fell off it and into a ditch, it becomes harder to emotionally get back at it. These type of conversations need to happen before opening a broker account or signing up for an investing course.
Building investing competencies
I view financial literacy to be more about building competencies, more specifically investing competencies. From my experience, the people that have this investing thing pretty figured out possess three competencies. My role as an Investment Coach is to help people develop these investing competencies.
Competency 1: Education – Principles versus Formulas
Once we have defined an investing path, we can target our learning to focus on developing our investing competencies in those areas. If we are committed to investing in individual stocks then we should focus our education on learning that area. Most investing education focuses on the mechanical aspects of investing and those mechanics which involve formulas, spreadsheets, and math trigger people’s pain points of finding investing overwhelming.
When we learn investing from this perspective it becomes more of an information transfer. While these are important components, I have found that people feel less intimidated and retain more knowledge when you take a more principles-based approach to investing. We live in a capitalist society but what does that mean? Most people don’t understand how wealth is created in our society.
Amazon did not become a trillion dollar company just like that. It went through an evolution that all businesses go through with various levels of success. Having an understanding of these investing principles of what drives stock prices can lay a better foundation for learning the mechanical components. Principles stay with you. They are sticky. They are easier to understand. Mechanical components can be tweaked and modified and improved over time but the core is always there. I have found introducing people to investing principles at the outset to be more effective in teaching the mechanical concepts that make people feel like a deer caught in headlights.
Behavioural part of investing is key
While most of the investing education focuses on the mechanical components of investing, I have found that the secret sauce that enables successful investing comes from understanding and integrating the behavioural aspects of investing.
We may know all the formulas and charts, but often it is our emotions that cloud our judgment and impair our ability to make successful investment decisions. It is this constraint that makes investing at times more of an art than a science. Each of us every day are in tug of war with various behavioural biases that can negatively impact our decision making. While we cannot eliminate these biases, we can manage them better. The investment industry and traditional educational institutions focuses more on industry jargon oriented mechanics rather than the behavioural-principles side and I think it is a big reason people become intimidated by investing.
Competency 2: Engagement – Practice, Practice, Practice
People are fearful of investing because they simply don’t do it enough. At most, people are actively looking at how their money is working when they receive quarterly statements and even then they have a hard time understanding if they are going in the right direction because they get bogged down in industry jargon.
We don’t commit enough time to learn and practice investing. In order to become proficient in a skill we need to practice regularly. A lack of practice leads to a lack of commitment that provides very few opportunities for meaningful feedback. As a result there is a greater probability that we will not develop the skillset, literacy, or self-awareness to make successful investment decisions. Technology has disrupted investing in good and bad ways. I think that technology can be quite useful in providing people with timely and meaningful feedback about their investing decisions to improve their financial literacy.
Most financial literacy programs are simple information transfers. Information is presented. Students take it home and there it sits. The Internet is mother of all information transfer vehicles. There is often no application and whatever practice is offered is theoretical and doesn’t apply to the student’s real-time situation. Often we end up talking around investing rather than rolling our sleeves and getting into the issues and problems we’re facing.
We don’t do enough investing. The investment industry’s response is to create simulated trading environment because unfortunately it is not interested in practicing with their clients so they are left to their own devices. Whatever investing path is chosen whether an active or passive one, we need to be engaged in that process to develop our investing competencies and overcome our fear of investing.
Putting it together: The Investing Playbook
Improving our knowledge of investing and engaging in it more are critical investing competencies we are constantly developing and building as we travel down our investing path. That’s all fine and well, but we need a roadmap, a plan, or what I like to call a playbook for when we are travelling down that investing path.
Having a playbook keeps us focussed on the long-term financial goal and keeps us disciplined and lowers the chance we fall off our investing path. The industry is very good at creating sophisticated investment plans that show all kinds of fancy tables and charts.
Again, the problem is the plans do not speak to the investors pain points and are often expressed in industry jargon that clouds the message. We need to develop communication tools and engagement tools that are jargon-free and consistently present clear messages and feedback on how we are progressing in our investing path. The best way to provide clear messages is to use the language the people are using that they can understand and relate.
Competency 3: Outcome = Empowerment
When we increase our education and literacy competencies and when we start practicing and engaging in the process of investing, another competency will develop which is empowerment. The more we engage and practice making investment decisions, the more experience we will get and that leads to confidence and independence.
Confidence does not mean chest-thumping and trash talking. Confidence implies people have developed a comfort level for investing and a process that is working for people. When you make decisions, you don’t hesitate because people have overcome the pain point of paralysis. We become independent. At the end of the day isn’t that the goal of becoming financially literate? To achieve a level of independence and improving our chances of achieving financial freedom?
There are so many ways to get there and I’ve been incorporating my own version of this these concepts into my practice. Whatever way we choose if we want more people to get into investing, the resources, tools, and support must be in a format that has jargon-free messaging, emphasizes principles instead of formulas, addresses the pain points people feel about investing, focuses on results and is customized for the individual not a demographic.
I don’t believe that these elements are demographic specific. A lack of engagement in investing is not just a Millennial issue. It impacts everyone because we are all wired in the same way and face the same pain points and uncertainties when it comes to investing.
Defining an investing path. Developing investing competencies. Incorporating a framework or playbook. Achieving financial independence. These elements build upon each other. They’re tangible. They’re relatable. The people who I’ve seen become successful investors have in one form or another followed this progression and are continuously improving upon it. It’s something that seems to work better when developed at a grass-roots, individual level instead of a macro level. The more we can build these type of integrated support and educational building blocks the better I think our chances of making investing great again … now!
Aman Raina is an Investment Coach and Founder of Sage Investors. Aman helps people who want to be achieve financial independence by teaching and engaging with them on how to make more educated and successful investment decisions so that they can achieve financial freedom with confidence.
Aman can be reached through his website (www.sageinvestors.ca), Twitter (@sageinvestors) and Facebook. This blog originally appeared on Aman’s website and is republished on the Hub with his permission.
Part 1 was insightful and informative. Part 2 was vague and therefore a disappointment.