All posts by Graham Bodel

Starting is Hard, Doing it is Easy: 9 ideas to get you started

Posted By Graham Bodel | October 19, 2016

Starting is hard. Doing is easy. Even when it comes to the hardest things, starting is harder than actually doing the hard thing.

For the most important things, or the things where we have the most to gain, starting is the hardest thing.

If things are really easy to do, if they’re important, starting is hard.

Why is that? Maybe we’re afraid of the consequences if we fail. Maybe we’re afraid of the consequences if we succeed. After all, what would we fret about all day if all our “to do’s” were done? Who knows where or why but as the proverb goes, “there is an enemy within.”

And if this enemy shows itself in areas which are important or where we have the most to gain or lose – it probably manifests itself as often as ever when it comes to the following:

relationships
personal fulfillment
exercise
diet
finances

These are all big areas where we could stand to gain a lot if we get things right! And the longer we delay starting, the more it stresses us out – we sit in a paralytic trance, waiting for inspiration to hit us and it just never happens.

Perhaps breaking larger goals into smaller, more tangible steps might help, or at least it might trick you into doing something that sends you in the direction of progress. While we don’t proffer advice in many of the above areas and in fact struggle as much as anyone, we think the following smaller steps might help get you on the road to sorting out your financial house. We’re sure there are more but here’s 9 to start:

9 smaller ideas to move you towards getting your finances in order

1.) Make sure you have an up-to-date Will, Power of Attorney designation and Health Directive.

2.) If you have people that depend on you, get insurance to make sure they’re taken care of if something happens to you – term life insurance is relatively cheap and pricing is fairly standardized.

3.) Pledge allegiance to the following mantra: “By far the most important thing I can do to ensure long term financial success is to live within my means.”

4.) If you have children, be sure to open a Registered Education Savings Plan (RESP) and invest enough to get the maximum Canadian Education Savings Grant (CESG)….free money from the government (need we say more?).

5.) If your company has a retirement savings program with matching contributions, it’s usually a good idea to contribute enough to get the maximum match.

6. ) Open a Tax Free Savings Account (TFSA).

7.) If you have investments, grab a pen and piece of paper and write down what you’re invested in, why and how much you pay annually in fees.

8.) If you can’t do number 7 without turning on your computer, educate yourself – we recommend the following Sensible & Concise Investment Books

9.) If these steps still seem overwhelming, find someone qualified and independent to help you.

Postscript – if you’re interested in digging a little further into the enemy within, please read Steven Pressfield’s The War of Art. He calls the enemy Resistance and it’s very real and very, very scary…..

Graham Bodel is the founder and director of a new fee-only financial planning and portfolio management firm based in Vancouver, BC., Chalten Fee-Only Advisors Ltd. This blog is republished with permission: the original ran late September here.

Four psychological biases investors must understand

Posted By Graham Bodel | September 21, 2016

In our last post we highlighted that behaviour might just be the biggest source of trouble for investors. People just aren’t psychologically wired to make investment decisions that are good for them and often do things that are potentially harmful.

Our brains have evolved to create protection mechanisms that in many instances are helpful – just not when it comes to investing! The subconscious creates short cuts designed to save us time when making decisions and to protect us from pain, both emotional and physical: basically, these short cuts help us perform better in “fight or flight” situations. While many of these biases and their implications for investors have been documented by the likes of Daniel Kahneman, Amos Tversky and others, we think the following four stand out:

1.) Familiarity Bias

We tend to stick with what we know, whether that is products we buy, places we frequent or stocks in which we invest. Presumably this heuristic evolved over time to help us make quicker decisions and keep us safe but when it comes to investing it can have the opposite effect. For example Canadian investors tend to overweight their portfolios towards Canadian stocks, a common phenomenon globally but Canadians are among the most extreme examples of what’s known as “home bias.”

While Canadian investors might feel more comfortable owning the shares of companies they read about in the news most often and that are closely tied to our own economy, from an investment perspective they are taking on unnecessary risk by being overly exposed to specific companies in the oil, mining and financial sectors. Canadians would be better off from a risk and reward perspective if they were to diversify more outside of Canada.

2.) Recency Bias

We tend to remember things better that happened more recently than we do things that occurred further back in time. If you look at expert forecasts from Wall Street analysts going back in time, they tend to forecast very high returns just at or following market peaks (like the internet bubble) and low returns following market bottoms (like during the 2008/2009 financial crisis): clearly not very helpful and if so-called experts fall victim to the same biases, what chance do the rest of us have? Markets are volatile and move in cycles: anchoring on recent trends or sentiment might lead us to make decisions that result in the opposite of what’s good for us.

3.) Overconfidence Bias

Daniel Kahneman believes this to be the most dangerous of all behavioural biases and the most difficult to overcome. Just like driving ability, people tend to believe they have a better than average ability to pick outperforming investments or investment managers. This bias leads people to ignore overwhelmingly convincing evidence, often at their peril.

For example, despite the fact that data shows that paying high fees for active investment management leads to lower returns on average and greater uncertainty of outcomes, people continue to try to beat the market or find winning investment managers. (Full disclosure, Chalten Fee-Only Advisors espouses an evidence-based low-cost, largely passive investment philosophy!).

4.) Herding

It’s a lot more painful to be wrong on your own than be wrong when everyone’s wrong. Surely the herding mentality stems from some innate desire to feel included, to avoid being exposed whether right or wrong. The result of herding in the investment world is that once trends develop there tends to be a “bandwagon effect” that becomes difficult for many investors to resist. “Fear of missing out” or FOMO as it’s popularly acronym-ed these days can drive individuals to make irrational investment decisions they might normally avoid if deciding independently.

The net effect of the above is that people make investment decisions that are harmful. Often the result is that investors buy into euphoric market peaks and sell out at the bottom of market panics. It is no surprise that studies show that investment returns earned by individual investors are not only lower than market index returns but lower than those of the mutual funds in which they invest: investors just get in and out at the wrong time.

And if it’s not enough of a struggle that we have these psychological biases to battle against, most of the financial media and investment industry use communication and advertising practices that are specifically designed to exploit all of our psychological pitfalls!

How can you win? To begin with, develop a investment plan that fits in with your overall financial plan. Define parameters that address your ability, need and willingness to take risk and then use your plan as an anchor (in this case an anchoring bias is OK!) to keep you on track and avoid being swayed by both external noise and internal psychological biases.

Investing isn’t about hitting home runs but staying out of trouble

Posted By Graham Bodel | September 1, 2016

People are often surprised when we say that successful investing does not mean you have to “beat the market.” Instead, successful investing is simply that which allows you to meet your financial goals.

Trying to hit “home runs” by picking hot stocks before they jump or timing market swings are activities more aligned with speculating than investing and may actually decrease your chances of meeting your goals. Ultimately, success is less about swinging for the fences and more about staying out of trouble.

Unfortunately, trouble can manifest itself in many ways. The most common troubles that can trip investors up are:

High and hidden fees

Canadian mutual funds have among the highest fees in the world – high fees detract from investment performance and over a long period of time can significantly erode your savings nest egg.

Lack of diversification

Should I invest a lump sum all at once or stagger it over time?

Posted By Graham Bodel | August 16, 2016

“Should I invest a lump sum now or drip it into the market over time?” This is a question we’re getting more and more often. As usual, the answer is not straightforward and of course … it depends.

Despite the declines last year and the early part of this year, North American stock markets seem to have continued their upward march and are now at peak levels. European and Asian markets aren’t as close to peak levels but nonetheless investors are jittery and not sure if now is the best time to invest.

The US election is pending, Brexit implications are still playing out and the news generally tends to be doom and gloom. It’s understandable why people might hesitate if they have a lump sum of cash sitting on the sidelines and are unsure if now is the best time to put it at risk.

It’s not only about expected investment returns

There are two distinct views on what to do with a lump sum.

The first is that it’s best to invest right away.

The second is that it’s best to spread your investment over time, engaging in what is commonly referred to as “dollar cost averaging”. Dollar cost averaging might involve splitting your lump sum into four equal tranches and investing one tranche every three months over the course of a year. In doing so, you’d smooth the impact of market volatility, maybe missing some good upward trends but also maybe avoiding putting all your money in at once just before a market crash.

What does the evidence say? The academic research tells us that trying to time the markets is futile and at any given time we can expect a future positive return on investment. After all, the market generally goes up, in fact according to Jim Yih of Retire Happy the annual return of the TSX stock index was positive 73.9 % of the time between 1920 and 2010.

So the odds are in your favour that you’ll be better off by investing now – certainly not guaranteed but expected to be positive. Dimensional Fund Advisors (not that Nobel prize winners are always right but but this group has a strong evidenced-based approach to investments) say the following on this subject (from its website):

“Standard financial analysis says dollar cost averaging is suboptimal. If you focus only on your investment outcome, investing a lump sum immediately lets you construct the best portfolio you can today; slowing the process with dollar cost averaging just keeps you in something other than your best portfolio until you are done.”

Sensible and supported by good math I’m sure … but not the whole picture. They also go on to say:

“Behavioral finance provides a different perspective. Because of the difference between the way people react to errors of omission and errors of commission, dollar cost averaging may give investors a better expected investment experience.”

Essentially what this means is that while purely from an investment perspective the expectation is that one would be better off investing a lump sum today, it is not a certainty and when decisions have to be made when uncertain future outcomes are at stake psychology enters the equation in a big way.

An active decision to invest now followed by an unexpected poor outcome might scar an investor from making future beneficial investment decisions. Surely there are many people who, scared and scarred by the market carnage in 2008/2009, sold out at the bottom and have remained on the sidelines through the subsequent rally.

Or imagine if you’d invested a large lump sum a couple of weeks before Black Monday in 1987 instead of smoothing it out over the following year or so. You may find yourself hesitant to ever put money in the markets again! Investors that are liable to suffer extreme regret from their own active decisions that turn out to be wrong (errors of commission) may find that spreading a lump sum investment over time eases the blow sufficiently to keep them invested and on track with their investment plan.

Figure out what kind of investor you are, make a plan and stick with it

Market crashes don’t happen very often and at any given point in time investors should expect a positive return. This doesn’t mean that behavioural/psychological forces aren’t real and powerful.

So what are investors to do? To begin with, investors would be very wise to spend some time considering how they might react to various market scenarios – what kind of investor are you? Are you unphased by market volatility and immune to external pressures like the press and market pundits? Do you feel really nervous making a decision under uncertainty?

Try taking a risk survey or two to help gauge your willingness to take risk relative to other investors – a sort of investing gut check. Try to imagine yourself in these situations and practice how you might feel and react.

Lastly, put a plan in place ahead of time – take the decision out of your hands – blaming the plan might be psychologically easier than blaming yourself if things don’t turn out exactly as expected.

Decide now what the best course of action is for you and document it in a well thought-through plan. Then make sure to remember it’s often when the plan feels most uncomfortable that it’s most important to stick with it!

Crossing two thresholds: ETFs and negative-yielding debt

Posted By Graham Bodel | August 2, 2016

A couple of interesting round-number thresholds in the finance world were crossed recently and we thought it worth pointing out!

1.) Canadian Exchange Traded Fund (ETF) aggregate assets under management reach $100 billion in May:

ETFs in Canada continue to grow, offering investors an increasing variety of low cost and transparent investment options. According to Atul Tiwari, head of Vanguard Canada writing for the Findependence Hub, the increasing importance of ETFs in Canada can be attributed to 4 trends (our comments in italics):

The rise of indexing – Canada is still way behind the US in terms of adoption of low cost passive investment options but things are changing.
Increased competition – The number of ETFs and number of ETF providers has grown significantly over the last 8 years.
Greater transparency and awareness of investment fees – individual investors can now assemble a low-cost globally diversified portfolio for 1/5th of one per cent or lower.
Fee-based versus commission based products – unbiased fee-based advisory services tend to favour lower cost, more transparent investment products like ETFs.

2.) Global sovereign debt trading with negative yields surpasses $10 trillion globally:

Yes, negative yield means that if you invest in a bond and hold it to maturity you will end up with less than your initial investment – not a very attractive proposition for investors. While central banks continue to try to spur risk taking, investment and economic growth by lowering rates, investors continue to thwart these efforts by demanding even more sovereign debt. Interestingly, the result is that near-term returns for government bonds have been positive as interest rates have continued to come down.

With interest rates so close to or below zero, bond prices are very sensitive to rate changes. The resulting near-term positive absolute return is offsetting the prospect for negative yield longer term. Even some corporate bond issues are being traded at a negative yield. We are breaking new ground that hasn’t yet been well hypothesized by academics or tested by industry practitioners. While this situation is unlikely to go on forever, it’s very difficult to try to guess what will happen next (or when rate increases may happen) and in the US there is new uncertainty over when the US Federal Reserve will resume its indicated rate increases.

The ETF milestone is a positive indication that things are getting better for Canadian investors in terms of fees and transparency. The negative yield milestone reminds us that investors still sometimes have to make choices in the face of extreme uncertainty. Perhaps the best we can do is use some of those low-cost ETFs to create diversified portfolios to dampen the impact of uncertainty wherever it shows up.

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