Although trading platforms have gotten easier and news has multiplied, money management has never been so difficult.
The advantage of self-investing is that you reduce transaction costs for executing trades to a minimum. There is a lot of free financial advice on the web that can help you make decisions about the investments you buy, hold, and sell. It is very easy to get information and it is very easy to transact through discount brokerage accounts – maybe too easy.
After over 20 years in financial services, one thing I’ve learned is that managing money doesn’t get any easier. Although trading platforms have gotten easier and news has multiplied, money management has never been so difficult.
1) Types of news they follow
Two decades ago, it was common to review analyst reports and focus primarily on company-specific news. Fast forward to today, we have a variety of sources of information to digest. Media reports, social media, special interest groups, pressure groups, all of which may or may not be biased. Fake news and manipulative business practices are also present in the cracks. All kinds of news have spread at an alarming rate that did not exist years ago. Deciphering fact from fiction is as important as determining whether the news will have a material impact, or is it just a headline? Is the news irrelevant to overall revenue? Does the story sound horrible but is it really just a drop in the bucket?
2) surrender to emotional cycles
If you look at the typical bullish cycle of the markets, it usually begins with hope, relief, optimism, excitement, thrill and then climaxes with euphoria. The descending cycle includes anxiety, denial, fear, hopelessness, panic, surrender, discouragement, and depression. The reason these cycles have names is because history repeats itself. Every time we hear people say “this time it’s different” – it’s no different. People who manage their own money will continue to sell at low points in the market. There are many studies on the psychology of money. When your investments start to drop, your fight-or-flight instinct kicks in. Professional fund managers and the wealthy will always benefit from buying at lower levels. One of the main reasons for working with a portfolio manager or wealth advisor is to make sure that you aren’t doing anything irrational at the wrong time.
3) try to time the markets
It is often very demeaning when trying to time the stock market. In practice, it seems like a great idea to sell all of your investments when you feel they are at higher levels with the buyback plan when they are going down. What usually happens is that the investments keep increasing and the do-it-yourself investor finds himself scratching his head and wondering what to do next. The result is that the money is held for a long time and is not even invested. Missing out on some of the best days in the stock market can have a big impact on your long-term returns.
4) Failing to take a disciplined approach to rebalancing
When managing their own investments, many independent investors don’t take their profits when they should. Taking a disciplined approach to rebalancing may force you to buy low and sell high. By having this discipline, you will reduce your profits from the companies that have outperformed and allocate the proceeds to the companies that have fallen behind. While it may seem counterintuitive, in the long run it is essential to have a disciplined approach.
5) Pay no more attention to their lives
I have often told people about the number of hours it takes to save money and build up a nest egg – it takes a lifetime. It’s a mystery to me why people don’t put more effort into making sure that the money they’ve spent a lifetime earning is managed with the same, if not more, energy. While you are working hard to make money, is the money you have already earned making money for you as well? If you don’t have the time to properly manage your savings, it’s important to make sure you have someone to do it. Over time, managing your nest egg should become your most important financial goal.
6) Do not follow the advice of professionals
Working with a financial professional reduces stress in the lives of our clients. As our clients age, their desire to make complex decisions decreases. When the markets enter times of uncertainty or volatility, it is nice to be able to meet with an advisor to discuss changes to the portfolio, if any. When we work with couples, we encourage both to come together. Together, we can define the risk tolerance and investment goals for each account. We help educate our clients on what to expect with different options. Then we also help look at the markets versus the portfolio. Having a benchmark understanding and tools to compare your performance against the markets helps you when looking at returns.
7) Lack of a total wealth plan
Financial challenges are one of the main reasons for disagreements with couples. Too often we hear of couples arguing over money, or just not talking about it at all – both are obviously not good for a healthy relationship. Having an independent manager who helps create a total wealth plan and budget templates can reduce the financial pressure on couples. We try to start conversations about money and create a cohesive set of goals that couples can prioritize and achieve.
8) Random approach to retirement income
A few decades ago, retired people could simply set a ten-year bond scale. Interest rates have been normalized and at significantly higher levels than what we see today. Each year, interest income would be credited to the account and, when any bond matured, we would set aside a portion of the value due. The rest of the funds were used to buy a ten-year bond. The effort that went into managing the investments was minimal: a few small stock trades and a few bond trades per year. Today, many retirees cannot live on the low returns currently offered by bonds and guaranteed investment certificates. This is especially the case with inflation rates at 30-year highs. The result is that today’s retirees will have a much larger share of their investments in dividend-paying stocks. The larger the share of equities, the more important it is to have a skilled portfolio manager who oversees the markets and makes sure that you are getting the cash flow and overall returns you want.
9) No risk management strategy
Often times, couples don’t communicate as well as they can when it comes to financial matters. In some situations, investment accounts are located at different financial institutions. One person may have an investment professional, and the other takes the “do it yourself” route. Tracking transactions and managing risk is difficult when investments are spread across multiple financial institutions, especially when some are professionally managed and others are not. Risk is not a bad word; However, we often see self-directed investors taking unnecessary risk with no potential for upside returns. We structure the portfolios with the aim of managing risk in a way that improves overall returns.
10) Complete avoidance of the tax advantageous structure
Self-employed investors are often unaware of tax treaties between countries and their impact on the types of investments that should be held in a tax-free savings account, registered retirement savings plan, or non-registered account. One of the first things we do when we start working with a client who previously made their own investments is to make sure that the placement of the investments is corrected. Always be careful when looking at investments that pay dividend income, foreign income, interest income and capital gains. We are often able to change the location of certain investments between accounts in order to improve the after-tax rate of return.
Kevin Greenard CPA CA FMA CFP CIM is Portfolio Manager and Director, Wealth Management within the Greenard Group at Scotia Wealth Management in Victoria. His column appears weekly on timescolonist.com. Call 250-389-2138, email [email protected] or visit greenardgroup.com/secondopinion.