Posted by Robert on October 28, 2013
This is a guest post by Robert, who lives in Calgary and worked as a financial adviser before retiring at age 35. He is married, has three kids and has returned to school with the goal of eventually living and working overseas.
There has been a lot of talk among economists and investors about human biases under the heading Behavioural Economics. People aren’t nearly as rational as economists assumed in their early work at modelling transactions and decision-making. We have predictable tendencies to exaggerate losses, to overestimate our resiliency to risk and to be overconfident about our ability to predict the future.
Our biases make it more difficult for us to be successful investors. How many people, when the market drops, focus too much on their paper losses, panic and want to sell their investments? How many people, when the market crashes, sell at the bottom and swear off investing forever? I know from my experience working as a financial advisor that the (admittedly imprecise) answer is: too many. The money that many people pay for investment advice pays not only for advice on investment opportunities and asset allocation, but also babysitting to avoid selling investments at every market correction, and to avoid getting sucked into enticing investments that offer 17% guaranteed returns (seriously, I’ve seen this), but is simply too good to be true (and I’ve seen it go bankrupt).
So let’s be honest with ourselves. Saving money is hard. We’d prefer to have something now rather than delay our purchase into the unpredictable future. It’s harder for some people than for others. But as long as we’re being honest, there are ways to compensate for the difficulty. As an example, having the employer deduct a certain amount of savings from every paycheque. As an example, a friend was telling me yesterday at his work that most of his colleagues can only have 1% or 1.5% withheld for the company savings plan, despite 100% matching from the employer (free money!). It’s because they live paycheque to paycheque and $100 makes a difference. I wonder if they would be able to increase their savings by 0.5% every six months or every year, without feeling the pain. I also suggested to clients that every time they get a raise, half of it be redirected toward savings. Being realistic allows us to work around our biases.
Facing reality also means knowing that the stock market is going to be volatile and fluctuate, sometimes wildly. In my research, I have found very few good reasons to own a diversified portfolio of stocks and bonds. Sometimes stocks perform far better. Occasionally, bonds perform better, while being far safer. These two investments have different purposes, in response to different investment needs. The benefit to an individual investor of buying a portfolio that’s 60% stocks, 40% bonds is that the ride will be smoother, the individual will have less opportunity to experience “losses” and will be less likely to panic. But in some cases, that can be a very real benefit.
Being realistic and honest with yourself is likely the best way to manage investment risk. Expect a small return each year, expect bad years once in a while, and expect to have trouble saving as much as you’d like. Then find ways to compensate for those difficulties. How honest are you with yourself about your investments? What do you do to compensate for your biases?
Posted by Robert on August 26, 2013
I spent the past week on vacation with my family in Lake Louise and Jasper. In all, we spent around $500. I feel that’s not bad for a once-a-year week-long vacation. And I’d rather spend money on an experience than on stuff. An experience isn’t going to clutter up my house. It doesn’t need to be stored and I don’t feel bad if I never get it out and use it, the way I do with my stuff. In fact, I have great memories and I can always go back and look at all the photos we took while we were there.
The one part of the vacation that cost the most (after the lodging) was a trip up the Jasper Tramway. It costs $80 for the family, and we spent between two and three hours going up the tram and hiking on the peak. If I do the math, that’s really not much more than taking the family to the cinema to see a film. Making that type of comparison, it seems to me like a much better use of money. But I haven’t ever spent that much money to take the family to a cinema, so the comparison is kind of cheating. Rather, I just need to put the cost out of my mind, saying that it’s something we want to do, we can’t possibly hike up the mountain (with our four year old) and we’re not likely to get another chance in the near future.
But I didn’t simply put the cost of the experience entirely out of mind and pay it, consequences be damned. We saved money by camping the first night, rather than staying indoors. It was cold, but it was fun for the kids and it saved $70. We also saved money by going grocery shopping before leaving Calgary, and bringing our own breakfast cereal and lunch foods. We found that the prices at the grocery store in Jasper, while far cheaper than eating in restaurants, were 30% to 50% higher than at home. In the end, I felt that the savings and the splurging balanced each other out and made for an enjoyable and memorable vacation.
Do you feel that spending money for experiences is worthwhile? What would you splurge for and where would you rather save money?
Posted by Robert on August 12, 2013
If there’s one overarching theme to this blog, it’s probably “money as freedom.” There’s nothing wrong with working 9 to 5, or working for “the man,” or even working to age 65, if that’s what you want. But the key phrase here is “what you want.” How many people go coasting through life, never taking a harder look at their assumptions of what’s possible and what they really want for themselves and their family?
Of course, I don’t have the answer to that question. But I do know that in our society, we face some powerful scripts. There seems to be a preferred path for moving through life in North America, and that path is very crowded. If a person doesn’t pay attention, it is very easy to get swept along by the crowd. Finish high school, go to college, get a job, buy a car, buy a house using a mortgage, have kids, buy another car, watch TV to unwind from hard days at work… Did I miss anything? To compete, some people go to a more expensive university, get a better job, buy a faster car and a bigger house.
There’s nothing wrong with this script, per se. It seems to work for millions of people. And it’s impossible to judge anyone who is living out this script by saying they didn’t choose it. But the script isn’t foolproof. There have been problems with unemployment, mortgage rates, real estate prices and increasingly social issues like divorce. The script isn’t working for a lot of people.
This is why I believe that we need to know what we’re working for and why. If the script we have adopted is working for us, great. But we can only know that if we know where we want to go. For a while, there was a lot written about doing internet work from a beach or perpetually traveling. If that’s for you, it may provide an alternate script. But one script isn’t better than another. What matters is knowing what you want from life, and knowing that your actions and choices are moving you towards your goals.
A script only offers a mental shortcut. It is like a pre-packaged way of life. It takes more effort to figure out what you really want, and attune your behaviors and actions to achieving that goal. Luckily, it doesn’t have to be done all at once. You might start by taking up a new hobby, developing a new skill, reading or watching about how others lead their life, taking a month of work to travel or try a different job. But it means being purposeful and exercising your from, a little at a time, to create the life you want.
Are you living your life on purpose? If you could change just one thing that’s within your control, what would it be?