Lifelong Wealth Lessons: “It depends”

January 20, 2022

It and depends are the two most important words in any conversation about you and your money. Your money questions can only be answered if you can provide an honest analysis of your life, your goals, and your personal experiences and family history with money.

Here are a few hard-earned lessons from over 20 years as an investor, an advisor, and a coach of advisors for the 99% of you who admit we still have things to learn about investing:

  • How you behave will almost always be more important vs. where you invest.
  • Short-term emotion is the enemy of long-term returns.
  • “Average” returns are OK – given time they should be much better than just OK.
  • If it seems too good to be true, trust that instinct.

While the experiences are mine, many of the following lessons were inspired by Morgan Housel’s “The Psychology of Money,” Daniel Crosby’s “The Behavioral Investor,” Richard Thaler’s “Nudge,” and/or Carl Richard’s “Behavior Gap.”

 

Lesson 1: Reset the value of financial planning

  • Your financial plan is a compass, not a perfect map.
  • Financial planning is about defining “reasonable” and how much is “enough”: What do I need? What do I need it for? What can I afford to risk? Do I need this risk?
  • Despite what you might hear, Financial Advisors add significant value for fees.

 

Lesson 2: Redefine long-term investing

  • The wealthiest people on our planet were generally born into a wealthy family, or they invested almost everything in themselves and their business idea. (And not always the first idea!)
  • Try defining investing as your participation in the long-term growth of great business ideas.
  • This is different from day trading and short-term returns. That’s speculating, which in and of itself isn’t a bad idea. It simply requires a very different mindset from long-term investing.

 

Lesson 3: Time is on your side

  • The biggest asset in your portfolio is time.
  • Warren Buffett’s average annual return of Berkshire Hathaway 1965 – 2021 has been about 20%.
  • That’s good, but there are managers out there with better results.
  • He made over 95% of his wealth after turning 65 due to the impacts of compounding and time.
  • “Average” returns, given enough time will generate above-average results.

 

Lesson 4: Don’t confuse luck with skill

  • Investing, like a casino, is one place where luck can sometimes outperform skill.
  • We have seen the recent rise of day traders, stock memes, and the do-it-yourself-er, because “investing is easy,” and “cheaper is always better,” right? (Spoiler alert: Wrong.)
  • Financial Advisors will help you focus on behaviour over time, reducing the element of luck.

 

Lesson 5: The only return that matters is yours

  • The 10-year average return of the Dow Jones, or any other index, should be irrelevant to you
  • Your rate of savings will almost always be more important over time than your rate of return:
    • 50% return on $0 is still $0
    • 25% return on $100 is $25
    • 10% return on $300 is $30
    • 5% return on $1,000 is $50
    • 1% return on $10,000 is $100
  • You can control your long-term rate of savings, but very little with respect to short-term returns.
  • You don’t even need a great reason to save. Just start and figure out the reasons later!

 

Lesson 6: Pessimism sells. Stop buying.

  • If you only read news headlines, you’d clearly see that the world is going to the birds, and fast.
  • Pundits, newspapers, magazines, podcasts, etc., don’t attract ratings with messages like “Over time, everything will be OK.”
  • Pause and ask: How does this impact me? Will this really change anything in my life?
  • If you’re worried about true unpredictable risk (e.g., illness, injury, death, etc.) please speak to a licensed insurance advisor.
  • If you’re concerned about market risks, please speak to your Financial Advisor.
  • Ignore short-term headlines and avoid knee jerk reactions – focus on your long-term, diversified portfolio that supports your personal financial plan.

 

Lesson 7: Have some fun!

  • It’s OK to have a little fun with your portfolio.
  • One alternative could be 90% of your portfolio supported by your Advisor and your long-term plan, with the other 10% in a self-directed brokerage account.
  • We refer to this approach as “core and explore,” and there are lots of variations.
  • Use the self-directed account to buy that “meme stock,” or that cryptocurrency, or that can’t-miss idea your neighbour shared.
  • Be smart, have fun, and look for your party stories here. Leave the boring stuff to your plan!

 

If any of this resonates with you, please speak with your Financial Advisor. If you don’t have one, we would be happy to introduce one of our fabulous Libro Coaches. We take a financial planning approach to your life, only utilizing investment products to support your personal plan.

Let’s Make Money Better!

By Paul McQueen

Vice President, Wealth