Behavioural finance

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Is your investment ‘broken’?

in Asset classes, Behavioural finance, Financial Plan, Investment Leave a comment
mushroom
How to fix it

If you’re a keen gardener and a bush or tree you have planted isn’t thriving despite your careful consideration to the conditions it likes you don’t just yank it out and stick it somewhere else in the hope it will bounce back. There are things you do first: You examine it, you research it, you treat it and as a last resort you move it… INVESTMENTS ARE JUST THE SAME.

Examine it, Analyse it. In order to examine anything, a diseased plant or a rogue investment, you have to know the basics of what you’re doing or get the advice from a horticulturist or investment specialist. Every investment you have, from savings pocket to retirement savings, must have an objective. What do you want the money for, and when do you want to use it? This simple input will dictate what platform to use, the asset allocation (the blend of cash, bonds, stocks and property), type of investment, whether it should be ‘wrapped’ in a life license, the tax implications and more besides. What are your expectations and are they realistic? Plants can’t be put anywhere – if they need full sun, they will not thrive in the shade. Equity investments need time to ride out economic cycles to really perform – you can’t day trade with them and expect the same results.
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Recentism Investment Bias

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recent2
Understand your behaviour – Grow your wealth

Recency/Recentism – is one of the Behavioural biases (a Cognitive bias) that can wreck your wealth, and is especially relevant in these volatile, ‘late-cycle’ times.

Trying to understand a person’s behaviour is hard enough, as soon as you add money into the equation it becomes infinitely more difficult. This is the first in a series of blogs and articles trying to demystify financial behaviour and put some clear action steps in place to make sure they don’t sabotage your wealth. (At the end of the series I will be putting them all together in an eBook). When you look at the long list of biases (like HERE), many of which you’ll probably recognise in the behaviour of those around you (and you – if you’re honest). Marketers and salespeople make good use of these biases to influence (aka manipulate) your buying behaviour. If you want to inoculate yourself against slick salespeople and irritating family arguments, a better understanding of these biases can help. These biases influence our investment behaviour too, and that can have a devastating effect in the long term. We’ve all heard the phrase “it is not that you’re a bad person, it is the behaviour that is making you look bad” – this is certainly true of financial behaviour.

Financial behaviour extends to every aspect of the ‘wealth equation’ (income minus consumption equals wealth – you can read more HERE if you missed that blog). We let our fears and prejudices stop us earning more income, we feed our ego which impacts our consumption, and we allow biases to influence how, when and where we invest our wealth.

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The Seasons of Wealth – Winter

in Asset classes, Behavioural finance, Investment Leave a comment
Winter
A wintery economy brings chores and opportunities

We are surrounded by cycles, some fast, others so slow we never see a change in our lifetime, but they are there. Climate change, for example, has been happening for millenia – it is nothing new (pollution is though of course). Somehow, every time winter comes round, especially a nasty cold front, we are caught unawares – gas bottles empty, no beanies and only salad in the fridge. The markets also go through cycles, while less predictable in timing than the four seasons, they keep on happening. Right now, for us in the Emerging markets, the winds are decidedly cool and the returns flattening, soon to turn negative for the year-on-year if it keeps up this pace.

Just like the winter season, we can pretend it isn’t happening, climb under the duvet and wait for the thaw, or we can take advantage of the opportunities it will bring.

Review your investment garden for better times in the future
When your garden is looking bleak and all the leaves are gone, it is often a good time to check that your garden plan is on track. Are all your risks covered, are your investments aligned with their objectives and your long-term plan? Many of the shares in our market have been overpriced, and as the market cools you could just pick up some bargains that have the potential to give you really good returns going forward. If you buy equities at the top of the market, it is like buying a ‘ready to eat’ avo, it can turn to expensive brown compost in the wink of an eye.

Keep your perennials alive
Some investments have a short-term objective – emergency fund or a deposit, but most of them are intended to be perennial, be there for many years. Gone are the days of ‘buy and hold’ – even the most robust of perennials have to be kept an eye on – once it is fully mature it is often too late to try and shape it. While your house is considered a ‘lifestyle asset’ and rarely liberates much equity in downsizing – it does do a number of positive things – it pegs your ‘rent’ (no 10% escalation clause – just interest rate changes, up and down) and it replaces paying rent post-retirement, so in effect it is part of your ‘pension’. Let’s put it this way, if you were to retire tomorrow you would need about R5m to generate rent of R20k pm, increasing at inflation for 20 years. Times are tough – but pay the bond first. (Please check that all bond correspondence is going to the right address and not the address on the bond – if you signed the bond before you moved into the house correspondence might be going to the old address – all legal in terms of the small print. Don’t assume because your bank details and statements are going to the right address that this ‘Domicilium citandi et executandi’. If you want to preserve the wealth in your property, buy once and once only. Every time you move you write off hundreds of thousands of Rand of that value.

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Caught in the middle

in Behavioural finance, Financial Advisory, Financial Coach Leave a comment
inthe middle
Surviving financially in the sandwich generation

Change is inevitable, but not always pleasant. Pre-retirees are finding that they are not only supporting adult children (sometimes even grandchildren) but their parents as well, neither of which was planned for. There are some fundamental changes to the norms and values in society that are causing these changes. Youngsters are waiting longer to marry, but cannot necessarily afford to move into their own home – or would rather live ‘rent-free’ and spend their money elsewhere. Marriages are failing at an unprecedented rate, and these split families can often not go it alone on one income. The incidence of ‘single parents’ is at the highest level ever. There is also the demographic issue that retirees are living longer, often much longer than they ever have and their retirement funds often run out, so they have to fall back on their children for support.

Whatever the reasons, at a time those would-be empty nesters should be ‘accumulating’ retirement funds, and have the mortgage bond paid off, they are having to incur expenses both to look after children and parents, both of which can have a devastating effect on their own pensions. There is no doubt that this trend will continue, and as longevity really kicks in, could get even worse.

This pressure of being financially sandwiched between children and parents needs to be planned for – both financially and emotionally. There are also some ‘soft skill’ changes that you can start implementing that don’t usually fall under the ambit of financial advice, but quite frankly they should.
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Savings and Social Media

in Behavioural finance, Debt, Investment Leave a comment
silent saving
Saving is silent, consumption is conspicuous

At the most basic level, the only way to grow wealth is to earn more than you spend and save the rest. If you can get that wealth equation to work for you, then you’re not going to have to worry about financial independence at any time in your life, but we all know that life happens, and more importantly – emotions happen. Humans are complicated, add money into the equation and it really becomes a mystery. Money has the power to completely change someone’s character, and let’s face it, it is even one of the major motivations for murder. We all have a ‘money mindset’, and often that is deeply entrenched in how we’ve been brought up, or the challenges we have had to face getting to this place. The past doesn’t always stay there, it lives in your mind and can influence everything you do, positively or negatively. That doesn’t mean to say that that mindset cannot be changed, the brain is a powerful thing, and more importantly it has plasticity, the ability to grow new connections all our life. We might have the most neurons we ever are going to have at birth, but considering we only ever use 5% of that brain, we have billions of ‘spare parts’, so we can make new pathways and those neurons can grow new connections all the time.

Building up a habit is the equivalent of walking a well-worn path in the brain, so deep it can become a rut. When we’re out and about doing our daily thing, we naturally walk down paths, they are easier and more comfortable – the same with our habits. We are often oblivious to our habits – how we dress, eat or talk. We all have money habits that we are probably just as unaware of, and most of those are wrapped up in emotion. Do you get a sinking feeling in your stomach at the beginning of the month when the cacophony of notification after notification signal the decimation of your bank account? There is a very good reason stores have payday specials – it isn’t that we are all looking for a great deal, we’re often looking to get a retail therapy high – because we deserve it.

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Prioritise without FOMO

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priority
Eenie, meenie….

There is always something that is at a premium – it could be time, space or money – and it is all about making choices so that you can keep all the balls up in the air and your dreams on track. These variables can also be traded off against each other. If time is at a premium, you could pay someone to do that task for you, if you run out of space, you can buy more, if you run out of money, you can use some time or space to make more. It’s all about balance and choice – and because money always enters into the equation somewhere, your wealth is impacted, either by consuming more, or earning less.
Now that we’re coming into the silly season it’s a good time to start getting your priorities right for the year ahead. By all accounts, it could be a tough year, and there certainly is a lot of uncertainty in the economy and politics. Inflation is creeping up, mostly because of the weaker Rand. Treasury is all tapped out of tax-payers funds (we think, but they may not), so Eskom are more likely to be granted their 18% increase than getting a bail-out or told to be more efficient – so keep looking at going off-grid and saving both energy and water. The Medical Aid tax credit is more ‘low hanging fruit’ that could bite the dust on 1/3/2017. Reign in your Medical Aid spending by combining a lower plan with Gap cover and if you’re on a family plan with one person using the lions share of your plan, look at hiving them off into their own plan.

If your priority is to accumulate wealth, there is no magic trick – you have to consume less than you earn. That is it. You can prioritise earning more, or by spending less – and of course looking after that wealth properly.
One important aspect of getting your priorities straight, and having half a chance of making them succeed, is that you and your partner have to have to be aligned, especially when it comes to consumption. Money may not be the source of all evil, but it certainly is at the root of more than half of rocky marriages – with toxic in-laws coming a close second. You might get away with running a dictatorship in the garden or kitchen, but when it comes to retirement, if you are pulling your wealth in opposite directions, it is going to end in tears.

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