Issue #7 – 16th August 2019

3) Control over their time and their life

Being in denial, wishful thinking and believing your own ‘BS’ really works well … until it doesn’t!

When it comes to money (assets, property, direct shares, business, Kiwisaver and the like), most people do not have enough – ever.

Some people are in denial about the need for money and that somehow everything will all just work out fine. 

There are also those in this category who have convinced themselves (and anyone else who will listen) that you do not need a lot of money to be a good person and anyway, when you are older you do not have the same amount of expenses.  So, they reason, you can live on the proverbial ‘smell of an oily rag’, so to speak and therefore no need to get carried away about “money”.

Some suffer the delusion of wishful thinking and that, for example, what they are doing now is all they need to do or is all they can do.  They argue that they are pretty much on track and that there is “nothing broken”.  Therefore, no need to look – nothing to see here!

Then there are those who are quite open minded as long as what we say to them fits in with what they believe (we call these people “rugged individuals” – basically, they are not open to anything other than what they believe). 

One group of people in my experience that are good examples of this behaviour are those who are new to share market trading and options trading.  There is a reason why the world is not full of rich and successful traders, even though there are a few that do succeed.  That is because it is very difficult and takes a degree of skill, tolerance, tenacity, faith and endurance that few possess. 

Property investors are another group of people that see residential property as the holy grail of investing – at the exclusion of all else.  For them, property is more of a religion than an investment.  Property can be a profitable investment but not because of the unusual set of circumstances (the liquidity bubble) that has driven property prices well beyond historical norms.  Residential property prices in New Zealand are expensive.  Even if the price of residential property declines, it does not mean that property is all of a sudden cheap – just less expensive.

Most people do not need to be any more intelligent or more educated.  A more open mind and a willingness to change is a great place to start …

Financial Planning

Positioning for Success

Financial planning is a different thing to investing – make sense? 

Investing is simple.  At WISEplanning, this means that you might have a lump sum of $100,000 or more to invest.  We can develop a portfolio or decide how to apply The Sustainable Wealth Model to it and make that money grow.

If you have less than $100,000 then you are in the category that we call ‘need to get the money’.  In other words, you do not have $100,000 lazily lying about, not knowing what to do.  Rather, you need to acquire it.

To be clear, getting the money is a totally different and separate approach to investing.  Completely different.

Financial planning is really about positioning.  It is all of the things that you need to do now, preferably in a cohesive way that sets you up to ‘get the money’.  It would include:

• Cashflow management – the household budget;
• Lifestyle and risk management – assessing your risks, putting a proper program in place;
• Asset ownership and control – wills, power of attorney, family trust(?), other arrangements etc; and
• Building your investment base – starting from absolute scratch if need be;

Before you get to those items however, it is best that you apply The Law of Money.  Earlier I mentioned the importance of a cohesive approach to your financial planning.  Rather than ad hoc or piece meal, we strongly recommend a cohesive and coordinated approach to your financial planning including all of those items outlined above.  Otherwise it is adhoc … ‘hit and miss’.

The Law of Money includes the combination of:

• Big picture strategy – the framework for success;
• The step by step plan – the action steps you will need to take to make it happen; and
• Mindset alignment – matching your behaviour with your big picture strategy.

Rather than be one of the nine out of ten that fails financially later in life, you can be in that one out of ten that succeeds.  It is quite straightforward really once you know what to do and how to do it.

Mindset Alignment

Align your behaviour with your goals

Mindset alignment, as you know, is about aligning your behaviour with your big picture goals and your strategy. 

Okay, that is fine but what are some examples?  At WISEplanning we sometimes use couple A and couple 2 to demonstrate the difference.  Couple A and couple 2 are difficult to distinguish, live in the same street, their children go to the same schools, they drive similar cars and so on.  Their financial planning and personal economic development, however, is very different.  Couple A may buy into certain myths about money and what can be achieved but they will be open to exploring those myths and challenge their beliefs around them.  Couple 2, on the other hand, would be less likely to entertain any conversation about those myths.

Couple A would listen to the idea of a cohesive approach to financial planning and readily see the merit in that approach.  Couple 2, on the other hand, basically do not get it.  Possibly because they are more transactional and practical by nature and do not readily grasp concepts or ideas of an intangible nature so readily.  It could be because they are busy and distracted that they just do not allow the time to think about it.

Couple A may be property investors and they will also invest in direct shares and likely be in business.  Couple 2 on the other hand, may or may not invest in property but if they do would likely adopt a simplistic approach rather than a strategic approach.  Couple A would explore the drivers of property price rises to understand how this asset as an investment functions in a variety of economic circumstances.  Couple 2 will readily buy into the idea that because property prices have increased over the last 30 years then they will always do the same in the future.  Couple 2 will be unlikely to question this and go on to make decisions based on what effectively, is a myth. 

Couple A will investigate risk management and be clear on the importance of protecting their lifestyle.  Couple 2 will adopt more of a transactional approach and when applying insurance to their risk management plan, will look to minimise premiums as much as possible, even at the expense of a suitable insurance programme that will respond in their circumstances when needed.  Couple A also like to keep premiums to a minimum but are more likely to invest the time structuring their insurance policies so that whilst, minimising premiums there is a greater likelihood that their insurance programme will respond when needed (and unlike couple 2, not just by chance).

Couple A, if they do not already invest in direct shares, will investigate it although they will not go there until they understand it well enough to know that it will add value to their efforts long term.  Then they readily include it as part of the plan.  Couple 2 are generally more likely to buy into the stereotyped narrative around the share market being like horse racing and link it to the share market crash of 1987.  They would be unlikely to investigate it sufficiently to discover Value Investing and use the 1987 share market crash and other general banter as the rationale why they do not invest in that area.  The reason we use couple A and couple 2 to demonstrate the difference is because A, is a letter in the alphabet whereas 2 is numerical.  These are two different languages.  The idea here is that couple A more readily understand the language of money and financial independence whereas couple 2 struggle to grasp it. 

Investing

Price is what you pay; value is what you get

What benchmark should you use to measure your investment performance?

Educated academics love this question because for them, everything needs to come down to a specific number or formula so that they can properly understand it.  The more complex, the more difficult to understand, the more they like it

The most common benchmark used to measure the performance of investment portfolios is bank term deposit interest rates.  Basically, if term deposits are 6% and the portfolio can only generate 4% then what is the point in a portfolio!?

The educated professionals quite like modern portfolio theory.  The idea being that you diversify and apply all manner of complicated techniques with lots of complicated formulas that few understand, in order to measure volatility, variance in returns, time weighted average performance and a variety of other complex criteria. 

The favourite approach for those investing in portfolios is to compare their portfolio with a share market index.  So, say you invested in global shares then you might look at the MSCI (the Morgan Stanley Capital Index) by way of example.  The idea is to compare how fast that index rises with the increase in your portfolio.  If the index rises faster, then your portfolio is no good, so the theory goes. 

The challenge with these types of benchmarks is that it is difficult to compare apples with apples.  Also, you get phases in market cycles that distort the pace of growth of one type of direct share over another and one asset type over another (e.g. tech companies over the last 10 years have generally outperformed growth companies and value companies). 

The other issue here is that as value investors, we know that indexes are made up of prices. Prices are driven by market sentiment – especially in the short term.  This makes prices and indexes that measure price movement a measure of popularity – not intrinsic value(!).  Price and value are different things. 

For those following modern portfolio theory and measuring benchmarks, they do not differentiate between price and value.  In effect, they play the share market.

Longer term, price and value run closer together, however in the short term they can vary considerably. 

At WISEplanning, we recommend that your investment goals and investment requirements represent the best benchmarks of all.  That is because they are relevant to your circumstances around which your portfolio should be designed – not benchmarks / indexes or interest rates that have little to do with your goals and investing needs – make sense?

“Denying the truth, doesn’t change the facts.”