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moneysense.ca, 27/07/10
From the archives: Give Yourself a (Financial) Education
In the past, most people can get by just fine without learning much about investing or building a portfolio. Pretty much everyone belonged to a defined benefit plan and their financial lives were much simpler. These days, financially speaking, most of us are on our own. It goes without saying that DIY investors need to be familiar with the basics of investing. Even those investors who work with an advisor need at least some basic investment knowledge to (a) hire a competent professional and (b) be confident that the advisor is managing their money well.
In a long-running rebate on the merits of Group RESP plans, a remark by a commenter touched a nerve:
To work with mutual funds or stocks, parents need to know what they are doing. This takes a lot of time and planning. I am too busy for that.
As you can imagine, I am not very sympathetic to the argument. If you are like me, you are exchanging eight hours of your precious time every weekday for a pay check and you owe it to yourself and your family to be an effective steward of your money. The reality of modern life is that, financially, we are on our own. Our retirement, our kids’ education and our general financial well being depends on how well we look after our money.
To become a successful investor, you should lay a strong foundation by taking the time to read a few good books. After that, you only need a few hours to devise an asset allocation, invest accordingly and spend about fifteen minutes every year to rebalance your portfolio.
If you have worked your way through my recommended books, you don’t have to sacrifice your leisure hours (unless you buy individual stocks or write a blog) to constantly keep up. Over the years, I’ve learnt both from reading and from experience that there are only a handful of rules for being a successful investor:
- Don’t take stupid risks.
- Diversify.
- Minimize expenses and taxes.
- Don’t trade too much.
That’s all there is to investing. Now, you can get on with gardening or photography or whatever with the confidence that you will do better than the vast majority of investors who are busy chasing the latest hot tip they heard on Market Call.
moneysense.ca, 27/07/10
I have talked with friends who claims that they don’t have the expertise or time on managing their own money. They have “a guy” who takes care of it for them. Let the professionals deal with it, they’d say. When I asked them how much “their guy” is charging them, inevitably, they’re unable to come up with a number. When I asked them what their ROI was, they have no answer, nor do they know if they’re beating the market.
I think people have a fear of money, or fear of talking about retirement. Perhaps, because these topics relate to people’s mortality, hence it’s an uncomfortable topic. I can relate to these people because my finances were a mess until mid 2009. I hadn’t filed tax returns for years, and my money was rotting in a savings account. The turning point was when my networth reached 6 figures, I felt like I owe it to myself to take care of things better.
[...] This post was mentioned on Twitter by Canadian Capitalist, Jim Yih. Jim Yih said: RT @CCapitalist: New Blog Post: From the archives: Give Yourself a (Financial) Education http://bit.ly/9K9fvK [...]
Hey! what if our hobbies involve WATCHING Market Call? :p
I’ve been trying to convince my dad for sometime to take things into his own hands, gifting PF/DIY books, talking to him about his investments, but more importantly investment strategies etc. and he always gives the same answer of how he’d rather pay someone to do it.
I think it is due to a combination of fear of not knowing how or what to do resulting in poor choices and a bit of laziness. It’s like studying, people are sometimes reluctant to put in the effort needed to learn something new and what is perceived to be complicated.
I understand that, for whatever reason, some might want to pay an advisor to take care of their finances. That’s fine with me. It’s their choice, after all. But they owe it to themselves to make sure that (a) they hire a competent advisor (b) they understand that they are paying their advisor and (c) they make sure their advisor has devised a plan for them and is implementing it. All of this requires some financial knowledge.
@Sampson. Only if you watch Market Call and do the opposite of what the talking heads say to do… LOL! That’s why Howard Green always closes every episode with the disclaimer to “consult with your financial advisor before making any investment decisions.”
The advice from TV is worth exactly what you paid for it. Zero. Some of the guests are already in those stocks before they get on air, so it’s in their best interest to talk it up before dumping them.
The segments on BNN that I enjoy include their “Power Breakfast” series when CEOs of usually small caps try to talk up their own businesses. I also like the economist commentaries from Linda Nazareth. And of course the general headline news of the day on segments like Business News and the like. Other than those, I find the rest to be all background noise.
A financial advisor can provide some great advice. When asking questions about investment a financial advisor provides some interesting perspectives on how to get some control over your financial situation.
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Another good article, I would add one more item to your list of rules to be a sucessfull investor.
Ignore the media, they are paid to attach an audiance so they can sell advertising and make a profilt, they are not paid to give advise. Nobody is going to watch a TV show where wevery day they get on and tell you to buy and hold index funds, that is just not exciting enough for TV.
As a Fee Only Financial Planner, I need clients to need my services in order to get paid, and I think my services are well worth the price. However if I am doing my job correctly and providing low cost simple investment options, and educating my client along the way, any client who is paying attention should not need my service for very long, unless they have a major life event such as having a child getting married changing job and getting close to retiring, because then it may be time they need to learn something new.
@Ryan: I have no doubt that a competent financial advisor can be invaluable to many, if not most investors. Unfortunately, a competent advisor is the exception rather than the rule.
I agree with your point on the media. Except for a few sane voices, the media is best ignored.
[...] Capitalist says give yourself a financial education. A great [...]
@CC. I don’t think the problem with financial advisers are so much to do with competency, I think the problem lies in the way that most advisers are compensated. Most advisers are compensated by commissions earned to push certain investment products. And since some investment products offer higher commissions than others, they are motivated to push those products regardless of whether they are any good or appropriate for the investor.
Paying an upfront fee for financial advice is probably a better business model for the investor. But to me, good financial advice is difficult to measure. I mean, if you pay for a landscaper or mechanic, you can see / hear / feel the results of their labor as soon as their service is delivered. Financial advice at least in terms of investment options, in my opinion, is a tough sell. But advice in terms of credit counseling makes a lot of sense for people who put themselves in deep financial doo-doo.