The Financial Coach™ - Managing people & their emotions around money » investing

Do the Mickey Blue Eyes…

Gregg — Tue, 13 Jul 2010 12:16:01 +0000

I enjoy using lines from movies when talking to clients about investing and financial planning. For example there is the classic line by Jack Nicolson’s character from “A few good men” when he is on the witness stand and being asked about the truth of an investigation to which he replies…”You want the truth? You cant handle the truth”. Sadly we get to use this when telling clients the truth about being able to retire or about their budgetting and the reasons that they are always in debt.

But one of my favourite lines that we often get to use is from the movie “Mickey Blue Eyes” which stars Hugh Grant as the boyfriend whose prospective father-in-law is a gangster boss. Hugh Grant’s character is very proper and speaks with a real hot potato in his mouth. The father wants to introduce him to his gangster friends but cant have him speak with that accent and so he tries to teach him to speak like a mobster…about the only thing he gets right is the line “forget about it” which sounds more like “fur ged abowd did”…and so it is with investments – clients need to learn to do the Mickey Blue Eyes and “forget about it”.

We’ve recently had a few calls from clients about their investment values – this is largely a function of quarterly or half-yearly statements just having gone out combined with the current volatility that is being experienced. Research shows that the more often you look at your investments, the less likely you are to stick to your long term plan/goals as it becomes too easy to focus on the short term volatility.

Unfortunately legislation requires that companies report frequently (how that happened is the subject of another post) and as a result clients are getting statements too often (in my opinion). Combine this with the ability to access the values online and the absolute glut of information by so-called experts it becomes too easy for investors to be distracted from their plans and to make decisions based on the short-term “noise”.

I am not advocating a reckless negligence of your finances but I recommending that if you are an investor (that implies that you are in it for the long haul) and you have an investment plan/strategy in place then you need to learn to do the “Micky Blue Eyes” with your investments and “fur ged abowd did”. Give them time and they will come right!

Dilbert on Finance

Gregg — Thu, 08 Apr 2010 12:01:13 +0000

The Dilbert cartoonist, Scott Adams, earned a MBA from Berkeley, worked at a bank (got held up twice at gunpoint), and is worth millions. So we presume he knows a thing or two about money. In an interview with the Akron Beacon Journal, Adams says he read about a dozen personal finance books and began working on one himself. However, he found it all boiled down to these nine points and he “couldn’t figure out how to fluff it up.”

1. Make a will.

2. Pay off your credit cards.

3. Get term life insurance if you have a family to support.

4. Fund your 401(k) to the maximum.

5. Fund your IRA to the maximum.

6. Buy a house if you want to live in a house and can afford it.

7. Put six months expenses in a money market account.

8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.”

If we adapt these to South Africa they might read something like this:

1. Make a will (you are going to die one day and the consequences of not having one if you have beneficiaries is too great to contemplate).

2. Pay off your debt including your credit cards and home loan.

3. Get life insurance if there is financial risk at your death (i.e. you have a family to support or debts that need to be paid including estate duty).

4. Fund your pension fund to the maximum (that the company allows).

5. Fund your Retirement Annuity to the maximum (if you dont have a pension fund).

6. Buy a house if you want to live in a house and can afford it. I guess the same logic would apply to buying a car - if you can afford it.

7. Put six months expenses in a money market account (once you have paid off your debt).

8. Take whatever money is left over and invest 70% in an equity based unit trust or exchange traded fund (etf) and 30% in a bond fund or 100% into a balanced unit trust fund and never touch it until retirement. As South Africans, probably at least 20-30% of this should be offshore (i.e. out of SA).

9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.”

Anyone seen the fat lady?

Gregg — Wed, 14 Oct 2009 14:43:44 +0000

So it looks like the “fuss” is all over and the equity market is set to run even further…I guess it is at times like these that you need to make sure you are “in for the ride” and not sitting on the sidelines watching it all go by. But it is also important that investors do a little “stock take” (pun intended) and understand/remember the following…afterall, has anyone seen the fat lady sing yet?

Investing takes time – equity markets can be extremely volatile – remember the past year? They can and do move rapidly in the short term (up and down) and so, if you don’t have time, you cant afford to invest into equities solely (diversify).
You cant time the markets – if you moved to cash a while back (after the market fell) and are still sitting there – sorry for you! You have missed the best part of the rally. You are either in or out – you cant be both and you cant time it right either!
Learn to ignore the noise around you – have a plan (know why you are doing what you are doing) and stick to it. Don’t be swayed by the noise.
Cash is not necessarily a “safe” or “low risk” option – it hardly ever beats inflation over time. And as an investor, inflation is your biggest enemy.
There are probably still some significant risks in the financial system – share prices have run hard in anticipation of earnings…there are plenty of people trying hard to talk the market up but if there are earnings disappointments then expect to see some more down days…
Inflation risk is still on the upside – big time – just imagine what the increase in electricity price increases is going to do to inflation (we are not alone in this – the UK is facing similar problems). Tradtionally high inflation is not good for shares…but it could still be a while before we see any siginificant increases in inflation.

Bottom line is this – have a plan and stick to it! If necessary find a good financial planner/coach who will guide you through this and coach you to stay the course.

The Financial Coach™

Lotto – even if you are in you probably wont win!

Gregg — Thu, 17 Sep 2009 17:34:18 +0000

There is an old song where the lyrics went something like this “the chances of anything coming from Mars are a million to one, but still they come!”

At least the odds were better than the chance of you winning the lotto in SA where your odds are one in 13 983 816 (or 0.000000072%)*.

Let’s put this in perspective: if there are 2 draws per week (104 per year) then you would need to play the lotto every draw for 134459 years to have played it ±14 million times and to be reasonably sure that you would win it just once. The slogan used to be “if you’re not in you can’t win” but it if they are honest it should probably be “even if you are in you probably won’t win”!

Now if the average life span is 75 years then the average person will live for 27375 days and then simply put (and not complicating things with actuarial tables) the chance of dying on any given day is 1 in 27375 or 0.000037%. You have a 511 times greater probability of dying on any given day than you do of winning the lotto!

In June 2003 it was reported that 27% of lottery players were unemployed and that 43% of players earned less than R2 000 a month. 2006 research found that 82% of South Africans played the lottery once a week and that 53% of the population did not engage in any other form of gambling. The average player spent R81 per month on the lottery with the lottery accounting for ±26% of total gambling spend in SA. Those who play slots spend R541 per month on average, and slots constitute ±44% of all gambling expenditure in the country.

Research was also conducted into gambling spend by disposable income groups, and this confirmed that all income groups are playing the lottery regularly. 70% of those who are in the lowest income groups (disposable incomes below R1 400 pm) play the lottery regularly.

So if the odds of winning are so ridiculously low why do people still play it? Can you really gamble with your head? The real motivator for playing is that one very, very small chance that you might just win that jackpot which could change your life forever – although this might be in ways you’ve never contemplated. (More than a few lotto winners have died quite soon after winning, either from natural causes or from crime related incidents).

So if the motivation for playing is the ability to change your life once and for all, why not invest that average lotto ticket money? If you took the R81 per month and invested it into a unit trust fund where you got a return of 5% better than inflation then you would end up with ±R1.1 million after just 17 years**. If you were hoping to get there by playing the lotto then by that stage you would have played 1768 times – still far short of the 14million required to ensure a reasonable chance of winning. (If money spent on the slot machines was invested, it would take just seven years to get to the million).

So how about it? Think twice about buying that lotto ticket and rather put the money to work for your future by investing it. This would be a real chance to change your life for good!

That’s all for now.

Gregg

*the new power-ball lotto has odds of 1 in 24 million.

** assuming a real return of 5% & an inflation linked escalation on the contribution.