By Miles Clyne
Happiness and tragedy are synonymous with life. If you haven’t figured this out by now, regardless of your age, you are living either an enchanted life, a naïve life, or both. This is very likely true for investors also. For those adverse to tragedy when investing, AKA the risk of loss, there are places to hide, like GICs. But they are not without consequence, perhaps unintended consequences. Like your money not keeping up with inflation and forcing their buyers to accept two future considerations: having to work longer, or save more, or even perhaps both. Working longer is often the easiest solution; you won’t have as many years in retirement, so you need to save less.
The other simple solution if the expected long-term performance of your investments is expected to be low, is to figure out how to live on less. If in retirement you need $25,000 from your investments annually as opposed to $50,000. Pretty simple math to figure out you only need to save half as much. But are you OK with this solution, and what will you change to make it happen?
Fear is often driven from a lack of knowledge. Lack of knowledge may be the missing link in our ability to recognize the full consequence of our decisions. IE: I buy GICs because I understand them, but I don’t know or understand my options. So better to do nothing than venture outside of what I know.
The fear that grips many people with respect to investing is and should be real. What shouldn’t be real is our inability to deal with it. It has been proven time and time again with not only humans, but with animals, that facing our fears is critically important to our quality of life. You may never lose your fears but learning how to deal with them Vs. living in fear is huge. An investors financial success is often attributed to their emotional behavior than what actually goes on in the markets. Fear is a real emotion that should not be ignored.
This is one reason that I disagree with investment firms having their clients filling out a risk profile analysis to determine what their appropriate investment strategy should look like. The analysis may be spot on for some, but it could perpetuate a worst-case scenario for others by simply playing into their fears. There is enough evidence around investor psychology to put an end to this analysis by over simplification. But that requires effort on everyone’s part: Investment firms, advisors and investors.
An old metaphor goes like this; If you’re green you’re growing, if not, you’re dying. If we believe this, we’d keep expanding our knowledge and health. Yes, this would also include our financial skill set. On Netflix, there is a documentary I recently watched called “The Magic Pill”. It documents a controlled study of how a number of individuals young and old altered their diets for the study. Ultimately, they lost weight, reduced medication, became more cognitive, hurt less and all experienced remarkable health improvements. The documentary challenged the standard food guide and its legitimacy and pointed out how following it was causing considerable adverse health effects.
What was really interesting is how one of the participants in the study, a retired nurse, responded. She said she always knew she was eating wrong but could never figure out how to change her bad habits until she was shown. Her humility was refreshing, as was all the participants. What was profound was how parents of sick children managed through the challenges of altering their children’s diets. The easy course would have been not to alter their kid’s diets, and not have to tolerate both their physical and verbal outrage from the children. Then to see these same kids do a 180-degree change, where their temperament and health took dramatic turns for the better.
The message was pretty clear. Do what you are afraid of. Often what we are afraid of the most, is what we need to deal with the most in our lives. But dealing with something is a process. As the nurse said, she knew she was eating wrong, she just didn’t know how to deal with the change until someone showed her. But first she had to admit and be honest with herself that she needed help. Look around, we are not alone, so many of us need help in one way or another. If we don’t ask, we most often don’t get.