Tag Archives: educated investor

If you read our last Educated Investor article, you may have noticed that I’m fond of translating what can otherwise be complex financial theory into digestible batches of three – such as three kinds of investors and three kinds of savers/spenders. Today, as we continue to explore the insights I’ve found most important in my 25 years as a financial professional, I’d like to share what I call the Three T’s of Successful Investing.

Insight #3: The road to investment success is paved with Three T’s: Training, Temperament and Time.

Success Strategy Number 1: Training
Training is only the first step in knowing your way around the Canadian and global markets, but it’s an important one.

With formal training, comes understanding and insight into how our markets operate – in theory as well as in evidence-based practice. When training is missing from an investor’s trading activities, it tends to be replaced by guesswork and gut reaction. This leaves you forever in doubt, vulnerable to chasing breaking news, tips from friends and neighbors, and pitches from financial salespeople who may not have your best interests at heart.

If you’re lucky, you may still make money anyway. But luck is not much of an investment strategy. The never-ending stress inherent to such an approach is both unpleasant and unnecessary. With training, it’s considerably easier to bring calm clarity to your financial decisions.

To address this first “T” to successful investing, we offer our own seasoned training by employing our Registered Financial Planner (RFP), CERTIFIED FINANCIAL PLANNER (CFP®) and additional credentials. We also emphasize financial literacy as a cornerstone of our client experience, so our clients can be equal, informed partners in their financial success.

Success Strategy Number 2: Temperament
While adequate training can go a long way toward strengthening frazzled financial nerves, you also are best served when you have the temperament to ignore the daily distractions that impede your path to success, focusing instead on sticking to a solid, long-term plan.

The truth is, investing can bring out our worst impulsive tendencies. Even though we may know that staying a prudent course is the most rational approach for building long-term wealth, the temptation to “do something” in turbulent markets is hard to overcome.

In fact, these tendencies are not only strong, they’re so ingrained that our own brains can trick us into believing we’re making entirely rational decisions when we are in fact being overpowered by ill-placed, “survival of the fittest” instincts.

Behavioural finance studies this relationship between our heads and our financial health. Wall Street Journal columnist and author Jason Zweig provides a guided tour on the subject in his book, “Your Money and Your Brain*,” describing the biased behaviours themselves as well as what happens to generate them. To name a couple of the most obvious examples:

  • When markets tumble – Your brain’s amygdala floods your bloodstream with corticosterone. Fear clutches at your stomach and every instinct points the needle to “Sell!”
  • When markets soar – Your brain’s reflexive nucleus accumbens fires up within the nether regions of your frontal lobe. Greed grabs you by the collar, convincing you that you had best act soon if you want to seize the day. “Buy!”

Humans Are Not Wired for Disciplined Investing

Mental Errors

Fortunately, we believe that a patient temperament can be an acquired skill, even if it doesn’t come naturally. By heeding the available evidence, you can learn to identify when you are falling prey to your own biases, so you can shift the odds back in your favour. It also helps to have an objective third party to point out the ones you might be missing. This is another way we seek to enhance our clients’ financial well-being.

Success Strategy Number 3: Time
Last but not least, even efficient investing takes time. It takes time to create a personalized plan that reflects your unique financial goals and risk tolerances. It takes time to translate those best-laid plans into a well-managed portfolio, optimized to offer your greatest odds for success. It takes time to keep that portfolio adherent to your disciplined plan. When your personal goals or circumstances change, it takes still more time to adjust your plan and your portfolio accordingly.

Thus, even for investors who are willing and able to tackle Training and Temperament on their own, there’s a valid question to consider: Don’t you have better things to do with your time?

If you enjoy spending time building and managing your financial future while adhering to the tenets of evidence-based investing, that’s great. If you could use assistance with any or all of the Three T’s of Successful Investing … that’s what we’re here for.

Rob McClelland
Senior Financial Planner and Branch Owner
The McClelland Financial Group of Assante Capital Management Ltd.

Part 2: Finding Your Financial Balance

In our last Educated Investor, I reflected on my 25-year history as a financial professional and shared one of the most important insights I’ve learned during the past quarter century: To preserve and build wealth according to your goals, you must save and invest. Today, I’d like to explore another timeless insight toward the top of my list of best investment practices.

Insight #2: To achieve financial independence, you must first achieve financial balance.

What is financial balance? Let’s start by talking about what imbalance looks like because, frankly, it’s far more common.

Buy this! Sell that! Beat the market! Flee the market! You see it everywhere on Bay Street and in the popular press. It tricks you into believing that reacting to the news is the only way to invest. Unfortunately, these sorts of hot tips may pose as relevant information, but they’re actually dangerous distractions, more likely to knock you off course than contribute to your success.

The first step toward achieving true financial balance is to determine what it is that you’re weighing. It’s not the market you’re assessing. It’s yourself. Financial balance comes from answering two main questions about yourself as precisely as you’re able.

Question #1: What kind of investor are you?
How much market risk are you willing, able or required to accept in pursuit of the wealth you want to accumulate or preserve? Investors typically fall into one of three broad personalities:

  1. Conservative – You are cautious about taking on market risk. That’s fine, as long as you accept that this means your expected future returns will be lower as well.
  2. Moderate – You are open to a mid-range degree of market risk in exchange for modestly higher expected returns.
  3. Aggressive – You are open to taking on a great deal of market risk as you seek a higher level of expected returns.

At The McClelland Financial Group of Assante Capital Management Ltd., we use FinaMetrica risk profiling software to help our clients weigh their financial wants and needs in this context. We also help them fine-tune the results, especially when there are conflicts between their inherent nature and their financial needs.

For example, you may be conservative by nature, but find yourself falling short of your financial goals as you near retirement. Or you may enjoy the thrill of the hunt, but you may be best off minimizing unnecessary risks if you’ve already blown past your financial goals.

Your investment personality isn’t static, either. In your youth, during your earning years and as you enter retirement, you may be more or less willing, able or required to take on market risks. The more familiar you are with your investment personality, the more likely you can achieve financial balance. Then, when breaking news about market volatility threatens to knock you off-course, it’s easier (if not always easy!) to stick with your disciplined plans and long-term goals.

Question #2: What kind of spender/saver are you?
Financial balance also calls for matching the type of investor you are with your spending and saving habits:

  1. Savers – Some people find it easy to save; it’s just what they do. This is usually an admirable trait … unless it’s taken to extremes. Since money is the means to an end, there’s no sense hoarding it with no end in mind.
  2. Balanced – As you might guess, the optimal position for most families is one that achieves a comfortable mix between saving and spending throughout their lives.
  3. Spenders – If you tend to be a prolific spender, it’s best to acknowledge it, so you can manage your investments and your lifestyle accordingly.

Financial balance falls into place when you align your investment personality with your saving and spending traits. For example, if you are inherently a moderate investor and a strong saver, you have improved odds for faring well over the long-term. On the other hand, if you invest conservatively but spend lavishly, you may run aground if your investment returns don’t keep up with your lifestyle. The goal is to avoid bad combinations of investment and spending habits well before they play out into bad results.

Achieving Financial Balance
As you can see, there are a lot of moving parts to consider in achieving financial balance. Different family members also bring different personalities into the mix. Plus, it’s difficult to be objective about your own inclinations. Let’s face it – we’re usually too close to the subject of ourselves to recognize our own best strengths and worst weaknesses.

If you’re lucky, all of the pieces in your investment whole come together naturally. From my experience, though, few investors are so lucky as to have that happen without facing some difficult realities and challenging choices along the way. That is why it has been my privilege for the past 25 years to help families focus on the importance of achieving and sustaining good financial balance in their lives. I hope to be doing the same for the next quarter century as well.

Rob McClelland
Senior Financial Planner and Branch Owner
The McClelland Financial Group of Assante Capital Management Ltd.

A common misconception about financial advisors is that they know how to predict the market or at least know when to get in and when to get out. The latter is known as perfect market timing. I think it is safe to say that no one can time the market with absolute certainty, however if there was a strategy that can achieve a reasonably similar result, would clients pay to participate?

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