Have you ever had that feeling of being overwhelmed when looking at a buffet of 100 items with all the choices available to eat and enjoy? Ever walked out of a buffet restaurant with a slight case of upset stomach?
Well it can happen in more than the food realm.
Although the worldwide web has increased availability of information and in some cases led to a democratization of specialized knowledge it has also caused society to be hooked on new information at the speed of LTE! There are more ways to connect and we are always tuned in.
Has the digital high speed wi fi era helped people become more financially successful? Media competition has certainly contributed to the amount of information. But is what we hear about the stock market and financial sphere beneficial to us? Should we let this never ending stream of news influence how we manage our personal finances?
I ask all these questions because of questions my clients have asked me. The sense that I am getting is there is information indigestion and I would like to address that in this newsletter. Every topic discussed here stemmed from either a client question/comment or observation from my financial planning practice.
In my experience as a financial planner I believe that the abundance of information has not helped financial success come easier to people. In fact it is just the opposite. I have seen and heard people get into financial pickles because they followed the comment of a friend or peer. Not that the friend or peer necessarily has wrong information. But new information must always be applied in the context of your own overall financial plan. And mostly it never is, then their whole financial situation is put in jeopardy. For example: a coworker raves about an up and coming diamond stock and urges his colleagues to buy while the price is affordable. So one person goes and borrows money on his line of credit to buy the stock. In his ultra busy life he does not follow its price path. Soon he can only make minimum payments on the loan and then he has a financial emergency. He then discovers the stock has sunk to being next to worthless. He is now stuck with a line of credit debt that will affect his finances long into the future.
The financial media’s motive is the same as any other media to get views, listeners, and readers. Here is an example of how news can be misleading. A few months ago a major Canadian network published this headline: US Economy Faltering. However, this was the story’s first sentence: The US economy’s recovery is on the verge of faltering. Is that not a significant difference in meaning? Also unfortunately, media outlets know that negative news sells more than good news.
It has now become customary to report the stock market movement on a daily basis. But guess what?? That is NOT news that’s just normal activity of shares being traded between buyers and sellers. What would be news is if there was NO market activity for a day or week.
The most important news is not what makes headlines. This is where fund managers prove their worth. They are more privy to the essential workings of financial systems and markets than you, I, or a reporter/journalist. That is why your partnership with me as your financial planner gives you a behind the scenes glimpse of ‘news’ that is not considered front page worthy, but is important nonetheless.
If I offered you a shiny loonie for the fantastic price of $1.20 how many of you would say great deal and buy it? Even if it was the 100th anniversary of the Grey Cup coin most of you would pass.
Yet in the financial realm this is exactly what is happening with the unprecedented sale of fixed income products. The fear of the stock market/equities has driven people into the perceived safety of fixed income, bonds etc. And who are selling the bonds? Companies who are confident in their financial future. Confident enough in fact to be buying the stocks that consumers are ignoring in droves! So says Bob Swanson of Cambridge Advisors with CI Investments.
Or what about Europe? Headline after headline has written off the continent amid a pessimistic outlook. But Michael Hatcher of Invesco has guided his European fund to outperformance. He finds the companies that are lesser known. Sure a lot of investors know about Nestle and Danone. But Mr. Hatcher gave a good example of a French elevator service company with excellent execution and efficiency. When you think of how many elevators there are in the world that laws demand be kept serviced, you know that is a company that will always make money.
Paul Musson and Phil Taller of Mackenzie Investments have for many years given their unitholders (you and I), consistent returns despite both market conditions and consensus that the US is a has been economy. Look for them to capitalize on the US being an innovation leader. Again many of the names they buy are lesser known companies.
An excellent manager spends his or her time being somewhat of a contrarian by focusing more on due diligence of companies whose stock they hold rather than general economic news. They travel to company sites and meet with management. They have teams of researchers and do in depth analysis.
It is gratifying to see that many of the funds I choose for my clients have been recognized with awards from the industry. If you want more details please let me know.
So when someone asks me: “Should I buy this or that new product instead of what I already own?” my answer is: It is not products you do or don’t buy that will get you to financial independence it is avoiding the distractions that get you off your game discipline.
An example of believing that owning the latest financial product would bring financial success, was the introduction of Guaranteed Minimum Benefit Withdrawals, an insurance product promoted as the answer to a volatile market. Similar to an annuity, people bought it with the idea that their nest egg would be shielded from risk. GMBWs are costly. Even worse they are dependent on decent interest rates to maintain the capital reserves required to honor the guarantees. The present low interest rates are causing many insurers to halt sales and those investors who already own them are in some cases not allowed to purchase more. It would not be surprising to see in the near future that the guarantees attached to these products having to be downgraded. Yet when first introduced a few years ago, there was a stampede to buy them as they were highly advertised.
What are some distractions that can get you off your game plan? Well, consider first that at present, for every $1 of debt Canadians hold they have only 61 cents of income(1). So interest payments are a big factor. Other distractions are late fees of all kinds, tickets, such as traffic and lotto, and bank fees such as NSF fees, or overdraft. I’m sure you can think of a few yourselves.
So what are the financial topics that are important in the upcoming few months? In my opinion they are: Financial repression, US renaissance in the country’s manufacturing sector, whether China’s adjustment to a domestic consumption economy will be a smooth transition, insurance products cost, and the discussion of advisors’ fiduciary duty to clients. If you would like further details on these topics please contact me. I have excellent articles on these.
I have to relate a reaction to my last newsletter. When I mentioned to a client that many people had lost significant amounts of money in Concrete Equities, which is now being sanctioned by the Alberta Securities Commission, I was taken aback by his reply. He said I had no business trying to scare people out of investments and that was unprofessional. I wonder how many of those fleeced investors wished that someone had given them a second opinion before they lost their life savings?
To ensure that I give the best advice for your financial situation, I must be kept up to date with events in your life that impact your finances. I hope to have at MINIMUM a reply to any email or phone message from me. Even better would be an in person meeting. Please extend the courtesy of your reply to my communication in whatever form.
Happy 2013!
- Sources:
- (1)Statistics Canada Investment Executive Mid November 2012