It has often been said that three types of people in life: The spender, the lender, and the investor.
“Poor people buy stuff, the middle class buy liabilities, and the wealthy buy assets.”
Let’s take a look at these truisms.
The spender will buy stuff, putting off achieving their financial goals until they have more money. In fact habits become harder to break over time. The day they plan for their financial future may never arrive. The spender needs to realize that almost every wage earner is capable of both meeting their every day expenses and investing for their long term goals.
The lender is happy to save their money in a safe account. They are unaware that there is a difference between saving and investing. In effect they lend their money to a financial institution which will give them a few percent interest for the use of their money. But consider what the financial institution will do with that money on deposit. This is where the buying liabilities come in. It is no coincidence that the interest rates in such savings vehicles as chequing or savings accounts, term deposits or GICs are considerably lower than a mortgage, car loan, or line of credit. There is a price for the safety aspect of those savings.
The wealthy however, are investors and buy assets.
Unfortunately there are a few reasons why people spend more time planning for their vacation than their financial future. As Terri Williams says:”…people typically pay little attention to personal finance until confronted with a decision.”(1)
First, the belief exists that planning is only for the wealthy. However, families who are not wealthy need to be more efficient in allocating their resources. so they can achieve their financial objectives. There is less room for error.
Second, there is an overload of financial information in the various media. Decision making becomes more difficult and easier to put off.
Third many people don’t want to consider unexpected financial responsibilities. This avoidance and procrastination will lead to the family being unprepared for major life events, both positive and negative. Decisions made under duress are reactive versus proactive.
Fourth, it is a myth that financial planning is expensive. For example lack of financial planning can result in higher than necessary taxation.
Here are a few random reflections to help you have dreams instead of nightmares about your investments. Remember I am here to hold your hand in good times and bad.
If I told you to use a metre stick to measure the distance between your home and work what would you say to me? “You are crazy, that is the wrong measuring tool.” Well, think of a year in your investments as that metre stick. It is too short a time to evaluate the merits of an investment.
Does constantly changing lanes while driving help you get to your destination faster? Neither does switching investments to the latest fad help achieve along term goals.
Say you like chocolate ice cream. One week the price is $2 a carton, on sale. If you are like me you go and buy a dozen or so. Next week the price drops to $1 a carton. You can now make one of two decisions:
1) Go and buy a freezer and seriously stock up.
2) Take all the ice cream you bought last week back to the store and sell it for $1 a carton.
Which action would most choose? Yet why is it when people buy investments they take action #2? Think about why we often buy lots on a good sale. It’s because shoppers know the price will not stay low. Neither will prices in the stock market remain low. Investor behavior is critical in a bear market.
In recent months there have been headlines about wrong doing in the American investment field. Some of you may be wondering if your investments would be affected.
The Canadian industry is more strictly regulated than in the US. Here are a few of the legal guidelines fund companies must abide by: They must disclose: both daily net asset values per share, and what the fund is invested in. Keep unitholders informed eg prospectuses, annual reports and statements, Publicise procedures for purchases and redemptions of funds. Seek approval of unitholders to make major changes in a fund eg to change investment objectives. Receive approval from securities authorities for other significant changes.
The Investment Funds Institute of Canada(IFIC), the Ontario Securities Commission, the Investment Dealers Association and the Mutual Fund Dealers Association all plan to keep ahead of developments in the United States and to work together for the interests of Canadian investors.(2)
It is my professional duty to research/monitor/keep current on developments, and to make appropriate recommendations. Several fund companies have issued press releases to address concerns unitholders might have, and to reiterate their commitment to do business in an ethical manner.
Would you like to see your idea, comments, feedback or question in an upcoming issue? Do you know someone with a financial challenge whose solution would benefit other readers? (All done anonymously of course) This newsletter should be a reflection of its readers’ thoughts and opinions. Please email or phone me if you want to see a topic in future issues.
(1) Investment Executive December 2003
(2) Investment Executive January 2004