He calls them the four C factors: context, consequences, complexity and community (see sidebar). Of particular relevance to investment choices is distorted complexity. People will concern themselves with a hot stock or a short-selling strategy or geopolitical trends when they don’t even know how much they are paying for active management. For example, if you have a $100,000 RRSP invested in mutual funds, chances are you’re paying $2,300 a year in management, trailer and other fees. If you have it with a broker, you’re likely paying more.
It’s irrelevant, then, to talk to most investors about timing the market and which stocks to pick. “There’s so much to be done just getting people to match the market [returns],” Sellery says. “There’s so much to be done just to get people doing smart things with their money. If I was dealing with a room full of people and all of them were earning more than they spent, had their debt handled, were saving regularly, were contributing to tax-saving vehicles and > their current investments matched the performance of the benchmark index, then maybe for kicks we’d talk about [the risk of] hyperinflation, the jobless recovery and all that stuff,” Sellery says. But he never is. “Right now less than 50% of Canadians put money in their RRSP. So we’ve got bigger fish to fry.”
Why are people so fixated on the idea of beating the market? It could be the same reason they strive to excel in their jobs, often earning more than they need to sustain their preferred standard of living: in their subconscious, Darwinian quest for status, it’s a way of keeping score. Or it could relate to our North American cultural bias for risk-taking. Kathleen Gurney, CEO of Financial Psychology Corporation in Sarasota, Fla., has interviewed tens of thousands of investors and come up with a series of nine investor personalities. Seven of these consistently fall for the lure of entrepreneurial behaviour and end up out of their comfort zone. “People like to believe that they’re higher risk-takers than they truly are,” she says.
Furthermore, their capacity to mitigate risk declines the worse their portfolios perform. “In my work with both consumers and financial advisers, I’ve found that people are willing to take more risk to avoid losses than to realize gains. In other words, when faced with a likely gain, investors are more likely to be risk-averse, while when faced with sure loss, they turn into risk-takers,” Gurney wrote in a recent blog. “You can see how this pattern could affect average investors. It’s a spiralling effect with one bad investment decision threatening them with a sure loss, which will lead them to take more risks in order to avoid this loss.
“I’ve seen this theory in action with some of my private clients in the last six months. Their worry about loss had become unmanageable and they no longer felt in control. All they wanted to do was sell and stop their losses. If they had sold, their timing would have been impeccable, being right at the bottom.”
The psychology of institutions and very wealthy families, Shaunessy points out, is very different. They aim first to protect their wealth and grow it, while regular investors start with very little wealth and take bigger risks to create it. Unfortunately, that way they are more likely to underperform.
Once they have their money basics sorted out, most attendees at Sellery’s seminars have two choices for their investments: they can stick with their broker or financial adviser, only now communicate better and shuffle their portfolio to match what they’ve learned. “Or they can go it alone. There are a lot of people whose situations are simple and they can go it alone and invest in an ETF-based portfolio that’ll work for them, especially when they’re sub-500K.”
“The person who has $10,000 in credit card debt should not be playing the 60-cent oil and gas juniors,” Sellery emphasizes. “Most people shouldn’t be in individual stocks.” There are three exceptions, he adds. One is that they want to do this with 5% of their portfolio because they love it. (“Have a good time!”) The second is that they’re working with a professional who has a track record. The third exception is if they’re working for a company and that part of their compensation is in company shares or options, or share purchases are subsidized by the company.
Sellery likens sensible investing to taking care of your health. Fad diets and exercise programs will come along, and some will work at attaining specific goals, such as finishing a marathon. But few of us actually run marathons, and the basic tenets of good physical health don’t change: eat a balanced diet, exercise regularly and get enough rest. “It’s really simple.”
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