Right, straight off the bat I have to tell you up front that I’m an investments man. I love investments (except when I don’t, and when there’s no control, but that’s another story).
I’ve spent a sizeable chunk of my career looking at them, analyzing them, recommending them, being wrong on them, being so right that I get the pat on the back because of them. So, I’m pretty much about them.
The thing is…so much of it is a big fat ruse.
Don’t get me wrong, I would recommend without a shadow of a doubt that everyone should be investing if they are able, and that’s what this post is about. But what most people don’t really appreciate is how much of it is so made up. So “fake news”, if you will.
Nobody has a crystal ball. At least no one has a crystal ball that can actually categorically tell you the future. Call me a non-believer if you like, but I’m just not a buyer.
And most people get that. Sort of.
The trouble comes when a disproportionate amount of love is given to “opinion” masquerading as “truth”. At any one moment, you can find a group of the good and the great with diverging opinions over what’s going to happen to the price of a stock, gold, bitcoin, the price of fish. That’s what makes a market. Buyers and sellers on both sides of the argument.
But it’s still opinion. Educated opinion. Insightful opinion. Often quite expensive opinion. But opinion nonetheless.
So where am I going with this?
Firstly, accept that what you hear on the TV, read on the hot tip sheets, get told down the pub and so on, is just opinion. That’s unless there’s an inside track based on undisclosed information. And then it’s very possibly illegal. So it’s for you to work out whether you want to buy into the story or not. Because that’s what it is, a story rather than a guarantee of the future.
Where I’m going with this is that it’s all about controlling the controllable.
Unless the investment has a guaranteed return (and even then keep in mind that death and taxes are your only guarantees out there), you can’t with hand on heart confirm in advance what your return will be.
However, there are some very important elements of investing that you do have more control over:
What you pay in fees
There’s so much research out there that shows how much impact fees have on total returns. The bigger the fees, the less you make. Management fees, front loaded fees, administrative fees, custody fees, transaction fees…It makes you wonder whether we can make any money at all.
It’s that simple and yet most people don’t even think about the fee part. It’s a big thing with motivational-speaker-turned-financial-evangelist Tony Robbins in his book Money: Master the Game: 7 Simple Steps to Financial Freedom. But we tend not to think about that free lunch being anything but.
Admittedly, those sneaky fund managers are only too happy to hide away in the small print how much it costs to buy into their bells and whistles product (that doesn’t actually do a hell of a lot in terms of making you money).
But it’s your responsibility to find out how much you are going to spend and whether you are willing to do so. If you don’t like what you see, you have the power to look elsewhere. It’s called shopping around.
What you pay in taxes
Firstly, this isn’t about tax evasion. Far from it. Whatever you do, you have to operate within the limits of your legal jurisdiction. Still, if you are willing to dig around, there are very likely to be ways in which you can negate your tax bill.
I’m not a tax specialist and certainly no expert on tax treatment around the world. But from my limited experience, there’s a fair chance your government has created tax-friendly programs to nullify the impact of tax on your investment returns, whether that’s from an income or capital gains perspective.
That’s everything from the Roth IRA in the US to the Individual Savings Accounts (ISAs) in the UK. You may not be able to get rid of all you tax, but you can often cut out some of it. So if the taxman is being kind to you make the most of it.
What losses you take
No one likes to lose.
It’s a learning experience, it’s part of growing, it gives you perspective, blah blah blah… I’ve heard it all.
But fundamentally no one likes to lose.
Yet the nature of investing means that at some point you will end up in a losing position on a trade (remember that thing about no crystal balls?). Or at least, losing money on paper. And in that situation, you haven’t physically lost any money yet because you haven’t sold out of your position.
And your investment will bounce back…hopefully…the experts tell me…I saw something in the tea leaves…I’m convinced….
The trouble is losses play into classic human biases.
Let’s start with the ‘overconfidence bias’. This is all about you believing in your own press. You refuse to sell out of a position that’s in freefall because you are so damn confident that things will rebound, even if it’s akin to Nero fiddling while Rome burns.
Then there’s ‘prospect theory’ – the idea that losses are viewed more emotionally than gains of the equivalent magnitude. As a result, we are more comfortable with taking risks that minimise potential losses, than to take risks that could mean positive returns. In other words, we sometimes do dumb things when we’re losing money.
We’ve all got to accept that losing is part of winning. No one is going to be 100% correct all the time so you’ve got to learn when to hold them, learn when to fold them. That’s investing.
What risk you’re willing to take
Perhaps this one is a bit murkier as not everyone actually understands the risk inherent in what they are investing in. And I get that.
But sometimes if it looks like a duck, smells like a duck, quacks like a duck…it’s a duck.
We all get sucked in by the fear and greed dynamic, which can turn perfectly rational individuals into human ATM machines for snake oil salesmen posing as financial advisors.
But there are also times when you know that you can’t afford to take risks. You know that you’re struggling to pay your utility bills but you still choose to stick your money into the latest hot stock.
Maybe you can’t entirely control the risk you’re willing to take because you can’t even quantify the specific risk.
But there are also those other times when you know deep down that you’re taking on a risk you don’t need to. Take control.
What does this talk about ‘control’ all mean?
When it comes to your money always look to control the controllable. We can’t dictate what happens in the economy or where the next market crash will be. But there are still choices and decisions you do have a bigger say in.
Sometimes we have more power over our money than we think we have.