| Behavioral finance is a relatively new facet of investing, and two of the key drivers that came out of the body of research done on the subject are the roles of fear and greed, and they are not mutually exclusive. You can see this behavior on a macro level in markets – with fear fueling corrections, and greed fueling bubbles. As individual investors though we’ll also recognize these two devils in ourselves – and not necessarily recognize them for what they are. Ironically, in order to be a successful investor, you often have to recognize which of these two forces are driving you, and the markets, and then work contrary to them. In other words, it is often when fear is running thorough the markets and everyone is selling their assets, that it is the best time to buy, and when everyone is piling on the bandwagon and there is a bubble forming in the market – it might just be time to take your profits and at the very least downsize your exposure. The art of investing is to know when to act as these cycles can run over long periods of time. A skillful investor knows when an investment stands a greater chance of gain than loss. They, in essence, are able to identify the investment attributes which turn an idea from a simple game of chance (equal chance of gain or loss) to a growing asset through time.  Many of my clients like the ‘fun’ of investing – it satisfies that dopamine hit that gets gamblers addicted (the game of chance which is more socially acceptable – right?) My advice if you want to dabble in the stock market is to ring-fence your wealth that is going to be used to retire, or as an emergency cushion – and you can then ‘play’ with the rest – that amount you are happy to double or lose. Leave your nestegg up to the professionals that do this all day every day. As an advisor, it’s my responsibility to identify which of those two emotions a client is running with, and while I am never rude enough to call them ‘fear and greed’ – reading between the lines, that is exactly what they are.  Over the last half decade, in RSA specifically, fixed income has been kind to the ‘fearful’ investor who has a panic attack at every small downside movement in their portfolio. Over the very long term, cash is usually at CPI, often less (especially after tax). Over the last 2 years, cash has handsomely outperformed CPI, but this is due to escalating global inflation which ramped up global interest rates (remember when the FED hoped US inflation was going to be transitory?). Equity is usually pegged at CPI plus 5-7%, property is somewhere between the two at CPI plus 4% (but it has gone through some significantly tough times – even outside of the pandemic upheaval.) Understanding what is ‘reasonable’ is very important to your (and your advisor’s) peace of mind. Beware of tracking your investment against a benchmark – fund managers are very adept at picking and choosing a benchmark that puts their fund in a good light. In our practice at Rexsolom Invest (www.rexsolom.co.za) we mostly use tailor-made (aka bespoke) investments rather than a slew of (expensive) Unit Trusts. Understanding the impact of fees is crucial to your investment – especially knowing what is allowable versus reasonable (a win-win for your investment and the asset managers and advisors that are helping you).  Tempering greed is much more difficult to achieve, and much more common place. The synonym I most commonly use for greed is ‘speculative’ – but unfortunately to some ‘speculation’ is seen as cool. Being broke is not cool. You’ll be astounded how many people, despite having their fingers severely burned by a speculative investment, will keep on coming back for more. Greed has a nasty way of pumping feel-good hormones (serotonin, but also oxytocin and endorphin) into your body, and helping you forget the crushing defeat. One of the most interesting behavioural attributes I have seen is how people assign human emotions to an investment. For example, someone won’t sell a poorly performing investment if it was gifted to them, they inherited it, or they got it as part of a company perk – so as not to disappoint the donor – even if they have long since passed into an economics-free zone. I have also come across equity investors who are determined to wait until a tanking share gets back to the price they bought it for, before selling it. It’s almost like it’s a poorly performing employee – “I bought you, now work damn it!” No matter how many times I implore them that shares do not have feelings, this trait persists.  One of the best ways to divest yourself of the uncomfortable feelings of fear and greed, is to delegate the responsibility to a trusted advisor – but don’t use them as your substitute whipping post or wailing wall. A properly constructed, well diversified portfolio that not only takes your financial needs into consideration, but also your fear-and-greed temperature and risk profile will help you save some of that energy for doing what is important – earning more money and spending less. One uncomfortable truth is that expending excessive energy (and patience of your investment advisor) on the day-to-day performance of your portfolio, is that energy that could be far better spent on aspects of your wealth that you have control over – especially in pre-retirement.  Wealth is what is left over after you have spent your income. It’s that simple. An adviser has no control over your active income – that’s all on you, I’m afraid. In time, they should be able to turn your wealth into a passive income, but until that time comes – only YOU can significantly add to that wealth. Spending your income, the consumption if you like, is entirely up to you both pre and post-retirement. If a client comes to me before retirement, then I can give them advice on how to start reducing this consumption to align it with what their future retirement income is going to be – but it’s up to them whether or not they do this. At the retirement ‘event’ that wriggle room has evaporated. There are some low-hanging fruit that are quick and easy to address – over-insurance or champagne medical aid on a beer budget. Others, take longer – downsizing home for example. Some seem almost impossible – children who won’t move out or become financially independent. Sometimes that takes something as radical as moving into a retirement village with no spare bedrooms, but of course if those stay-at-home-progeny are masters at manipulation, they’d probably demand an allowance.  The first step in understanding your personal profile is getting a grip on what your spending really looks like. A personal income statement if you like. This is deeply uncomfortable if you haven’t done it for a while, and I am sure you would far rather not go through that angst. It’s worth it – and you don’t have to keep on doing it. If you’re a regular reader of my posts, you’ll know I offer a free RedFile with an income statement and balance sheet template on request. Everyone, especially over the age of 50, should know what capital and income they need to be able to retire (present value of course). It’s all very well to say “I am never going to retire” ….but life happens. You can insure your ability to continue to earn and income (temporary and permanent disability insurance) up to age 70, and before you spout “self-insurance” make sure you or your advisor has done the math. Life cover (which includes disability cover) does not have to be ‘for life’ – it is there until you’ve got enough investments to do precisely that – self-insure. In other words, if something happens to you, you can afford to go on ‘early retirement. One important caveat – as you get older your body starts to break – so take out that insurance before you become uninsurable! A good advisor will look at your wealth journey holistically and not be pre-occupied with the ‘sexy’ side of the profession – which is not life insurance. It is fairly quick and easy for your advisor to give you that capital goal, and to tell you if, based on your current investment inputs (aka behaviour) you’ll get there. If you want a rough rule of thumb for an amount of capital you need to produce an income that increases with inflation and does not run out, look at a maximum of R4000 pm (more prudently R3750) for every R1m invested (not assets, investments). In short, if you haven’t already done so, take the baby steps of really finding out your ‘status quo’ and if you really are doing okay. Articles and Blogs: New Year’s resolutions over? Try a Wealth Bingo Card instead NEW Wills and Estate Planning (comprehensive 3 in one post) NEW Pre-retirement – The make-or-break moments Some unconventional thoughts on wealth and risk management Wealth creation is a balancing act over time Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |
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