Investing and Saving in a World of Negatives
By: Jeff Scammell, Financial Advisor, JDS Financial Planning Inc.
It is no secret that the world is falling apart. Terrible crimes are happening all over the world including on our home turf. Our closest neighbours are dealing with some major issues that could bring their society into the 21st century with the rest of us. There are multiple 24-hour news channels built to spread the good word, or in most cases, the negative word. It’s unbelievable that these “reporters” jobs are to spread negative thoughts and theories as if they were fact and concrete. When a good news story comes up, it gets poked full of holes. If Obama’s administration provides something great, they dig up something negative about him from the past in attempt to discount the positivity that is present NOW.
With many of the large news networks running what seems like a “negative mandate”. It is no wonder that when it comes to personal finance, the majority of us are scared. It seems as though every piece of data sends the financial markets into a tailspin. Or instead of a tailspin, a huge upswing. Yes, the markets are volatile. And yes, volatility is translated by many as a form of risk. And yes, risk is considered scary. Let’s break a few myths here.
- The major news networks are always credible: This is a myth, they often report in real time, meaning the story or the issue is developing. A developing story does not have all the details and when some details are missed, it can change the entire ending of the story. Have you ever heard a joke from someone who missed the punchline or a key piece of information? It made you feel a little uncomfortable didn’t it? Same thing happens when you miss a piece of a story. When telling jokes, we set key words that steer the listener toward one ending and then the punchline lands them in a completely different ending than expected. That creates humour. If these key words are used in delivering the news, added in with missing details, the reporter can steer us to a conclusion they want us to hear and we fill in the rest of the details. Think about the last time you talked to a friend about a big news story, you filled in a lot of details didn’t you? “I think he was going crazy”, “I think that is the problem with America”, “If I were there, this is how it would have gone down”. The news reporter gives some detail, sets the tone and direction of the conclusion, and you filled in the rest, thus validating it in your own head.
- Volatility is bad: Volatility is caused by human beings trading stocks based on what they think other human beings will be doing. They are speculating that because XYZ Company lost a contract, that it would not make a lot of money this year so they sell it. This doesn’t mean the company isn’t still going to grow, and isn’t still a great long term company. When it is sold, someone buys it at a discount. Therefore, the volatility has actually helped someone purchase a long term investment at a discount. Volatility in this case wasn’t great for the short term investor who got scared and sold, but volatility was good for the long term investor who just picked up a bargain.
- Risk = Reward: Although this is a very broad definition, it is not necessarily true. Typically, in life, things that are hard or considered risky, will most likely have a bigger outcome in the end. We have all seen enough Shark’s Tank and Dragon’s Den to know that this is not always the case. So when putting together portfolios and considering which advisor is best, don’t get bought in by the risk=reward tactic. While this is generally true, it must be taken cautiously. Since garbage portfolios are also considered risky, and typically with no reward, there are many other factors than risk that measure the quality of the investment. So do not make your decision based on risk alone.
So what is the main message of this blog? Sometimes I struggle staying on task. What I want you to take away from this is that the information that gets plugged into us on a daily basis over decades, is not always factual. In fact, when someone gives financial advice to a general audience, it will most likely be wrong for you. That includes the blogs that I write and post. The reason being, you are very unique. Your family is unique. It would be impossible to write out scenarios that fit every family across Canada. So here is the real piece of advice: Consult a real financial advisor. Not an advisor on the bank rotation, but an independent financial advisor that helps you build your customized portfolio. And more importantly, they are going to help you build the habit of saving in the first place.