I am going to guess that by now, even though I have given you the math and shown you the size of the money that you are giving away (and could be keeping), there are still some doubts in your head that you could possibly do this yourself. So, in this chapter, I want to address some of those fears head-on and hopefully dispel some of the misconceptions that are guiding those fears. These misconceptions often stem from a lack of understanding or experience, and they can prevent you from taking control of your financial future. Today, we will debunk (isn't that a great word) these myths and provide you with the confidence to move forward.
Misconception 1: Investing is Too Complex
Yes - doing things like putting together investment vehicles and underwriting initial public offerings (IPOs) can be complex. This is not what you need to be doing, and most importantly, this is not what your investment advisor is doing for you. Your investment advisor does not have the information to exploit the world financial markets in order to make money for you. They are accessing information that you can access and making decisions that you can make. Investment advisors don’t make so much money because they are routinely outperforming the market. They make so much money because people are paying them high fees to perform a relatively straight forward job. Investing is not too complex. Like most industries it is however shrouded in its own jargon. Picture this: you walk into a financial advisor's office and you're bombarded with terms like "alpha," "beta," "derivatives," and "arbitrage." It feels like stepping into a foreign country without a map or a guide. The complexity seems overwhelming, and you think to yourself, "This is not for me."
However, the truth is that while the world of finance does have its complexities, the basics of investing are straightforward and accessible to anyone willing to learn. Let's break down these concepts.
Your investment advisor does not have the information to exploit the world financial markets in order to make money for you.
Understanding the Basics
Investing revolves around three core principles: risk and return, diversification, and long-term planning. These are the building blocks upon which you can construct a robust investment strategy.
Risk and Return
At its core, investing is about balancing risk and return. Imagine you're at a casino. The higher the stakes, the higher the potential payout, but also the greater the risk of losing everything. Investing works on a similar principle. However, the investment market is much less risky than the casino. In the casino, the house always eventually wins. Not so with the market. Over the past 40 years, the S&P 500 has grown steadily by 10%. That means that you can reasonably expect a return of 10% by just investing in an index-linked fund (more on that in Chapter 4) and letting your money sit there. Higher returns typically come with higher risks, and lower risks usually mean lower returns. Understanding your risk tolerance—how much risk you are comfortable taking on—is crucial in making investment decisions. As is building a portfolio with varying degrees of risk.
Diversification
Diversification is the practice of spreading your investments across different asset classes or investment vehicles (such as stocks, bonds, and real estate) to reduce risk. Think of it as not putting all your eggs in one basket. The idea is that different assets will perform differently under various market conditions. For example, you wouldn’t want to invest in bread, flour, and wheat because imagine that a terrible blight would hit all wheat crops in North America. This would impact the flour market, which would then in turn, impact the bread market. Not only is the goal with diversification selecting different types of investment vehicles (stocks, bonds, and real estate) but also investing in non-dependent industries. This is called investing in non-correlated assets. Non-correlated assets are investments that do not have a high correlation with each other. When one asset class experiences a downturn, the other asset class may not be affected in the same way or may even perform well, thereby reducing overall portfolio volatility.
By diversifying, you can protect yourself from significant losses if one particular investment performs poorly.
Long-Term Planning
Successful investing is about patience and long-term planning. The stock market can be volatile in the short term, but historically, it has provided solid returns over the long term. By focusing on long-term goals and avoiding the temptation to react to short-term market fluctuations, you can achieve better investment outcomes. For example, the S&P 500 Index has returned a historic annualized average return of around 10.26% since its 1957 inception through the end of 2023 despite having years like 2008, where it was down 36.55% and 2022 where it was down 18.01%. If you are willing to approach your investing like a marathon and ride out the market vs a sprint where you are trying to guess how to outperform the market like a day trader on the Nikkei, you are going to do just fine.
Educating Yourself
We’re going to break down what a lot of terms and concepts mean in this book, but if you hear one that you don’t know. Just look it up. There is no shortage of resources explaining terms and concepts. And I promise you, there are few that you will need to know that you won’t be able to understand.
Investment advisors don’t make so much money because they are routinely outperforming the market. They make so much money because people are paying them high fees to perform a relatively straight forward job.
Misconception 2: Fear of Losing Money
One of the biggest fears people have about investing is the possibility of losing money. And I get it. It’s a big one. It's a visceral, almost primal fear—like watching your hard-earned money slip through your fingers. However, this fear often stems from a lack of understanding about market volatility and risk management. Investing your money is not the same as gambling, and your investment advisor does not have access to information that you don’t. You are not paying your investment advisor those big fess because they know how to outsmart the market and you don’t. Outsmarting the market is not the goal.
Understanding Market Volatility
Market volatility just means that investments go up and down, and it is a natural part of investing. The stock market will experience ups and downs, and short-term losses are inevitable. However, historical data shows that the market tends to recover over time and generate positive returns in the long run. It's like riding a roller coaster—there are thrilling highs and terrifying lows, but as long as you stay on the ride, you will ultimately reach your destination.
Managing Risk
To mitigate the fear of losing money, it's essential to manage risk effectively. Diversification, as mentioned earlier, is a key strategy for managing risk. Additionally, setting a clear investment plan and sticking to it can help you stay focused on your long-term goals rather than reacting to short-term market movements. While the idea of doubling your money overnight can be exciting and thrilling, it’s thinking like that will result in losing your hard earned money.
Emotional Discipline
Emotional discipline is crucial in investing. Fear and pipe dreams can lead to poor decision-making, such as panic selling during market downturns or chasing after hot stocks. By maintaining a disciplined approach and adhering to your investment plan, you can avoid making impulsive decisions that could harm your financial future.
Learning from Mistakes
Every investor, no matter how experienced, makes mistakes. The key is to learn from these mistakes and use them as opportunities for growth. By analyzing what went wrong and how you can improve, you become a better investor over time. Remember, investing is a journey, and each step, whether a success or a failure, contributes to your overall growth.
Misconception 3: Lack of Time
Another common misconception is that managing investments requires a significant amount of time. I get it! I am stingy with my time. It’s a precious commodity, and it's understandable if you feel like you simply don't have enough of it to dedicate to investing. But if you go back and calculate how much you are paying your investment advisor, you might realize that you are paying yourself a pretty attractive wage per hour to invest your time yourself.
Efficient Portfolio Management
We are not talking about uncovering stocks that will outperform the market or learning how to buy credit default swaps. We are talking about putting together a solid and well-balanced (diversified) portfolio (collection of investments) that will generate a reasonable rate of return over time. The time involved in doing this is setting up your initial portfolio, and investing your annual contributions and re-balancing your portfolio twice a year - or maybe quarterly. That’s it!
Regular Reviews
Rather than constantly monitoring your investments, set aside specific times to review your portfolio. Monthly or quarterly or even bi-annaul reviews are typically sufficient to ensure your investments are on track. During these reviews, you can assess your portfolio's performance, make any necessary adjustments, and stay informed about market trends.
Using Technology
Investment apps and tools can help you stay organized and informed without consuming too much of your time. These tools can provide real-time updates, performance tracking, and educational resources, making it easier for you to manage your investments efficiently.
Continuous Learning
Investing is a continuous learning process. As you gain experience, you'll naturally learn more about different investment strategies, market dynamics, and economic indicators. There are countless resources available, and I’ve compiled, curated, and broken many of them down into an easy-to-use step-by-step framework with no missed steps.
Applying What You Learn
The best way to learn about investing is by doing it. Start with small amounts of money and gradually increase your investments as you become more comfortable and knowledgeable. By applying what you learn and gaining hands-on experience, you'll build confidence and develop your investment skills over time.
Overcoming Psychological Barriers
Fear of the Unknown
Fear of the unknown is a natural response when venturing into new territory. The world of investing can seem intimidating, but by educating yourself and taking small steps, you can overcome this fear. Remember, every expert investor started as a beginner. With time and effort, you can become knowledgeable and confident in your investment decisions.
Overcoming Analysis Paralysis
Analysis paralysis occurs when you become overwhelmed by the amount of information available and struggle to make decisions. To overcome this, focus on the essentials and avoid getting bogged down in details. We’ll start with a simple investment strategy, such as a diversified portfolio of low-cost index funds, and gradually expand your knowledge and investments as you become more comfortable.
Dealing with Loss Aversion
Loss aversion is the tendency to fear losses more than we value gains. This psychological bias can lead to overly conservative investment decisions or panic selling during market downturns. To combat loss aversion, focus on your long-term goals and remind yourself that short-term losses are a natural part of investing. Maintaining a disciplined approach and sticking to your investment plan can help you stay on track.
Managing Expectations
Unrealistic expectations can lead to disappointment and frustration. It's essential to understand that investing is not a get-rich-quick scheme. We are not talking about how to identify and benefit from some GameStop short squeeze. Building wealth through investing takes time, patience, and consistent effort. By setting realistic expectations and focusing on steady, long-term growth, you can avoid the pitfalls of chasing high returns or making impulsive decisions.
Building Your Confidence
Starting Small
Starting with small investments can help you build confidence and gain experience without risking significant amounts of money. As you become more comfortable and knowledgeable, you can gradually increase your investments and take on more complex strategies. For example, if you have traditionally given your financial advisor $10,000 per year to manage within an RRSP or TFSA account, maybe this year, take that $10,000 to start managing yourself before you decide to pull your entire portfolio from your financial advisor.
Setting Realistic Goals
Setting realistic, achievable goals is crucial for building confidence. Break down your financial goals into smaller, manageable milestones and celebrate your progress along the way. Achieving these milestones will boost your confidence and motivate you to continue working towards your long-term objectives.
Tracking Your Progress
Monitoring your investment performance and tracking your progress towards your financial goals can help you stay motivated and informed. Use investment apps and tools to track your portfolio's performance, analyze trends, and make data-driven decisions. Regularly reviewing your progress will reinforce your confidence and help you stay focused on your goals. And, if you are starting small and keeping some of your portfolio with your investment advisor, track your gains in that portfolio, the management fees that you are paying and your gains in your personally managed portfolio too.
Learning from Mistakes
Mistakes are a natural part of the learning process. Rather than viewing mistakes as failures, see them as opportunities for growth and improvement. Analyze what went wrong, learn from the experience, and use the lessons to make better decisions in the future. Over time, you'll become a more skilled and confident investor.
As you move forward, keep in mind that every successful investor started as a beginner. By taking small steps, staying informed, and maintaining a disciplined approach, you can build a solid foundation for long-term financial success. The journey may have its challenges, but the rewards of financial empowerment and independence are well worth the effort.
You can do it and I can help.
Empower Your Wealth: Become Your Own Financial Investment Manager is a 20 part series that teaches readers how to self-manage their investments. It covers basics to advanced strategies, emphasizing the importance of financial independence, diversification, risk management, and technology