How not to waste your money

2012-08-11 12:12

Why are we so obsessed with the talking heads on CNBC and CNN when we

don’t even know the outstanding balance on our credit cards or how much

we have in our company pension fund, asks Maya Fisher-French

There are two questions I am always asked by fellow journalists.

Firstly, why on earth did I leave the lucrative world of stock broking to become a journalist; and secondly, as a journalist why don’t I write about shares and the markets.

The simple answer is that all of the above does not matter.

What really matters is what we do with our money on a daily basis.

While it may be fun to watch the market and discuss opinions, how does it really affect your life plans?

How does it pay off your debt or pay for your kid’s education?

Unfortunately, our media tends to focus primarily on the “sexy” world of markets and finding headline-grabbing stories that evoke extreme emotion from its audience, which results in investor behaviour that actually undermines our long-term savings goals.

The “behaviour gap” is what author Carl Richards has coined to describe the difference between the performance of a fund and the returns actually received by the investor in that fund.

In his chapter “We don’t beat the market, the market beats us”, he writes about investor mistakes rather than investment mistakes.

Research has shown that investors’ attempts to time the market by selling and re-investing into a fund results in losses.

Allan Gray, which recently brought Richards to South Africa, has found that the average investor in the Allan Gray Balanced fund received a 14.3% yearly return over the past 10 years compared to the 16.6% return delivered by the fund.

While 2.3% a year may not seem that much, over a 10-year period a R100 000 investment in the fund would have delivered R464 500 versus the average investor’s return of R380 600 – a difference of R83 900.

The difference in return is due to investor behaviour where investors got sucked into the greed and fear cycle, no doubt as result of paying far too much attention to daily market commentators.

The irony is that the Allan Gray Balanced Fund is specifically designed to limit the volatility of the markets and should in fact prevent the need for market timing by investors.

In reading The Behavior Gap, I felt I had found a kindred spirit when he wrote: “Picking the next Apple is not a financial goal.

“Saving for retirement or having enough money to send your kids to college are financial goals.”

Richards, who spent many years as a financial adviser in the US and now heads up investor education for BAM Advisor Services, writes about how to manage your money, how to move from financial planning to life planning, how to choose the perfect investment and how to make decisions “that are in tune with reality, with your goals and your values”.

It also helps that the book is really easy to read and has simple pictures to illustrate his points.

He demystifies the so-called world of finance and shows that money decisions are more about your emotions and goals than the latest predictions by Nobel Prize-winning economists – they get it wrong as much as they get it right.

To illustrate his point, Richards writes about three famous market forecasters who all had completely different views of the market in late 2010 to early last year.

Market forecaster Robert Pretchter stated: “The Dow, which now stands at 9 686, is likely to fall well below 1 000 over perhaps five or six years as a grand market cycle comes to an end.”

Yale economist Robert Shiller predicted that the Standard & Poor’s 500-stock index would rise from 1 280 to 1 430 over the next decade – a 1.3% rise per year.

And finally, veteran market watcher Laszlo Birinyi forecast that the S&P’s would hit 2 854 by the end of the day on September 4 2013. That is quite a prediction!

The point Richards makes is that here are three market gurus with three divergent forecasts – all pretty extreme.

So what is an investor to do?

Richards’ advice: ignore them.

In his book, Richards explains how to put together a financial strategy that is about your goals and your needs and which ignores the market hype.

While listening to market gurus and having an opinion about the market is fun, it should not change your financial plan – only events in your life should.

The events that have a direct impact on you should require you to make an adjustment to your investment decisions.

If you want to start investing, if you want to create a road map for your life and build long-term wealth, invest in this book first.

It is a helpul tool that will definitely save you money by helping you make better decisions.

» Next week: City Press interviews Carl Richards on how to speak to your spouse about money

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