Here's what I mean., Let's say you were in the market for a new car., You did your research, put the time and effort in to finding out everything that there was to know about every option, performance stat, you name it., You know everything there is to know about that car. Even the price., You then put the screws to the sales person. Because you know your price., You use the internet to do your research. You know your price., Then, after all that research, suddenly, the day you are ready to go and buy the car - the price is suddenly slashed by 30%., What do you do?, You get excited., You just got what you consider the best car for your needs not only for a great price but the value that you have now obtained has gone way up.
So now let's say you were in the market for a new house., You find your neighbourhood and you do your research., You know everything there is to know about the area., You know what you want and you know what you should pay for it., You use the internet to do your research. You know your price., You know the best streets to buy on., You know everything there is to know about the area and what a good price is., Then, after all of that research and patience, a home, fitting your criteria exactly comes on the market., But, it comes on the market for below what you felt was a good price., What do you do?, You get excited., You drop everything to make the offer so you can snag that deal., You got tremendous value for your money.
Now, let's assume it's time to make an investment., You do your research., You build your portfolio's target asset mix., You set your geographic mix., You feel you know exactly what you should buy., Then, just as you are getting ready to move that money into your portfolio, the markets experience a downturn., What do you do?, Usually nothing., You freeze., But, aren't you supposed to "buy low and sell high"?, Aren't you supposed to take advantage of opportunities when they present themselves?
So, what went wrong?, Well, here's a list (and by no means is this an exhaustive list) of what went wrong., If you let your emotions dictate your investment making decisions, you'll be wrong every time., OK, so let's do a logic test., The only way you can make money on anything is to buy it for a lower price than you sell it for., Now, when are prices low? When everyone is optimistic or when they have lost faith?, So if we know this, why don't we practice what we know?, One word. FEAR., False Evidence Appearing Real, Conquor your fear through knowledge. Knowledge is the only thing that can eliminate fear., So, where do you obtain that knowledge? Well, this podcast is a good first step., The next one however is to find someone who you can work with. Someone who you can trust., I've mentioned it in the past but if you live in Canada, go to www.fpscc.ca and click on the find a planner link., Find some planners in your area and book an appointment to meet with them. I've outlined in some of the original episodes what you should expect from those meetings., I've also got a free consumer awareness guide outlining the 12 key questions you must ask a financial planner before you hire one., This free report will provide you with everything you need to know about how to properly interview a prospective planner and provide you with the key questions you need to ask., You misinterpreted entertainment for advice., Have you ever watched an investment television show?, What is the first thing you notice?, I notice the noise., The shows seem to play off of the stereo type that investing is trading., That investing is a game., I know, I've been on the shows., You want to know what gets you air time?, Sound advice?, A disciplined approach to investing?, WRONG!, BORING!, What get's you air time is "Sound Bites"., If you can put your message into a brief sound bite, you are golden., Air time is expensive., It's a limited resource., So, the people who keep getting asked back are the ones who don't BORE the audience., Which is unfortunate because "boring" can make you a lot of money., You didn't invest in the investment programs you qualified to invest in., Does your paperboy qualify to invest in the same investment solutions you are investing in?, If you have acquired a certain level of wealth and you're still investing in the same investment types and solutions you were investing in when you first started, you are probably in the wrong place., Buying mutual funds., $0 - $100,000, Hiring a personal portfolio manager., $100,000 +, Hire an investment counsellor., $500,000 +, Most of these non-mutual fund solutions are only offered through comprehensive financial planners., Which leads me back to: Find A Good Certified Financial Planner who you an work with., You didn't know your numbers., So, this begs the question: "What numbers do I need to know?", 1. What is your attainable retirement income?, 2. What is your attainable retirement age?, 3. What is your required rate of return?, 4. What is your required savings rate?, If you don't know the answers to these questions, you shouldn't be making any investment decisions., Doing so is simply putting the cart before the horse., If you don't know how to find out these numbers, then find yourself a good fee based certified financial planner who you can work with., You became over-confident., I've been in this business for a while. Some would actually call me a veteran., And here is the one thing that I have seen, time and time again., When the markets are doing well, people are more comfortable with risk and when the markets are doing poorly, they are less comfortable with risk., Which is backwards - again the logic is missing., I've heard other investment professionals say "Investing is perverse.", You see when markets are down, investors feel that risk is elevated. But nothing could be further from the truth., In actual fact, the risk has been reduced. This is because investments react AS events happen and so as the markets fall, risk is lowering., This is also known as the Fear Premium., I'm hoping that this is beginning to make sense with you because when you get this, you begin to act more rationally when it comes to investing., So, when the markets rise, don't get lulled into the false sense of security and become over-confident. The reason is simple. Risk is rising at this point. Emotionally though, it feels wrong., And this is what moves the market in irrational ways. When you get this, you can see the forest for the trees., You let the fee tail wag the dog., Have you ever heard of any elite athlete who doesn't have a coach?, I'll let you in on a little secret., Building and keeping wealth can be a full contact sport and all financially successful people will attribute a lot of their wealth accumulation to having a good support network who they can turn to - at any time., Anybody who thinks they can do it alone are sadly mistaken., You'll find one of the questions in the free 12 key questions you must ask a financial planner before you hire one special report is to ask the prospective financial planner how they keep up to date with the latest and greatest strategies and techniques., One of the most important things they could say to you is that they have what I call a Mastermind Group who they meet with regularly., I actually have many., Every 90 Days I spend a full day with approximately 40 of the most successful small business owners. Not just anybody can join this group. You need to meet some very strict criteria and you have to pay close to $10,000 a year to remain a member of the group., The best truly do hand out with the best., I meet every quarter for another day with 8-10 of the most successful financial planners in Ontario., The best keep hanging out with the best., I have regular online meetings with some of the most talented minds in my Top Guns Network., I record and share these calls online - see The Fly On The Wall Update Calls on our website., So, when someone tells me that they are going to "do it themselves", I cringe., If the best can't do it alone, what makes you think you can?, Would you pay someone the equivalent of 1% of your assets to protect you from losing 45% of your assets?, Anybody who sold there investment portfolio in 2008 after the Canadian market fell 45% is wishing today that they had someone who could have talked them off the ledge., So, it's not that keeping fees in check is not important, but don't think you will simply make more on your investments by choosing the ones that have the lowest management fees., You made investment decisions based on the scenery that you see in your rear view mirror., How do you choose your investments?, Here's what most people do., They find an online tool that ranks all investments against one another., Then, they sort the investments on the 5 and 10 year average numbers. They then choose the investments based on these numbers., Don't believe me? Then take away the historical performance and answer me this: Why is each investment or mutual fund in your portfolio in your portfolio then?, The reality is people don't usually have any other reason for an investment to be there other than the investments historical rate of return., Now, let me ask you this: If you were going to drive from your home to your office, where would you look?, Would you watch the rear view mirror or would you look out the front window (and glance in the rear view mirror every once and a while?), Ridiculous question I know but most people buy investments simply by looking in the rear view mirror (i.e. they only look at historical performance.), Historical performance doesn't really tell us much of anything other than what has happened. And, have you ever read the disclaimer on every investment advertisement?, It simply says that past performance is not an indication of how an investment will do in the future. And that future performance can vary quite significantly from the historical performance., In other words, the past is a useless indicator., So, how should you research your investment options?, Focus on process., Find out everything you can about the investment making process (or discipline) that the manager follows., Again, look for logic and then you can test this process against historical market activity to determine how the process would have stacked up during various market cycles., If you see some consistency, you are heading in the right direction. If there is no rhyme or reason for what has happened, there is too much uncertainty and you should proceed with caution., Focus on the process and not the performance because the performance will come as long as you can remain with the investment process through thick and thin., Studies show that some of the most successful long term investment solutions have posted great long term rates of return. However, in these same investments, almost none of the actual investors received the long term stellar performance. Why? Because the investor did not stick with the process through thick and thin., You didn't get basic math., Quick question: If you invest $100 and the investment falls by $50, what rate of return do you need to make to get back to break even., Here's the math:, The $100 fell by 50%. It is now worth $50. To get back to $100, the $50 has to double. In other words it has to make 100%., So, when an investment loses 50%, it needs to make 100% to get back to where it started., The hole most investors fall into when they sell during a market correction is deeper than they think. It's no wonder why most emotional investors lose faith in the markets.
I've said it before and I'll say it again., Financial Planning is the KEY, it always has been and always will be. Find yourself a great financial planner to work with today. You'll be glad you did.
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