Choice?

Is too much choice simply too much for some people to handle these days?

Interestingly, the more choice we have, the more disappointed we subsequently become. This is actually contrary to most people’s belief that the more choice, the better. Let’s take for example a simple trip to the ice cream shop – there are so many flavours to choose from now. Inevitably you choose something and take the first bite and then wish you had chosen the other flavour. The same applies at the restaurant, and how about choosing the colours to paint your house. How many shades of white are there for goodness sake?

So despite the fact that economic theory suggests that we are rational economic agents who know their own business best, perhaps this is simply not true when investing. This is why the government is implementing MySuper, a low cost and no frills solution for those of you who show high levels of apathy towards their superannuation and retirement.

Guess what, in my experience this is absolutely correct. To this stage I have not been convinced that the majority of Australians would not be advantaged by investing into a MySuper option. The reason for this is that most investors overestimate their ability to choose good investments. Furthermore, they are also prone to making investment decisions based on past performance rather than an intellectual framework. Finally, they also get caught up in the fear and greed cycle resulting in taking less risk when things are bad and taking more risk when things are good which is unfortunately the incorrect course of action (Warren Buffet states "Be fearful when people are greedy, be greedy when people are fearful").

The Dalbar study supports this. In the 20 years to the end of 31 December 2009, the S & P 500 index in the USA averaged 8.2% per annum wherea’s the average investor achieved a return of just only 3.17% over the same time period.

Someone who wants to really make a difference to their long term goals should consider paying for some advice but I must warn you...achieving your long term goals rarely has much to do with picking the right investments - it is more about understanding the key financial levers that affects your long term outcomes including income, expenses and asset allocation.

If you think that by chopping and changing your investments and trying to pick the next winner is your path to financial prosperity, I say good luck!!!!

Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances

Emotions - your greatest enemy

Here is an interesting thought.
When the price of a good or service goes up, let’s say Banana’s or Petrol, our first inclination is to buy less. Right?
Then why do we not apply the same philosophy to financial assets? If the price of a listed share goes up, why are people more inclined to buy it......and looking at the reverse, if the price falls, they sell it. The same can be said for managed funds. Investors and Financial Planners are more inclined to purchase managed funds that have performed well over the past 12 months.
The problem is, people appear to incorrectly extrapolate past price changes into the future. This is unfortunate for so many reasons, not least the fact that there is overwhelming evidence to suggest that this behaviour destroys wealth. The Dalbar Study in the USA has found that over the 20 year period to 31 December 2009 the US Sharemarket S & P 500 Index had an annual return of 8.2% whereas the average stock fund investor averaged a paltry 3.2% (barely above the rate of inflation).
Investor behaviour is shaped by the false belief that there are market guru’s that can predict the future. This faith is placed in stock brokers, economists, managed fund analysts and Financial Planners. If the truth be known many investors are none the wiser as they do not have the ability to benchmark or “judge” their investment performance with their peers.
Poor asset allocation decisions and market timing nightmares also compound the problem.
Emotion is your greatest enemy. When people are most fearful, future expected returns are actually at their highest. Knowing this, why are people tempted to withdraw money from the share market at this time? Ultimately, investors will only succeed if they have the right plan and discipline in place.
Charles Kindleberger once wrote “There is nothing so disturbing to one’s well being and judgement as to see a friend get rich”. This is a very poignant statement, but should be a lesson to people that we need to constantly battle our emotions and biases and this sometimes needs the help from an expert.
Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances