Welcome back to another edition of the Informed Decisions Blog, Ireland's #1 Financial Planning Blog & Podcast! This week we will take on an obscure topic, a topic which is often left till the bitter end before we give it consideration! When it comes to focusing on your Financial Planning, Financial Independence or 'building wealth' it pays, quite literally, to begin with the end in mind!
Speaking of Financial Planning I am delighted to share with you that the 'My Money Matters' Programme I was invited to help create with Count Her In is now alive and well (and carrying a decent introductory discount!) It was a really great thing to be involved in, to be creating a Programme which I believe will have a hugely positive impact for people that want to make positive changes in their finances. It made it all the more rewarding to get paid a few euro for my time and expertise in helping them create it! Seriously, we hope it is of real and tangible long term benefit to anyone who feels it would be of help.
How Can We Die With Too Much Money!?
We'd like to now introduce you to this weeks' fictitious characters, Sinead & Johnny. For simplicity we'll say they were both born in 1948, meaning as of 2018 they are 70 years old. Sinead is from the South East, but living in Dublin since she was a young lady, lured by the handsome young Johnny at the time! Sinead worked on and off over the years, while also rearing their 2 children, Sheena & Joseph, who are now in their early and late 40's. Sinead's husband Johnny worked all his life, most of it in 1 large factory, originally as a labourer and then moved into supervisor and management roles. Johnny loved working and only retired fully from paid employment at the age of 69. Since then they have both been enjoying the spoils of their 50 years of work, travelling, going away for weekends with friends & family, and enjoying the company of their 5 grand-kids!
We all love an oul get-rich-quick scheme don't we!? Even if we know it's far too good to be try we will 'click' through or read beyond the head-lines, we just want to know more, 'sure its only looking'.......that is what has you reading this right now! Well I am on a mission to train you out of such inquisitiveness, this is lesson 1!! (and it's totally free!)
Imagine a perfectly sane and prudent nation of people getting swept up into a frenzy of buying, trading and bargaining of a particular item, an item that holds the value of a common flower bulb. Imagine the same frenzy taking hold of an entire nation for over 3 years, eventually resulting in a catastrophic downturn and wiping-out of many many of its' citizens personal wealth and life-savings.
We will explore such an event which happened in the not too distant past, and explore what we can learn from it to protect ourselves from such get-rich-quick schemes in future. (some people have drawn similarities between this event and Bitcoin, we aren't doing that as they are totally different products & we have no idea how Bitcoin will progress, however the behaviour of the masses might not be that dissimilar!).
Oxford dictionary define a commodity as 'A useful or valuable thing'. Another definition they put out there is 'A raw material or primary agricultural product that can be bought and sold, such as copper or coffee'. Whichever way you look at it, be that a useful and valuable thing, or indeed a basic product, Commodities have found their way into many many pension and investment portfolios.
Apparently as many as 4,000 years ago our Neolithic ancestors here in Ireland made use of cattle, for food, leather and indeed milk. Many of you reading this may never have milked a cow, however you may well own a very tiny portion of a fund which tracks the price of those fine animals!
Chances are, if you are a member of a company pension scheme, or have some spare money invested, you are investing in Commodities, whether you know it or not! As strange as it may sound cattle prices are frequently an aspect of Commodities in investment terms, so you could well have an active interest here!
We are going to look at the pros and cons and alternatives to investing in Commodities, either as a lump sum investor or a pension investor here in Ireland.
Check out the full blog version at www.informeddecisions.ie
We've spoken about volatility here before, and we have put it on a bit of a pedestal on account of it's hugely positive influence on the long term saver/investor who embraces it and recognises it as the huge ally it is. Euro Cost Averaging (Or Egg-Cost-Averaging as you'll see in a moment) is an outcome of these fluctuations.
Euro-Cost-Averaging is just one of the many aspects of Financial Planning in Ireland, which goes some way to explaining why our Financial Planning and Money Podcast here, is over 60 episodes old and we have so so much more to share with you dear readers and listeners. We are on a mission to become the place for people to turn when they need real information and insight which is un-biased and practical to Irish people who want to deliver positive financial futures for themselves....not too much to aim for!?
What is Euro Cost Averaging?
This is a jargon term the industry created many moons ago. In plain English it refers to the fact that if you are saving regularly into an investment, that investment will increase and decrease in value over time, meaning you are buying into that investment at these various points, some high, some low, which results in an average price paid.
Imagine you buy €2 worth of eggs every week from old Mrs. Corrigan (fictitious character!) up the road. The number of eggs you get for your €2 from Mrs. Corrigan on a given week is based on how much demand there is for the eggs, and how productive the hens have been that week! For example one week you get 12, another week it is 8, the following week 9, another week 10, another week 9 and another week 12. Over that particular 6 weeks you got a total of 60 eggs. You paid a total of €12, so the Egg-Cost-Average here would be calculated as €12.00/60 = 20cent per egg, over that period of time! Simple! Though we like to let on we are very smart in the Financial Services industry, that is basically what Euro Cost Averaging is!
Is Euro Cost Averaging An Investment Strategy or Just An Outcome!?
While some argue that it is an investment strategy designed to reduce volatility and 'average-out' your returns over the long term, while others suggest that it is an outcome, whether positive or negative, when an investor contributes a certain sum at regular intervals over a period of time.
We suggest it is indeed the latter. There is much research which points to the fact that as an investment strategy, it is flawed and statisticaly less likely to deliver better outcomes than investing it in one lump sum. Say you have €150,000 to invest, research suggests that it is best to invest it as one contribution instead of trying to time the markets and drip-feed it into a particular strategy over a period of time, say 12 months. You'll see why shortly.
In the USA Euro Cost Averaging is known as Dollar Cost Averaging (DCA). Finance journalist Dan Kadlec of Time Magazine summarized all the relevant research research when he wrote, "The superior long-term returns of lump sum investing (instead of DCA) have been acknowledged for more than 30 years. Similarly, decades of empirical research on DCA has found that it does not function as promoted, and is a sub-optimal investment strategy". This debate is one for another day, the main purpose of the past 2 paragraphs is to outline what Euro Cost Averaging is, and is not, and how it impacts.
So What Does Euro Cost Averaging Actually Do?
What better way to explain it than to display it in numbers. Let's imagine this weeks' character, we'll call her Grainne, starts a regular savings investment or indeed a pension where she will be contributing the same amount every month, even for 6 months:
Month 1 - Cash Invested: €300 Unit Price: €1.00 Units Bought: 300
Month 2 - Cash Invested €300 Unit Price: €1.10 Units Bought: 272
Month 3 - Cash Invested €300 Unit Price €1.50 Units Bought: 200
Month 4 - Cash Invested €300 Unit Price €1.20 Units Bought: 250
Month 5 - Cash Invested €300 Unit Price €1.15 Units Bought: 260
Month 6 - Cash Invested €300 Unit Price €1.00 Units Bought: 300
So, as you'll see from above, there was quite a lot of volatility in the first 6 months of Grainne's investment journey, that's purely for illustration purposes! The value of the fund she was investing in grew by 50% in value and came back down to the price at which she had started investing 6 months ago. How does that leave her in terms of being up, down or level!?
Grainne has at this stage invested €1,800 (6*300). She has a total of 1,582 units in this particular investment, meaning she has paid an average of €1.14 per unit. Considering that her units are currently all actually worth €1.00 she will actually be down money, as she paid a high price for units relative to their current value, particularly in months 3 and 4! She would have invested €1,800, as we saw, and as at month 6 her fund would be worth €1,582 (1582 units * current price of €1.00!). Grainne may well feel like this has been a rubbish investment, and want to cash out her chips now, but alas we must not allow her take such a knee-jerk reaction.......
So, whats the moral of this particular story I hear you ask!? Well as you can see, if you are buying units (investing) on a regular basis, even with Euro Cost Averaging, you would be best advised to keep a hold of your investment until the value comes above the average price at which you have paid over the course of the investment journey. If you are in a pension, the timelines will obviously be much much longer, however the same principles apply.
Another moral of the story is that, if you are investing regularly, it may seem counter-intuitive really you do not want to see the value of the fund going up! At least until it is time for you to cash in your chips! You really do want to be buying them at a low price, accumulating them at a huge volume, and when they come up in value, you cash them and then enjoy the fruits of your labour! Buy low and sell high is a term we have all heard of, Euro Cost Averaging can help you achieve that......let's see how..
Does It Help Me As a Saver?
In this story we're going to outline Joe's investment journey. He is a good guy, has a great financial coach who has identified his goals, and indeed his concerns regards his retirement planning. Joe needs to accumulate a pot of €200,000 by the time he is 62 in order to allow him reduce his hours, and to support the lifestyle that he desires, in addition to his other assets he has. So off Joe goes and start contributing €600 per month into his pension....
Month 1 - Cash Invested: €600 Unit Price: €0.20 Units Bought: 3000
Month 2 - Cash Invested €600 Unit Price: €0.18 Units Bought: 3333
Month 3 - Cash Invested €600 Unit Price €0.15 Units Bought: 4000
Month 4 - Cash Invested €600 Unit Price €0.12 Units Bought: 5000
Month 5 - Cash Invested €600 Unit Price €0.14 Units Bought: 4285
Month 6 - Cash Invested €600 Unit Price €0.20 Units Bought: 3000
Joe's initial 6 months were too a roller-coaster, with his fund falling in value by 40%, from 20c to 12c at one point. In real terms this would most likely feel like armageddon again, there would be some sort of economic crisis to drive a well diversified portfolio down by 40%, but it will happen again soon, mark my words! So, despite this sense of panic around the place, thanks to the strong financial coach that is working with Joe he persists and has faith in the constant upward curve that is global equities, and he actually end up big-time in the green.
Joe has invested €3,600 at this stage, he has a total of 22,618 units. Divide one by the other and we can see that the average price Joe has paid for his units has been just under 16cent. They are currently worth 20cent, so his €3,600 is now worth €4,523! And that was having gone through a financial crisis that had eroded 40% of the value of his fund at one point!
Moral of the story for Joe? If you are regularly investing through a crisis that smashes the value of your investment fund, you are buying cheap, you are accumulating huge numbers of units at a discount......it's like a Next Sale in Blanchardstown Shopping Centre.....except at this sale every eejit in the country is quite wrongly telling you to keep your money in your pocket/deposit account....more fool you if you listen to them!!
How Would It Have Gone If They Invested a Lump Sum?
The funny thing is that if Grainne had of invested a lump sum in month 1 instead of regular payments over the 6 months, she would be in the same position she started, having paid €1 per unit at the start, the same point it was at by the 6 month point. So for her, you could argue that she'd have been better off doing a lump sum, but you can only say that based on the value it is right now.......
If Joe had invested a lump sum, he would be breaking even at this point also. He is better off having paid regularly.
The moral of that story?! Nobody can tell what the markets will do, it is not a debate to get into, should I aim to Euro-Cost-Average or will I go with the Lump Sum, impossible to answer, it's a bit like the old chestnut of a question, 'Should I Fix my mortgage or go with a variable rate'!? Impossible to predict future rates/fluctuations.
What some would argue however, is that based on the fact that equity markets are positive more than 70% of the time, if you dollar-cost-average your way instead of going with a lump sum at a particular point in time (if you have the lump sum available) you will more than likely be paying higher prices by purchasing at more points in time.
This debate of Lump Sum or Euro Cost Averaging is for another day, so this might just whet the appetite!
QFA | RPA | APA | Qualified Coach
We kick of 2018 full of optimism, gratitude and excitement for the year ahead. After what was hopefully a nice Christmas break we all are raring to go, and apparently as many as 50% of us (myself included!) feel that customary urge to set some resolutions for the year ahead.
The top resolutions that we make (the 50% that do!) are; weight loss, exercise related, smoking/alcohol related and money related. So even as a broad estimate this suggests that 15% of the population in Ireland try to motivate themselves into better money management habits at the beginning of the year.
According to Professor John C. Norcross Ph.D of University of Scranton Psychology USA, 10% of all resolutions result in sustainable change. Pretty poor that therefore 90% of all resolutions crash and burn!
We are keen students and readers of all things performance, behaviour and success related here. Never-mind it's impact on how we deal with our money, the ability to perform, behave or succeed has such huge impact on our life and the lives of those around us. For this reason we decided to kick-off 2018 with something a little different (this will be a common theme to 2018!).
What Do Resolutions Look Like?
Resolutions are often very broad and sweeping statements. I will give us smoking. I will spend less money. I will clear my credit card. I will eat less Ben & Jerry Ice-Cream! They all sound worthy, they are probably all very well-intentioned, however they are all vague. There is no time line, no specific action, no measure as to whether it was a success, or way of measuring progress.
As a serial resolution-maker of maybe 10 years now I, for one, can confirm that they just don't work! Not only that but by the end of January I've probably passed the self-deprecating phase of under-performance and am firmly into the 'I actually didn't want to change' phase by March. By April it's 'I can't remember what my resolutions were' phase!!
A resolution is defined as a 'firm decision to do or not do something'. Essentially the above resolutions, or decisions to do or not do something are based on habits, smoking habits, eating habits, exercise habits, money habits. Habits as we all know can be very difficult to change, hence they are habits!
Why Do Resolutions Fail??
We've done quite a lot of reading on this, seems there are a few trains of thought we will share here now, that might prove useful if you are one of the 'resolutioners' who struggle with making progress on your resolutions! Take what you will from these, some may seem more credible than others, perhaps see which one sits best for you!
1) False-Hope-Syndrome: When we make resolutions we often aim too high relative to what we truly believe we can achieve! For example, If I'm eating 15 portions of junk-food/snack per week and I set a resolution for myself of cutting all junk-food from my diet, my internal dialogue/subconscious is already telling me (quietly!) that 'there's no way in hell you're going to be able to do this'!! We have all heard of false-hope, so essentially what this train of thought suggests is that some of the resolutions we set for ourselves are walking ourselves into it, and a confidence-bashing if/when we fail to reach the targets we set ourselves!
2) Cause & Effect: This idea stems from the suggestion that when we set a resolution, and we actually do the new habit for a period, that if we don't notice the desired effect immediately we can become de-motivated and fall back into old habits! So, lets say I decide I want to be 'better with my money'. If I watch my spending, open a savings account and start popping money in for a few weeks, and maybe even start contributing to that pension that I had been putting off. Well unless I get the desired feeling and feedback from having done that i am in high risk of cancelling the whole friggin' lot and going back to my old ways! We love feedback, we love knowing that what we are doing is having a positive impact and that we will be much better off as a result. If we don't get that feedback quickly we might fall off the wagon!
3) Self-Stories: This suggests that we ALL have internal self-stories, views on how we see ourselves living and behaving. This internal and mostly subconscious viewpoint determines much of our behaviours, habits and importantly our decisions. Your subconscious has predetermined, based on your self-stories and self-talk, what decision you will make when you are confronted by the choice between a salad or chips and burger for lunch on the 18th January!! It does also suggest however that we have the power to change our internal self-stories now. We can, through visualisation and goal-setting change how we see ourselves living and behaving. This is said to be one of the single most powerful tools in performing as we want to perform, to achieving what we want to achieve and in ultimately changing habits.
Say for example that you wanted to clear the debt you owe on a credit card. Up to now you had been slow to clear it, instead you have in the past made unnecessary purchases, clothes, cars and other items instead of actually clearing your debt. If you have been this way for years then your self-story will likely re-affirm for you that you are 'bad at clearing debt' and that you 'love to buy nice things instead'. That is your self-story, for you right now it seems true. However you can change that story....we can convince ourselves of a new self-story, one whereby we will see ourselves as 'great at paying off debts quickly' and 'able to resist impulse purchases easily'. When we are next faced with a decision about what to do with the €300 left in your bank account on the last day of the month, you are much more likely to act in a way that is congruent with your new self-story.....you'll most likely happily direct that money to your credit card as opposed to spending it in Arnotts!
What Could We Do Instead of Setting Resolutions?
If you have been setting them then the research suggests that you are very likely to have failed. That doesn't obviously mean you should quit resolutions (ironic!). However there is a lot of research out there that suggests we should not frame desired behaviour change as 'resolutions' for ourselves. Instead there are, for example, some really powerful goal-setting tools that we could use to help us get to where we want to get to. Instead of having a broad resolution such as 'I will get better with my spending habits', try and build a goal using the following framework, SMART.
Specific: Try and be as specific as possible about the behaviour/habit you want to create. Don't aim to do lots of things, focus on the really important thing for you. Pick one not 5!
Measurable: If it is not measurable in some way then it will be impossible to know if you are making progress (feedback)
Attractive: It must appeal to you, deep-down be of meaning to you. If not it will fall by the way-side when life gets in the way!
Realistic: It much be realistic, by all means make it stretching but not crazy stuff! (false-hope)
Timely: If you are aiming to be doing the new habit, by what date exactly do you want to be doing it, and for how many days/weeks in a row. Ideally aim to do whatever it is your doing within the next 3-5 months max, any longer and it is too easy to put if off until 'another time'!
Using the above tool (which has been around for centuries by the way, not my creation!) may just help turn a vague and broad resolution into a really appealing, measurable and sustainable goal to be achieved by a certain date in the near future.
What Else Might Help?
The research shows, and personally I believe it, that if your goal is written down then you are much much more likely to achieve it, whether it is a goal, a habit, a behaviour, the action of writing it down, and ideally being able to see it regularly will keep it at the fore-front of your mind, might help re-write your self-story, and enable you to do whatever it is you have set for yourself.
It's probably worth noting too that they suggest it takes 21 days to form a new habit. It's kinda hard to understand how they have measured this! Irrespective of how long it actually takes it's probably fair to say that when we set off on our quest to reach our goal we should be patient with ourselves, good things don't generally happen over-night....so expect it to take some time!
If we can be of any support to you over the year then by all means feel free to use us! If we can act as an accountability partner, or someone to check in with on soem queries then please do so...if we can help we will help.
Looking forward massively to a hugely fun and full 2018!
QFA | RPA | APA | Qualified Coach