Great Rewards Require Sacrifices

Life can be super easy. Especially in our modern, first-world, wealthy, high safety net society. There is no reason why you need to intentionally work your musculoskeletal system, exercise your brain, engage dynamically with others, compete, beat others, lose to someone who is better than you, or truly fail at something that matters to you at any given moment or period of time. However, these things are precisely what makes you a capable, successful human being.

There are good and meaningful rewards which are the product of deliberate and thoughtful sacrifice. In contrast, no deliberate efforts result in fleeting rewards which often carry long-term damage.

The Elimination of Sacrifice

We live in time like no other. You can easily get a brainless 8:00 - 4:30 job that pays reasonably well. You can transport yourself everywhere you need to go on the entire planet in plush, climate controlled comfort. You can never take a chance, never make a difficult decision. You can avoid ownership of mistakes and never be truly honest. You can get through an entire 24 hour period without walking more than 200 steps. You can live quite effortlessly packing two or even three times your healthy body weight--there's even battery powered mobile assistance if you get really big. You can eat all the crap you want, drink nothing but concoctions of toxins, and smoke or otherwise inhale poisons. You can easily design your life so you are never more than an arms length away from a super-size soda and a bag of Cheetos. You can inhabit an office chair and computer desk by day and your couch and video game controller by night.

However, there's a cost to this almost infinite illusion of wealth and easiness that has never before been experienced by any living thing on Earth. It turns out humans, like all living species, are not designed to function well over the long term with all this comfort. Living your life with no real exercise, drinking soda pop and beer, eating Cheetos and French fries, telling lies and half-truths, and having bugged out eyes from electronic screens while living vicariously through virtual personas are awful choices in the long run.

About fifteen, maybe twenty years of this physical and mental gluttony results in massive health problems. Heart attacks in your late-30s or early-40s. A diet of pharmaceuticals to try control every bodily function from cholesterol to blood pressure to glucose and insulin--all with nasty side effects. Your knees or hips need to be replaced because they are "worn out" (despite your obvious minimal use of these joints). The physical and emotional costs cannot be measured: depression, anxiety, pain, surgery, lethargy, and cerebral atrophy are no joke. These repercussions are an alarming over-correction to your years of self-inflicted, existential abuse.

These same products of physical, mental, and emotional health can seamlessly apply to financial health also. It's super easy in our society to live in an illusion of financial ease. Credit cards loaded with thousands of dollars in spending power come in the mail after completing a two minute online application. Your bank probably reminds you every month or so that you are pre-approved for a five figure line of credit. Every major and minor purchase can be financed with money you never earned--as long as you pay a monthly fee for the privilege. No one forces you to save a dime. And, if you're from B.C., you can apparently get by on a net negative savings rate for decades without repercussions.

However, this means a long-term miserable existence of reliance on others--the exact opposite of personal freedom and dignity. You will need a steady job with a bi-weekly paycheque, you need "free" government health care, you need CPP/OAS/GIS and other three-letter programs to provide for you financially, you need your rip-off bank that you probably hate, and you need an organized power that slowly strips away your freedom in order to serve you. It results in a vicious culture of dependence.

Even rare and seemingly positive events like winning the lottery or receiving massive inheritances are not true rewards. Often these instant, massive financial windfalls which are not earned cause long-term destruction. Families are torn apart, friendships quickly wither, the sudden millionaires develop mental health challenges, addictions are formed, and financial ruin is around the corner. Again, it is as if the natural order of things was broken. To correct the system some supernatural forces intervene, inevitably returning things to their original path. However, there's that familiar and rude over-correction as some strange, unexplained punishment is dished out for the disturbance of that natural order.

Cultivating Meaningful Rewards

The relationship between sacrifice and reward is most interesting. There are very few things in life that truly come easy in every sense for the long term. We need to work hard and strive diligently to cultivate good outcomes. Good outcomes, the ones that really are meaningful to us, are often the outcomes which seem the farthest away and most difficult to reach.

It turns out there are great long-term incentives in place that reward a little punishment and promote a little risk taking with regards to your personal well-being. Regular aerobic activity mixed with the occasional grueling physical punishment does wonders for your physical structure. A diet of greens and fungi, complex and fibrous carbohydrates, and quality whole meat keeps your body lean and your mind sharp. Regular reading, constant learning, and intense thoughtful debate with friends and acquaintances helps your mind age slower than your body. Telling the whole truth and owning your mistakes promotes others to trust you, grows your personal happiness, and completes your psychological processing.

Taking risks of various forms helps us experience the same emotions and thought processes that ensured our species survival and dominance in a world filled with much bigger, much scarier organisms. We are innately designed for challenges. When we are no longer challenged by survival necessities in the natural environment, we need to mimic those challenges in our modern world.

Likewise, true financial success earned through hard work, grit, and better decision making is often lasting financial success. The process of sacrifice brings the reward as well as the ability to manage that reward. Studies back this up, self-made millionaires are happier and more successful in life than inheritors. If you want to be wealthier and happier, you need to earn it. That means sacrifice and hard work; a continual process of getting your financial condition to a better and better place.

A Strategy for Meaningful Financial Rewards

Start with your spending. Carefully analyze everything you spend money on and determine the real value of the goods and services you acquire. Are they truly worthwhile, or are they a form of compensation for your personal laziness which results in long-term costs? Are you attempting to compensate for self-induced stress and unhappiness with "stuff"? Are you chasing the expectations of others to your own financial and emotional destruction? Sacrifice the unnecessary and meaningless extras in life. Instead, work towards a realistic, longer-term set of goals.

Begin saving. Once you've got complete control over your spending, you'll find there's a pile of cash left over at the end of every month. Hundreds or thousands can be funneled into savings or debt pay-down. While debt accumulation is a symptom of negative net production today, savings is simply storing your excess production for your future benefit. We can produce well for a long time, but as our body begins to break down with age that excess production of younger years comes in handy. The rewards of dedicated saving over time can be very fulfilling: you can move to a less stressful job, take a sabbatical to reorient yourself, enjoy an early retirement or semi-retirement, travel and explore, or contribute to the development of a better world around you.

Grow your savings with investing. There are countless ways you can put your excess production (savings) to work by contributing to other's ambitions and taking a fair portion of their return. While not without flaws, the concept of mutually beneficial financial relationships runs deep through our investing world. The emotional strength required to invest properly is a modern form of risk taking. When investing, you experience all the emotions that make you stronger: fear, greed, loss, gain. If you make logical and calculating decisions, the rewards will show themselves over time. However, if can't muster the strength and emotional control required for success, your results will be lackluster.

Over time, when done correctly, your overall wealth will grow exponentially as resources are funneled to productive endeavors. You can invest very passively, buying units of just one single ETF your entire life and watching the growth. You can also choose a strategy that limits drawdowns by converting your savings to safer bonds when business cycles change. Alternatively, you can invest aggressively to make the most of growing businesses while always keeping a large portion of your money in the safest assets.

The importance of these three elements of financial success are in precisely that order: spending control, savings growth, and investing. When all three elements are used together, the rewards will be nothing short of spectacular. But there are no true shortcuts.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.

Finding a Good Financial Adviser (Part 2)

In Part 1, I talked about keeping track of incentives when it comes to financial advice. I didn't want to make the post too long, so I decided to split it in two parts.

Let's look at the factors that identify good advisers: compensation structure, encouragement of complacency, corrupt practices, and over-complication of investment choices.

Compensation

Compensation is a very important factor. After all, if you want to look at incentives this is the first stop. Let me be clear though, do not expect anyone to work for free. Good advisers should earn a good living and you should willingly pay them fairly for their services without having unreasonably expectations.

In the financial advice world, the two main compensation structures couldn't be more disparate: clear asset-based compensation that you pay directly, or murky kick-back compensation that the funds pay (and you pay indirectly).

Always choose an adviser with compensation arrangements you fully understand.

Good advisers charge a transparent fee which covers all money management costs along with other financial advice. Fees usually start at 1% of invested assets and can drop to 0.5% of assets for large accounts. The higher your assets, the lower the percentage.

Good advisers will not make any money other than this fee. No bonuses, kick-back schemes, referral schemes, or Cayman Island vacations paid for by the fund companies they recommend. Any extra money they earn should be passed directly to you.

As a general rule, avoid advisers who earn money from commissions, sales charges, bonuses, etc. Usually you have no clue how they are paid and they often don't make a big point of volunteering that information either. The less you know and the quicker you pass by that information, the happier they are.

Here's how it works with these other guys. You invest in a fund or insurance product they recommend and they take 3-5% right off the top in sales fees. Then they get another 0.5-1.0% of your assets in hidden annual commissions.

Often, they get an extra bonus if they sell products over $xxx from one fund company. This could incentivize them to push you into bad products so they hit their bonus targets.

These advisors will also collect fees and commissions by selling you loans and insurance products. This can push them to sell you loans and insurance you don't need (or are over-priced compared to the broader market).

These advisors might also get referral bonuses (money or gifts) from people they refer you to. This could include a mortgage broker, real estate seller, car dealership, or travel agent. These handshake deals can be very lucrative and totally unknown to you or even their bosses.

It's one big murky system but unfortunately it's the most common form of compensation in the Canadian personal finance world. The largest advisory firms in Canada work this way because it's lucrative for them—stay far away!

Complacency

All too often clients with advisers are way too complacent with their investments. Almost stupidly, they trust everything their adviser does... until a market crash that is. Communication can be poor and portfolio risk levels are often inappropriate.

Good advisers take the time to explain everything to you and should answer all questions you have in a way that you easily understand. No industry jargon or doctor's office Latin. They should be clear and reassuring, but blunt and honest.

Good advisers will freely admit they can't control the market and neither can you or anyone else. The only thing they can do is structure your portfolio so that in most situations it will meet your needs: your risk tolerance, volatility tolerance, income needs, tax efficiency, and return expectations.

They should encourage you to stick to the strategy you developed together regardless of current market performance. The only time investment strategies should change is if something drastically changed in your personal situation. Market corrections should not affect investment strategies!

Good advisers will provide you with good information that compares your investment returns with the market benchmarks on at least an annual basis. That is the MSCI ACWI Index (in Canadian dollars) for all stocks and the FTSE TMX Universe Bond Index for bonds. *Let me know by way of comment if these links are changed*

If your portfolio exposes you to 60% stocks and 40% bonds, the real benchmark comparison should be 60% MSCI ACWI and 40% FTSE TMX Universe Bond Index. Do not accept performance comparison to a compilation of multiple indices.

Do not be fooled by advisers recommending a complicated portfolio and then comparing to a complicated benchmark. Comparisons should always be made in the exact proportions of major asset classes that were specified in your original financial plan which they developed with you! Don't forget, complicated plans are simply your adviser believing their complicated portfolio will outperform a simple portfolio.

Bad advisers will turn to jargon when they are asked questions they don't understand. They try to appear much smarter than you through terminology. They will sound very wishy-washy on investment strategy and will promote "tinkering" with your portfolio when you aren't happy with returns.

Bad advisors will also be hesitant to provide you with clear investment return information. They will rarely compare your performance to the real benchmarks.

Never trust an adviser who compares your performance to a "custom benchmark" established by the fund company. Also, never accept a comparison to "comparable funds". That's slang for we picked the crap out there to make you believe we look good. Don't forget, less than 20% of actively managed funds outperform their benchmarks so there's lots of crap to choose from when picking comparable funds.

Corrupt Practices

Good advisers develop investment plans with you based on your personal situation. They will be very clear about how they are diversifying and structuring your portfolio to meet your risk tolerance, tolerance for volatility, financial situation, and expected return on investment.

Once this plan is in place, good advisers will stick with it regardless of market performance. The only trading they should be doing is the initial buying in the desired proportions and the maintenance to keep the desired allocations as the market moves. The portfolio adjustments should be periodic and systematic. Once a quarter, twice a year, annually, when the allocations are off by more than 5%, or another similar standard.

Bad advisers love to play on your emotions. They over-promise returns and under-explain risk. They put you in assets based on your naive beliefs or their gut instincts. Run far, far away as fast as you can if an adviser suggests you buy what they believe should "outperform". Or is "currently trending upwards". Or if they can "guarantee an easy X% with minimal risk". The only investment with minimal risk is government bonds—they will return 2-3% a year.

Bad advisers also promote portfolio tinkering. Gold goes up, they put you in their 'Assertive Gold Miners Value Fund'. Oil prices crash, they suggest you move out of the 'Global Oil Opportunities Fund' and into their 'European Banks Disciplined Equity Fund'. They simply are not sticking to any plan, if there even is one to begin with. It's emotional investing, performance chasing, and you will lose in the long run.

To make matters worse, this portfolio tinkering by bad advisers is borderline criminal. Every time they move you out of a product and into another they can collect a sales charge (3-5% of the purchase value remember). Not only that, by the time the next fund is "hot", its sector is probably already overbought and won't continue climbing the same way.

Research has shown that funds which outperformed their sector over the previous five or ten years are very likely to underperform the sector benchmark in the next similar time frame.

Dalbar, a U.S.-based financial industry analytics company, publishes an insightful report annually on investor and adviser behaviour. Year after year Dalbar finds that mutual fund investors substantially underperform broad indices. So what are Dalbar's recommendations to advisers? Stop over-promising clients on performance, pay attention to client risk tolerance and properly control risk exposure, and make accurate promises in clear terms of probabilities.

Complicated Portfolios

Good advisers have you invested in products you easily understand. It should be so easy that you could do it yourself if you had the time, discipline, or confidence. Index ETFs, larger individual companies, gold bullion, farmland or timber funds, office or apartment building funds, you get the drift.

Stay away from any funds that charge more than 1% in management fees. Hell, stay away from funds that charge more than 0.50% in management fees. It's unnecessary and no, they will not perform better because their managers are "smarter". Very, very, very few investment managers are able to consistently outperform the comparable index.

Good advisers also limit your portfolio holdings to a reasonable number of investment products. For sure less than 20 holdings, probably less than 10. Warren Buffett's $150 billion investment portfolio owns less than 50 different stocks; the top 10 holdings account for 80% of his total portfolio. If the Oracle himself can invest $120 billion in just 10 holdings, a good adviser can definitely keep your six or seven-figure portfolio down to 10 holdings.

Bad advisers push you into complicated products that you don't understand. This includes funds with other creative names like "disciplined", "balanced", "special", "concentrated", "strategic", and so on. Fancy words that translate to under-performing, overpaid, stock-picking, not-so-magical investment managers who are probably plain greedy to boot.

Bad advisers also put you into portfolios with an enormous number of holdings. If the portfolio proposed suggests you invest in 50, 80, or even 100 different funds, stocks, and other products, run away. It's a tell-tale sign that your adviser is massaging products into computer software programs in order to present you with implied future performance based on past performance that fits your wants and needs just right. Or he is presenting complicated portfolios to appear more valuable and knowledgeable.

Bad advisers tend to sell you into products which are very similar. I can almost guarantee the 'Opportunity Senior American Fund' will perform similar to the 'US Strategic Equity All-star Fund' over the long haul: very poorly. Don't get fooled into thinking two shitty products are actually different. Shit is shit. Period.

A Good Adviser Is...

A good adviser is honest and clear about their compensation. They encourage the use of low-cost products, like ETFs, because it doesn't impact how they get paid.

Good advisers work with you to structure a portfolio with 20 or fewer holdings which aligns with your risk tolerance and financial circumstances. They promise you realistic, or even cautious, expected long-term investment returns.

Good advisers acknowledge they cannot help you outperform the market benchmarks, but they can keep you from drastically underperforming those benchmarks.

Good advisers help you stick to the investment plan that you created together, regardless of market performance and your emotions.

A good adviser is like a good sports coach—they use their knowledge and confidence to push you farther than you could go on your own while protecting you from injury.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.