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Three million dollar questions

Charlie Sheen’s character in the movie Wall Street (1987), Bud Fox, said “Life all comes down to a few moments. This is one of them”. History has shown us that just one good or bad decision can change the course of someone’s life. I have ponded if this statement is true for investing as well. That is, is successful investing the result of a multitude of good decisions or just a handful of important ones?

Why is this question important?

There are two reasons why this is important. Firstly, if it is true that there are only a few very important decisions, you need to know which decisions they are. Secondly, if fewer decisions are required, the task of wealth accumulation looks significantly less daunting and therefore you are less likely to procrastinate.

Intelligence is definitely not an advantage… In fact, I’d argue it’s often a hindrance!

Authors such as Malcolm Gladwell have long postulated that intelligence is a poor predictor of success. In fact, studies have shown that 4% to 6% of success can be attributed to someone’s intelligence.

In my experience, some investors/clients are too smart for their own good and, as a result, sabotage their success. Behaviours like making things more complex than they need to be, taking proven and fundamental sound strategies and adding their own “bells and whistles” in the effort to achieve better returns, trying to predict markets and cycles, using macro-economic data and statistics inappropriately (everything can be proven with statistics, can’t it?) and so on. As the saying goes; “statistics are used much like a drunk uses a lamppost: for support, not illumination”. Investing is actually deceptively simple – please don’t unnecessarily complicate it.

A 30-year longitudinal study of more than a thousand kids found that those children with the best cognitive control had the greatest financial success in their 30s. Cognitive control predicted success better than a child’s IQ and better than the wealth of the family they grew up in. Cognitive control refers to the abilities to delay gratification in pursuit of your goals, maintaining impulse control, dealing well with setbacks or failures, holding focus, and possessing a readiness to learn. Tenacity is the one-word description. Being smart or an expert in your occupation does not necessarily translate to financial success. I have met plenty of high-income-earning professionals (for example) that have very little wealth.

Just because you are smart doesn’t mean you will make smart financial decisions.

Three million dollars decisions

I know from personal and professional experience that there is very few decisions you need to get right to become a very successful investor. In fact, there are only three decisions:

  1. What you spend – the decision to spend less than you earn and invest the difference is by far the most important decision you need to make. Without surplus income your wealth accumulation opportunities are limited. The phrase “pay yourself first” refers to prioritising the allocation of your income. That is, make it the number one priority to allocate a certain amount of income towards securing your future – your future fund. Our country has a future fund, do you?
  2. Who will help you – will you find an advisor or mentor that you trust to help you or will you try and do it all yourself? I am not necessarily referring to a financial planner. It could be your accountant, a wealthy individual or someone else. My mentor says “a poor man cannot teach another poor man how to become rich. Only a rich man can teach a poor man how to become rich”. Who you trust as your mentor or advisor is an important decision. But just because it’s an important decision doesn’t mean that you should avoid making it. Delaying finding the right mentor or advisor could be just as costly as selecting the wrong one. More on this point later.
  3. How you will invest – selecting an investment methodology is the second most important decision. Will you invest in one single asset class such as property or various asset classes? When it comes to property, will you invest in property for income or capital growth or both, will you develop property or renovate, will you trade property (buy and sell)? When it comes to shares, will you pick which stocks to invest in, use a stock broker, invest in managed funds or invest in low-cost passive index funds? Will you try and time the market or invest when the time is right for you? Will you borrow as much money as the bank will give you or maintain a conservative loan to value ratio? Will you commit to a set of investment rules to prevent you from making emotional decisions?

In summary, all you need to do is:

  • religiously spend less than you earn;
  • allow other people (more experienced than you) to help you make smart financial decisions; and
  • stick to tried and tested, fundamentally safe and sound investment methodologies.

If you do this then there’s an excellent chance that you will be a very successful investor. It truly is that simple.

Learn from other peoples experiences

When it comes to financial planning, can you do it all yourself without having to trust an advisor? Maybe, but here are a few things to consider:

  • Malcolm Gladwell devised the 10,000-Hour Rule in his book Outliers. In simple terms, Gladwell postulates that to achieve greatest in anything you need to amass 10,000 hours of practice. He cites the Beatles and Bill Gates as examples. How many hours of financial planning experience have you accumulated?
  • No matter how many hours you spend researching and analysing, can you be certain that you have not missed anything? If you do miss an opportunity or risk, what could it cost you?
  • A lot of successful investing comes down to discipline. Emotion is the enemy of discipline. Can you trust yourself to remain unemotional about all future financial decisions even in the face of adversity or stress?

If you are the smartest and most experienced person on your (wealth) team, you should be very concerned.

Advisors: All care and no consequences

Some people might think financial advisors have all care but no consequence. That is, it’s easy to invest other people’s money if you have nothing to lose. This might be true for employees of very large companies/banks but it often applies less to boutique firms.
In this day and age with internet reviews and so much bad press about the financial planning industry, I am acutely aware of the cost of reputational damage as a result of any advice that is anything less than perfect. I have spent the last 13 years of my life building my firm’s reputation and I know it that if I don’t look after it, it can be ruined in a matter of minutes. Therefore, it is critical that I ensure that every single bit of advice we give clients is sound and in their best interest. So I have more at stake financially than most of my clients.

Always focus on what’s important

The weight loss industry is a good analogy for how humans overcomplicate solutions. There’s lots of differing advice available including eliminating sugar from your diet, the paleo diet, don’t eat carbs after 5pm, the red wine diet (I made that one up). However, if you want to be healthy it is simple isn’t it? Eat fewer calories than you burn, exercise 3 or more times to week and eat a balanced diet. We all know this but yet we still search for the magic bullet. Why?

Don’t repeat this mistake when it comes to securing your and your family’s financial future.

Focusing on the wrong questions or issues will waste time, energy and money. You will never get the time back again. Instead, opt for the simple and successful approach which involves making absolutely sure that you have nailed the above three questions. If you get these questions perfectly correct (and you have to), you have to get very little else right to secure your financial future.

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