Saving and Investing

Savings and Investing

The hardest decisions to make in life are those that combine both emotional and financial decisions – and that's where beginning to understand the not-science-of-investing begins. How much you gain (or lose) tomorrow then becomes the domain of different saving and investing strategies to use to get there.

Simply put, investing is a form of saving and going without today, to gain more tomorrow.

Two sides to the same coin

We deliberately combine the words saving and investing as a reminder the decision to invest requires a change in at least two behaviours.

• A decision to go without today to use tomorrow, and
• A decision about how you will behave when the tough times come, the investment markets become volatile and people's investments begin to lose value.

Looking ahead, your success in saving and investing has a lot more to do with what you don’t do when market volatility occurs, than what you might do.

Insight: Practically speaking; if the price of your home drops $50,000 today, you only have lost that money if you sell the property today — effectively locking in the drop in value by selling off the asset — next year it might also rise in value. Financial Advisors use the phrase crystalise the loss to explain this lock-in-your-loss phenomenon.

Beware the increased risks of Online & App Share Trading (and online gambling)

Buying and selling residential property is usually a lengthy and involved process that does not happen quickly at the push of a button. In contrast, buying and selling shares, stocks, and equities are usually electronically traded faster than you can say ‘Let's stop and sleep on this decision…’

• With decisions made at the speed of an internet connection and a mobile device app, this speed of decision can have significant financial outcomes as many people buy and sell share market investments based upon their emotional history (known or unconscious moneyisms) and behavioural triggers of fight or flight.
• Their thinking can be swayed by the latest stock tip from a radio shock jock, flame wars in online forums and the 'Twitterverse', or what their disinterested neighbours say (or boastful relatives pretend they do), and how they feel they will look in the eyes of people, they may want to impress.

[If you feel these comments are too flippant an observation of people's default saving and investing behaviour, perhaps this is an early helpful sign we're probably not the money advisers for you].

For all those still here and still reading, here is where we ask our clients to start their understanding of saving and investing.

Acknowledge there are many roads to the same destination

Here is an example we all face daily.

There are 14 major global corporations that own over 60 major automotive brands across the globe, (not counting the smaller local companies in various countries around the world). People choose to own different cars for different reasons of taste, expectation, appearance, safety, performance, status and the default reasons for most – of budget and availability.

In a similar way, there are many different savings and investment vehicles (pun intended) that people use to get to where they want to go, as well.

• Some people like to save money in a bank term deposit and play the long safe (and hopefully secure) game to save for later.
• Other people like to invest in direct residential property that (hopefully) given enough time, appreciates significantly in value.
• Still, some people focus on maxing out their superannuation contributions, while others use a Managed Discretionary Account (MDA) to actively manage their investing and market movements over passive investing in index funds.
• Some like to buy their own home and then, think carefully before they refinance the mortgage and only once the mortgage is paid out, continue to make that ‘monthly repayment’ now into their super fund or another form of savings and investing machine.
• Still, others like to hedge their options ahead of time and have a blend of saving and investing habits starting early. They max out their super fund contributions, work to buy a home to live in while making extra repayments each month into an offset account for the mortgage, and they may even start an investment savings bond for 10 years for each of their children when they're born because they’re want to take early advantage of compounding interest and compounding periods in the markets.
• Others are focused on pre-retirement planning retirement and constantly improving their financial literacy doing whatever they need to do to set themselves up for a comfortable retirement and manage their levels of self-control while investing in uncertain times.

The list of different strategies is somewhat endless; and there are probably no right or wrong answers to many of the decisions about, ‘what's the best way to reach a final goal?’ Regardless of the journey you take, a strategy and an adviser can help smooth out the bumps along the way.

It's about how 'you feel' about your financial decision and whether you're still able to sleep well at night with them.

All that to say this: A financial advisor can lend their expertise in investing discussions, strategy, accessing investment opportunities and sharing their knowledge of human behaviours to watch for that arise under financial stress — because when the hard times come, investing behaviours cut across the very human tendency to respond with ‘fight or flight’.

Now to keep Larry the Lawyer happy, let's be clear: This is general advice only and we haven't taken into consideration your personal needs so when you’re ready for investment advice, always use a professional – and we’d love to help you out with that. Oh and 'past investment performances does not, cannot and will never be a guarantee of future investment performance' just so we're clear.

If you want to go fast go alone, if you want to go far, go with a financial advisor you trust and can grow with.

Thinking about Saving and Investing 101 — The Emotional Connection

It’s easy to feel confident in your investment strategy when the stock market is performing well, but the reality is that the market moves up and down in cycles over time. That’s why it’s important to understand your risk tolerance – because it helps you decide how much risk you take (*or may need to take)

Getting to Know Your Own Investment Risk Profile

There are many names for an investment Risk Profile; some call them Risk Tolerances, some You Risk Appetite, and others call them Investor Behaviour Profiles.

Regardless of what you call this emotional mindset, getting to understand your own risk tolerance (and how it might change over time too) can help you better understand how different risk profiles can affect your investment strategy.

Three key factors underpin your Investment Risk Profile

Three main factors work together to determine your risk tolerance – your willingness, your ability to take investment risks and of course the timing.

1. Willingness

Your willingness to take financial risk is tied to your personality and how much you’ll worry about your investments

If you’re the type of person who may have sleepless nights of worry when the market changes, you probably have a lower risk tolerance. This means you’d prefer investments that are less likely to lose money and as a result, offer a lower return on the investment.

If you’re willing to leave your money alone and stick to your long-term investment plan through ups and downs in the market, you probably have a higher risk tolerance.

Remember not all investments are liquid

Be aware that some investments are considered 'lumpy' and cannot always be sold off quickly and converted into cash. So if you need to access your money at a particular point in time, say paying for children's weddings, a big anniversary holiday, graduation or retirement - that adds an additional layer of complexity as your risk tolerance may well need to change with your need for liquidity - the closer you get to that ‘target date’

Pro Tip: Everyone likes to think they are a high-risk investor - until the value of their investments begins to drop and they feel like they are losing money and then make knee-jerk reactions to buy or sell impulses. Savings and Investing require learning about old habits, developing new skills and understandings and moving towards greater money maturity - if you’re not prepared to do that work at the moment, you may be a 'saving in a term deposit' kind of person.

Think of a person who bought and sold their family home every time it rose or fell by $50,000 in value - what does that suggest about their emotional tolerance for risk?

2. Ability

Your timeline (an advisor's favourite world is time-horizon) also plays a big role in your investment strategy.

The younger you are, usually the more time you may have to recover from market downturns – particularly when it comes to your retirement saving and investing goals.

If you’re in your 20's and maxing out your Superannuation contributions each year as a way of forced saving, you may be able to handle short-term changes in your investment values.

3. Timing

If you have (or now need to take) a lower risk capacity, you would be majorly impacted if the market dropped along with the value of your investments.

For example, if you’re about to retire in 90 days, you probably wouldn’t want to put a big chunk of your savings into a risky longer term and volatile investment - the time horizon would probably be against you.

That’s why it’s important to check in with your advisor as your life changes just to get a second opinion as to whether you're about to make a big mistake, driven by unconsidered fear, or whether your proposed choice is in line with your known risk tolerance and expectations.

Recognise what affects your liquidity needs

When you begin to think about what might influence your level of comfort with your risk tolerance, ask yourself these two questions:

1. When do I need to use the money I’m investing? In the short-term, medium-term or longer-term?
2. How would I react if this investment dropped significantly in value by 10% or even 30% or more?

Recognise what affects your capacity

Let's be clear, there are many factors beyond just your time horizon; like your income and other assets, your financial responsibilities to family, and friends, overcoming a divorce, relationship breakdowns and managing business fluctuations — all play a role in your ability to take on investment risk.

Simply put, risk capacity is your ability to survive financial loss (emotionally & financially) if your investments take a steep drop in value. You don't want to be forced into a situation where you need to begin selling your assets (advisers love to call this process ‘liquidating assets’) just to pay your everyday bills. That has a terrible emotional impact on all involved.

If you have a higher risk capacity, this means you can stay the course and hopefully rebuild your assets over time even when (not if) the market takes a significant drop in value.

Where to from here?

Starting to get familiar with the concepts of different risk tolerances and becoming more aware of what drives your own money behaviours, can help prepare you for the inevitable changes in the market and can save you a lot of stress and regret.

Your risk tolerance comes down to your psychological makeup, preferences, your preparedness to learn about investing and reasonable expectations and your real-world financial situation.

• Whichever way you look at it, there is a lot to consider - that's why you use a Financial Advisor to help you get clarity on what you want to do, how you may want to do it and the timing and risks to navigate.

It’s important for these three areas to line up. If you’re very willing to take risks, but unable to recover from market drops, you could run into real financial challenges. And if the timing isn't right for the strategy you want to follow (because all good decisions usually take time) - a bad decision is on your horizon.

Insight: Balance your risk portfolio; if you're going to take risks in one particular area of your life, why not offset it by being unusually cautious in another realm of your life? Like the entrepreneur who kept their day job while testing their ideas, or someone who decided to increase their learning about investing and apply an equally enthusiastic approach to seeking out some additional educational courses to strengthen their employment prospects. Balancing your risk portfolio and the application of your energies is better when all the new eggs are not all in one basket.

Once you know your current risk tolerance, you’ll be able to make a better choice about a strategy for your investments

There are typically three strategies (and a near-infinite variety within each of them and a crazy fourth one that's not a strategy):

Conservative: your tolerance and capacity are lower. This strategy might include fewer stocks and more bonds (only sometimes) or money-market assets (which usually offer steady returns with less fluctuation in price).

Moderate: you might be somewhere in the middle, perhaps someone with a higher risk tolerance but a lower risk capacity. This strategy might include a mix of stocks and bonds to uphold a more balanced approach.

Aggressive: you have a higher risk tolerance and higher risk capacity and accept that you might see big swings in the value of your investment over time. You’re also looking for the potential of bigger returns. This type of strategy tends to be made up mostly of stocks (as opposed to bonds) from big and small companies.

The bonus strategy is:

Speculative: perhaps not an investment strategy at all but more an opportunistic time-linked addiction. You can follow that rabbit hole down an insightful article here.

Ultimately, you’re in control of assessing your tolerance for risk and deciding on how much risk you take. But you don’t have to do it alone – you can benefit from the guidance of an expert who can help.

How we can help

Talk to your Sapience Financial advisor to make sure your strategy matches your risk tolerance, your needs and your time horizon.

Related: Types of Saving & Investing services available