Posts tagged Robin Powell
How to be more disciplined about retirement saving

One of the reasons why people find investing harder than they should is that human beings are hard-wired to focus on the here and now. We’re much more concerned about immediate threats than longer-term dangers such as failing to save enough money for retirement.

In this video, Professor Arman Eshraghi, an expert in behavioural finance at Cardiff Business School, explains how to develop a more disciplined approach to investing for the future.

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Video transcript:

Human beings are hard-wired to focus on the present.

We’re finely attuned to the immediate threats around us. What we’re not quite so good at is dealing with long-term dangers, like not saving enough money for retirement. Professor Arman Eshraghi is an expert in behavioural finance.

He says: “When it comes to events that happen in the long-term, whether it’s going into retirement, etc. we don’t plan for them sufficiently because we don’t see them as sufficiently close.”

Thankfully, help is at hand in the form of financial technology, sometimes called fintech for short. The technology enables us to automate our retirement saving, so we put aside a set amount each and every month without even thinking about it.

Arman Eshraghi says: “Fintech applications basically can allow you to automate your decision to invest in the markets without much thinking, so you really make a decision once, you make a commitment once, and then effectively, the process of investment gets automated — let’s say, every 20th of the month.”

Starting to save early for retirement is very important. But we should also increase the amount we put away each month as our income goes up.

Committing to increasing our pension contributions as time goes by is another very valuable discipline.

Arman Eshraghi says: “Research by some economists in the US shows that there are techniques like “save more tomorrow”, so this is Richard Thaler, for example, who has talked about “saving more tomorrow”, which effectively means that you make the decision to invest a base level and then, effectively, you add to it a little bit every month. And without noticing the pain, let’s say. And then over time, this grows into a significant amount of investment which would then hopefully be a source of income for the long-term and for retirement.”

So, don’t give yourself an excuse to spend money that you should be saving for retirement. If you haven’t done it yet, automate your investing now.

It’s easy to do, and in the years ahead, you’ll be very glad you did it.

Picture: Aaron Burden (via Unsplash)

Why overconfidence in investing can be dangerous

Generally speaking, it’s good to have a positive outlook on life. But too much optimism, or overconfidence, can be a problem, particularly when it comes to investing.

In this video, Lisa Bortolotti, Professor of Philosophy at the University of Birmingham, explains why investors need to be realistic.

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Video transcript:

Generally speaking, it’s a good thing to have a positive outlook on life, and to be reasonably optimistic about the future. It’s better for our health and mental wellbeing for a start. But there are potential pitfalls too. Lisa Bortolotti is Professor of Philosophy at the University of Birmingham and an authority on the dangers of overoptimism and overconfidence.

“I think, where you see the negative effect is where you have context, where things are so complicated that being optimistic about your competence or your performance leads you to making mistakes and taking too many risks. So, finance is an obvious case. Finance is very complicated. You need to take into account the relative value of different options and the idea that you will make the best decision because you’ve made a very good decision in the past where you tend to think your previous luck as skill makes you too confident about the decision you make and less likely to listen, maybe, to other people and take into account different factors.”

A tendency towards optimistic bias or unrealistic optimism is part of the human psyche. It’s the way we’ve evolved. Behavioural experts have identified different dimensions to it. One of these they refer as the Illusion of Control.

As Bortolotti explains, “The Illusion of Control is when something is happening and we witness the thing happening and we tend to think that we are actually interfering with what is happening and determining the outcome. I think, in the financial world it’s possible that we may think that we will be able to know whether a certain company will be successful or whether certain rates will go up or down. And this capacity, that we think we have to predict how things will go, will make us make decisions that are more bold and do not take into account other factors that we should factor in.”

Another aspect of optimism bias is the so-called Illusion of superiority. In other words, thinking we’re better than we actually are.

“The superiority bias, which is also called the 'Better Than Average Effect’, is the idea that we tend to think of ourselves as better than average - in a number of domains. So, we may think that we are more attractive, smarter, more generous as well. Now, The better than average effect has been observed across the board and it normally works in combination with the optimism bias to make us make predictions about the future that are too positive, too rosy, because if I think that I have a lot of skills and a lot capacities and I think that things that are negative will not happen to me, then I will think that I can control what happens in the future, and I can determine a future that is happy for me.”

Again, it’s good to be optimistic and confident to a point. In fact, you need to have a positive view of the future to invest in human enterprise in the first place. But be realistic, and don’t overestimate your ability to outperform other investors.

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What can investors learn from academia?

Some financial professionals are dismissive of academic research, arguing that it’s too far removed from the realities of today’s financial markets. True, academic models are, by their nature, theoretical. But that doesn’t mean investors can’t learn practical lessons from them.

In this video, Gerard O’Reilly from Dimensional Fund Advisors briefly explains what those lessons are.

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Video transcript:

When we talk about evidence-based investing, what we’re really referring to is academic evidence.

Some financial professionals are dismissive of academic research, arguing that it’s too far removed from the realities of today’s financial markets. True, academic models are, by their nature, theoretical. But that doesn’t mean investors can’t learn practical lessons from them. Here’s Gerard O’Reilly from Dimensional Fund Advisors.

“Academics come with models of the world, and those models are usually incomplete. But what do you learn from the models? You gain insight about the real world. The models have to be incomplete for you to learn from them, but you do learn. You can gain insights about better ways to invest, better ways to structure portfolios, so that when you come to the real world, you’re better equipped and have better frameworks to make rational investment decisions.

“So academia, by its nature, has to simplify the real world so that you can understand the real world better. But that’s the beauty of how academics approach the problem: they simplify it just enough so that it’s real enough to be interesting, but understandable enough so that you learn something. “

Dimensional is possibly unique among asset managers in that everything it does is based on empirical evidence. Over the years, the firm has worked with some of the most famous names in academic finance.

Gerard O’Reilly explains: “Gene Fama, who won a Nobel prize a few years ago, is an academic that we have been very closely related to since the founding of the firm. Along with Kent French who’s a co-author and a very close collaborator with Gene Fama. And what we’ve used from their work, and they have shared their work with us and the world over time, is really the intuition that their work has given to us about prices - securely prices reflecting information.

“Other academics are academics like Robert Merton, who also won a Nobel Prize, Myron Scholes has also won a Nobel prize - and their work has also given us tremendous insights, whether it’s in lifecycle finance or in how to structure portfolios. So they’re to name just a few of what I would call some of the great academics in finance, and there’s many more that we’re associated with and that we work with. But the work that they have done has really led to some big innovations in the field of practical investing that I think Dimensional has been able to use to the benefit of our clients.”

The most famous contribution that Fama and French have made to our understanding of the financial markets is the so-called Three-Factor Model, and an updated version, the Five-Factor Model. In a nutshell, Fama and French have demonstrated how certain types of stocks — for example, value stocks, small-company stocks and stocks of firms with high profitability - tend to outperform the market as a whole, over the long term.

Gerard O’Reilly elaborates: “We think that there are differences in expected returns across stocks and across bonds. How do you identify those? With the intuition from the Three and Five-Factor Model. Lower price, higher-expected cash flows, higher-expected returns.

“So, we say, how do we structure portfolios? Let’s look for low-price stocks relative to some fundamental measure of firm size, high-expected cash flow i.e. high profitability. That’s higher-expected returns, less overweighting those stocks.”

It’s not necessary for investors to have a detailed understanding of the work of Fama and French, but it pays to use an adviser who does have that level knowledge. Academic research really does provide us with insights that you, as an investor, can benefit from.

Picture: Alfons Morales via Unsplash

Does sustainable investing reduce returns?

There’s been a big increase in interest in sustainable investing in recent years. But what exactly do we mean by sustainable investing? And, if we invest with our conscience, can we expect to receive lower returns?

Robin Powell explores these issues in this short video, with the help of Dan Lefkovitz from Morningstar.

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Video transcript:

An important development in the financial industry in recent years has been the growth of sustainable investing. But what exactly does it mean? Here’s Dan Lefkovitz from Morningstar:

“We define sustainable investing rather broadly. We consider it to be a long-term investment approach that incorporates environmental, social and governance criteria - ESG. And, it can range from sort of old-fashioned, exclusionary screening, like you might’ve seen in an ethical or socially responsible fund. Avoiding stocks of alcohol, tobacco or gambling companies, perhaps coal. It can also be just integrating ESG factors into the overall investment analysis. And that sort of integration is actually the most popular form of sustainable investing today.”

Passively managed funds are very cost-effective, but, by definition, they generally invest in the whole market. So, is there a conflict between passive investing and sustainability? Dan Lefkovitz says, on the contrary, they complement each other well.

“It’s interesting, you might think that, but in fact, we’ve recently seen quite the opposite. So, we’ve seen big passive investment managers, the likes of BlackRock, Vanguard, and StateStreet become a lot more active with the companies that they own, simply because they are replicating an index. Now you are seeing passive investment managers who have to own these companies and feel like they’re sort of suck in a long-term relationship with no option for divorce, be more active when it comes to their ownership.”

If you want to combine passive investing with sustainable investing, there are funds available — particularly exchange-traded funds — that effectively do both.

Lefkovitz says: “We actually think that sustainable investing lends itself very well to index funds and to exchange-traded funds. The kinds of positive and negative screens that are typically employed with sustainable investing actually fit very well in index and exchange-traded fund format. There also seems to be an alignment between the demographic that sustainability appeals to and the exchange-traded fund. Younger investors like sustainability and they also like exchange-traded funds.”

Of course, all investors are ultimately looking for good returns. So, is there is a price to pay for investing with your conscience?

“The number one frequently asked question we get about sustainable investing is: “Do you sacrifice returns if you are investing sustainably?”. And, interestingly, maybe in theory if you’re limiting your universe and not investing in certain companies because they’re not sustainable, that would be limiting. In practice, our data show, that sustainable funds perform on par with their non-sustainable counterparts. There is even some evidence to show, that sustainable investing leads you to companies that are poised for outperformance.”

That’s it. Thank you to Dan Lefkovitz from Morningstar.

Picture: Shawn Bagley via Unsplash

Is sticking with your bank really right for you?

It’s been said that you’re more likely to change your spouse than your bank. But, as you run the ruler over your personal finances, ask yourself whether your bank has been doing the right thing by you.

There’s plenty of research that shows we suffer from “inertia” when it comes to switching financial services, even though this could save us – or earn us – significant sums.

Think about it: When interest rates fall, does your bank pass on the full extent of those rate cuts so your mortgage is cheaper? When interest rates rise, do you get the full benefit with a commensurately higher rate on your savings? Have you been stung by the auto-renewal of a term deposit onto a below-par rate?

I’d be prepared to wager that the rate on your credit card (or cards) hasn’t fallen anywhere near as far as official interest rates in recent years. Some cards are still charging around 18 per cent, even though official interest rates are at rock bottom.

That credit card is probably with the same bank as your mortgage, and your savings account, and your debit card … need I go on? That’s part of the problem: banks and other financial service providers know the more products you have with them, the less likely it is you’ll shop around. 

In Australia, the Productivity Commission has identified “bundling” as an impediment to competition. Another study found that loyal, existing borrowers were paying interest rates on average of 32 basis points higher than those for new borrowers –  a “loyalty tax” worth billions of dollars in additional profits to banks.

It probably wasn’t so much that these borrowers were feeling “loyalty” but more likely that they were worried switching would be costly or difficult, or would just plain mess up their direct debits. Or maybe it was just a case of “better the devil you know”.

So, make a list and check it twice:

What are your top three needs from a bank?

Are you a borrower or a saver? Is a bank’s home loan rate or savings rate more important to you? Think about what really matters to you.

Is physical location important?

If you never go into a bank these days, why do you feel compelled to stick with your bricks-and-mortar institution? Make sure to check out the offerings of online-only banks.

How important is customer service?

I earn a good interest rate on my savings with an online bank, but heaven forbit I need to talk to someone on a weekend…

Compare rates.

Remember that “loyalty tax”? Keep up to date with changing rates and remember that you can haggle with your existing bank – get them to match new offers.

Compare fees.

That includes monthly “service” fees, ATM fees, and charges for overdrawing or declined payments.

Compare your values

I can’t begin to count the number of banking scandals in recent years. At what point would you take your money away from a big bank and put it somewhere like a smaller bank or credit union?

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The pounds and pennies myth
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There’s a well-known phrase that’s often used when the topic of budgeting comes up: “Watch the pennies and the pounds will take care of themselves.”

It’s true that small expenses — a posh latte here and a takeaway there — do add up. But the outgoings that people really need to focus on are the major ones. In most cases, it’s what they spend on their homes and cars which has the biggest impact on how much money they have left at the end of each month.

In other words, it’s far more important look at the pounds (and the hundreds of pounds) you’re spending before the pennies.

But, as the financial writer Andrew Craig explains to Robin Powell in this video, the first step to taking control of your expenditure is to start a spreadsheet showing all the money you spend each month.

It doesn’t matter how big your income is; if there’s more money going out than you have coming in, you could be heading for trouble.



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Video transcript:

It’s well documented that, all over the world, levels of financial literacy need improving.

The good news is that, by investing a modest amount of time in researching this subject, you can improve your finances substantially.

Andrew Craig runs a financial education website called Plain English Finance. He was inspired to start it while working in the City of London.

Andrew says: “One of the things that really came home to me in doing that was, even people in the city had a really kind of bad nuts-and-bolts understanding of their personal finances. What is an ISA? What is a pension? What are stock markets? What’s inflation? What are interest rates?

“I started Plain English Finance as a sort of angry young man, as a reaction to that. And our guiding principle ever since I did that has really been to improve the financial affairs of as many people as we can.”

What then, according to Andrew, are the most important personal finance rules to follow?

He suggests there are two main ones.

“Rule number one is: don’t spend more than a third of your income on your house — which is something that sounds a bit crazy to people these days because we’re so obsessed with homeownership in Britain — because rule number two is: you should basically always invest ten percent of your income in investment products that aren’t your house. And a lot of people, in spending vastly more of a third of their income on a roof over their head find that they then can’t afford to save and invest ten percent of their money in investments.”

Saving or investing ten percent of what you earn can be a challenge.

The best way to tackle it, says Andrew, is to start a spreadsheet showing all your monthly outgoings.

You should then focus on trying to reduce the biggest numbers.

Andrew says: “Rather than trying to save money on how many cappuccinos you buy everyday... or, you know, going to Lidl instead of Waitrose... which is all very laudable; actually, the single easiest way... there are two things that are very easy to change if you’re willing to live in a less fashionable neighbourhood and perhaps a slightly smaller house or flat, is — number one — the biggest number is invariably the roof over your head.

“And then the second one down the spreadsheet from that tends to be cars. Too many people... dare I be slightly sexist, particularly men, rush to buy a really flash, expensive car prematurely.”

For more tips on keeping your finances in shape, you can always visit Andrew Craig’s website.

You’ll find it at plainenglishfinance.co.uk.

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Planning for retirement isn't all about money
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One of the biggest mistakes that people make when planning for retirement is underestimating how big a life event it is.

Typically they’re so focussed on the financial side of retiring — ensuring they have enough money to fund the lifestyle they want — that they don’t give enough consideration to emotional, social and other important aspects.

For most of us, whether we realise it or not, work is an integral part of our sense of identity and self-worth. It also provides us with stimulating company and social interaction. When, suddenly, work stops, some retirees struggle to come to terms with their new existence.

Of course, making sure you have enough money to retire, and that you don’t spend it too quickly, are important functions of a financial planner. But there are other, non-financial matters that a good planner can help you with in the run-up to retirement.

Barry LaValley is a specialist in retirement planning, based near Vancouver. Robin Powell recently caught up with him on a recent visit to England. In this video, Barry explains exactly how a planner can help you to get more out of life beyond the world of work.

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Video transcript: 

In the run-up to retirement, people often say they want to try new things and get the most of out of life.

But there’s something that psychologists call continuity theory, which often stops that happening. 

To put it simply, we instinctively prefer to stay as we are. 

Retirement expert Barry LaValley says a good financial planner can help you to match words with action.

Barry says: “My view on it is, you do as much as you can as quickly as you can, and hope you can do it for thirty years. I believe life is meant to lived. Now that doesn’t mean that, in the first years of you being in control of this life, that you take all your financial resources and squander them. Because one of the big fears — and justifiably so — is you might outlive your money. 

“At the same time, you don’t want to be a prisoner to anything, particularly your financial resources. So, figure out what you’ve got — my grandmother used to call it cutting your coat by your cloth, you’ve got to figure out how much cloth you have — and then just go and live life to its fullest. Because, you see, life will change and there will come a point — may come a point — when you can’t live the life that you want. And in the meantime, I don’t want you to enter that period of life going: ‘Darn, I wished I had.’”

What, then, are the main contributors to a fulfilled retirement? Barry suggests there are five important ones. 

Barry LaValley says: “I think we should focus on what positive psychology actually tells us that happiness is, based on our responses internally to the world that we live in. And there’s five conditions that people should be aware of, each one of these contributes to happiness, and they are: one — that you should have positive engagement in life, you should really feel like you’re outlook and everything is going to be as optimistic as you can make it. So, positive energy. 

“The second is going to be your engagement in life itself: feeling that life has purpose, feeling that there’s a reason for you to get out of bed. The third one is your relationships: you know, we get more from our relationships than anything else that we do, as it relates to healthy ageing. The fourth one is meaningful activities: doing things that are important, things that make us feel relevant, make us feel like we have value. And then the fifth one is achievement: we need achievements, we need them each and every day.”

So, when planning your retirement, those are the five key things you should focus on.

No, none of them has very much at all to do with money. But they are all issues that a good financial planner can help you with.

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How to tell whether you can trust an adviser

It’s very important, when choosing a financial adviser, that you find someone you can trust.

However, working out whether they’re trustworthy or not isn’t always easy. The size of the firm, for example, tells you very little.

Herman Brodie is a financial author and consultant who has specialist expertise in building trust-based relationships. 

In this video, presented by Robin Powell, Herman explains what you can do to help you find the right person to manage your finances.

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Video transcript: 

Just as you need to trust your doctor, you also need to trust your financial adviser.

Financial author and consultant Herman Brodie is an expert in adviser-client relationships.

Trusting your adviser, he says, will give you much more peace of mind.

Herman Brodie says: “So, if I trust my adviser or I trust my asset manager, the riskiness of the whole enterprise we’re doing together is actually diminished. So my level of anxiety is reduced. 

“Now, a lot of bad things can result when we are overanxious about the engagements we are involved in. And financial markets are fraught with all of the kinds of things that we as human beings find the most disagreeable. And this often leads us to do precisely the wrong thing at the wrong time. 

“Now if we perceive the whole riskiness of the engagement to be reduced because we trust the person who we’ve confided with our assets, then, of course, this brings an enormous amount of reduced stress for clients.”

Sadly, some advisers in the past have proved themselves to be far less worthy of trust than others.

If trust in your existing adviser has broken down, it’s very different to rebuild.

Herman says: “When you get advisers, for example, pushing products that are very expensive when there are cheaper alternatives, or because they are tied to a particular product issuer. Or even in medical professions, where doctors have been seen to be prescribing particular medicines because they are taking kickbacks from the pharmaceutical company. 

“It’s evidence therefore that they are actually not acting in my interests at all, they are acting in their own selfish interests. And this damages the perception of benevolence. And those perceptions are very very difficult to recover.”

Herman Brodie says there are two components to trusting an adviser. The first is a conscious decision: Is the adviser competent? The second is more sub-conscious: Does the adviser have my very best interests at heart? Ultimately, though, you have to trust your gut instinct.

Herman says: “At least with the conscious part of that evaluation, in terms of, you know, the skills and training, and let’s say the fiduciary responsibilities that that adviser takes on board. On paper, that adviser must stack up, so the competence measure must at least be satisfied. But, whether you are going to perceive that person as benevolent or not, it’s largely non-conscious, I cannot tell you how you are going to feel about somebody.

“Who I’m going to be able to be open with is probably going to be somebody different to you. And as a consequence, you just have to go with your gut. There is no secret formula for identifying benevolence. Everybody sees benevolence in a slightly different place."

So, you should choose an adviser who is clearly competent, but also one who will put your interests ahead of their own. Only you can decide if someone ticks both boxes.

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