Chiropractic + Naturopathic Doctor

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The Key Decisions


April 24, 2013
By Paul Philip

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We live in a world full of choices.

We live in a world full of choices. But, because our busy lives are crammed with family, friends and work commitments, sometimes the possibilities can seem overwhelming. Finances are a perfect example. With all of the different investment options available, it’s difficult to know which direction is best for us. There’s so  much information out there (and much of it unreliable) that we often end up making bad choices that lead us to take unnecessary risks, not diversify our portfolios properly, and pay way too much in management fees and taxes. The result is poor investment returns that impede our financial success.

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With all of the different investment options available, it’s difficult to know which direction is best. To make decisions that lead to a successful investment experience, it’s critical to change your way of thinking about what it takes to really succeed at investing and growing your money.

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If this sounds familiar, it’s critical that you change your way of thinking about what it takes to really succeed at investing and growing your money. You can have a successful investment experience, but to do so, you have to make some important decisions.

Throughout this series of articles I will outline the key decisions you need to make to be a successful investor. Each of these important decisions will be outlined and explained without any financial mumbo-jumbo – just honest common-sense advice.

THE DO-IT-YOURSELF DECISION
Successful investing is not easy – if it were there would be a lot more wealthy people out there. If you are thinking of do-it-yourself (DIY) investing it’s critical to do an honest self-appraisal before you begin. First, this means you need to make sure you have the time, knowledge and interest to invest on your own. Secondly, how do you determine your asset allocation? That means deciding how your investments should be split up into different asset classes such as equities, fixed income or cash. As well, how will you diversify, meaning which specific asset classes should you include in your portfolio and in what proportion? Should you choose active or passive management? The first hopes to outsmart the market while the latter seeks to deliver market-like returns. And finally, when should you rebalance? That is, when should you sell certain assets in your portfolio and when should you buy?

At first, doing it yourself may seem like the least taxing option. But finance can be complex, and the odds are stacked against you.

The truth is that for most, attempting to invest on your own can be difficult, time-consuming and emotionally draining. Our natural instincts can be our worst enemies. That’s because investors make emotional decisions and these bad decisions can cause irreparable damage to their investment portfolio. In fact, their emotional behavior to economic news often sabotages the returns they actually earn.

Well-known recent investment research (Dalbar) shows that between January 1, 1990, and December 31, 2009, the average stock fund investor earned an average annual return of only 3.20 per cent, barely beating inflation, while at the same time the S&P 500 index earned 8.2 per cent. Why the huge disparity?

Quite simply, we feel comfortable and confident when markets rise and we invest/buy more. But when we experience a downturn, fear sets in and we are quick to sell, resulting in our buying at, or near, market highs, and selling at, or near, market lows. The result is that the investor makes little or no money at all. It’s ridiculous. Time and time again people trying to manage their own investments make this mistake and the financial services industry doesn’t care – they make fees on both the buy and the sell side. Markets are not the enemy – usually the problem is the investor him/herself.

There are many emotional behaviours that work to sabotage long-term returns. Do any of these sound familiar?

Overconfidence – It can lead us to take unnecessary risks or instil such fear in us that we react without thinking. Almost always the result is huge losses on our investments.

Being attracted to high prices – Many investors are more attracted to equities when their prices have risen than when their prices have fallen.

Following the crowd – We like to do what others are doing. It feels comfortable. But history shows that when the herd moves one way, you should consider moving in the opposite direction.

Fear of making a mistake – We hate failure and many times we feel paralyzed about making investment decisions because we fear they will turn out for the worse. A good example is leaving money sitting in a low-interest bank account because you’re afraid to buy stocks at the wrong time. My view is that the right time to invest is when you have the money and the right time to sell is when you need the money.

HIRE A PROFESSIONAL
But investing can be simplified to ensure success. We need discipline to counter these normal human tendencies and take responsibility for our future. To do this, we need to first gain an understanding of how markets work. Then, we should focus on the things we can control. The best way to do this is to have a good guide in your corner and seek the advice of a qualified advisor to bring discipline and clarity to your investment plan. You have only one investing life cycle and hiring a professional to guide you on this journey is the prudent approach for most.

Once you’ve made the decision to work with an advisor, the question becomes, which type of advisor should you choose? The two basic options: a retail advisor or an independent, fee-only advisor. What’s the difference?

Retail advisors
Retail advisors are often licensed brokers or certified financial planners and you can find them at your local financial institution or mutual fund company. They often sell a limited range of products – only those approved by the firm. Costs are also an issue because they are usually high – often two to three per cent annually of the value of your investment portfolio. That’s excessive. It can also leave you with limited choices. It’s similar to shopping for a car and walking onto a Ford dealer’s lot. Chances are you’ll be driving out with a Ford. The same is true with retail financial investments. 

Fee-Only Advisors
Alternatively, fee-only advisors are usually independent and can have access to a wider variety of cost-effective investment solutions. Independent, fee-only advisors’ financial goals should be more closely aligned with their clients’ because they are generally free from the conflicts, constraints and pressures that retail brokers face. They have no incentive to give anything but their best advice. An independent, fee-only advisor is free to set their own compensation (fee schedule) and is often significantly less expensive than a retail advisor.

When it comes to investing, you get what you don’t pay for – lower fees will translate into a higher rate of return
for you.

The larger the portfolio, the greater the savings. The fee schedule will be transparent, not buried in a hard-to-read disclosure statement, and your investments will not be locked into any deferred sales charge schedule. It’s a competitive marketplace and the best independent advisors add further value by providing holistic financial planning to their clients. 

Ideally the advisor to look for is what is known in the industry as a “triple threat;” that is, a certified financial planner (CFP), an insurance expert (CLU), and securities licenced (that is, can offer a wide variety of investment choices).

THE RIGHT ADVISOR FOR YOU
Finding the right advisor for you is important. You don’t want to hire an advisor only to later feel like you want to make a change. Getting the right person from the start will save you both emotional and financial stress.

There are two areas of “fit” that are essential for having a long-term, successful relationship with your advisor.

Investment philosophy – There are many different philosophies for managing investments and building wealth. You want to find an advisor who clearly articulates their investment beliefs and methods in an easy-to-understand fashion to make sure they align with your goals. If the advisor does not have a clearly defined view or can’t communicate it well, keep looking.

Personal connection and trust – You will be establishing a close working  relationship with your advisor, sharing important personal information (both financial and emotional). To do their job best, an advisor needs to know you well. Make sure the advisor walks their talk. Finding the right advisor to work with is a two-way street – feel free to ask lots of questions and find out about the advisor’s personal background and experience. Ask the advisor who is their ideal profile? Do they have lots of clients in your profession and understand the opportunities and challenges of the chiropractic community?

Your patients put their trust in your experience and skill to help them achieve optimal health and wellness. It’s a similar relationship when it comes to wealth management. If you want optimal financial health and wellness, spend the time to hire the very best so you can enjoy the financial life you and your family deserve.

Look for Part 2 of this article in the June issue of Canadian Chiropractor. We will examine the asset allocation decision.


Paul Philip, CFP,CLU, has been advising hundreds of chiropractors across Canada on building and protecting their wealth since 1992. His firm, Financial Wealth Builders Inc. is located in Toronto, Ontario. To learn more about building your wealth visit
www.fwb-inc.com or contact Paul at paul@fwb-inc.com, 1-866-735-5581.


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