Monday, August 13

Sticking to Your Strategies

Don't join the flavour of the month club when it comes to your finances! While you may get away with it in the short term, I believe that shifting strategies too often will punish you financially in the long term.

One reason for that is basic human psychology: you will want to chase the strategy that has already worked (and whose time may be past) and exit the strategy that is creating pain right now (which means leaving at a low point). Most reasonable financial strategies are designed for the longer term, so if you only implement them in the short term they won't always work.

A good example of this is owning real estate. If you hold a property for less than five years, and the market stays flat, you won't have enough to pay off your mortgage after commissions and other expenses. Even a modestly rising market won't compensate you if you sell too quickly. A 5% increase in a year will translate to just paying off your mortgage with no profit on most properties after commissions. But as we all know, owning your own home can be a great cornerstone of financial independence. If you stay in the same home for 15 years and accelerate your mortgage payments modestly, you could end up dropping your cost of living by a bundle when that last payment is made.

It's worthwhile to remember this fact when stock markets are falling, interest rates are rising and housing bubbles are collapsing in many areas. Your future does not depend on big gains tomorrow. It does depend on holding steady and keeping your eye on the goal - not the noise of today's market gyrations.

One challenge for me right now is that my house is turning into a bit of a headache, with tenants and renovations to deal with. It's so tempting to just say "sell it!" and have a bit of cash in hand and a headache relieved without drugs. But I have a vision of one day owning both a rental property and a primary residence so that I have some cash flow that is unrelated to a job or the stock markets. So now I have to push myself to do some hard or unpleasant tasks that are going to be investments in keeping my future plans on track. If I change my strategy now, then I will be back to shopping for a first property instead of having one in place and being ready for the second when the time is right.

One final word of warning though - I don't mean to imply that your plans should never ever change. They need to grow and adapt with your life circumstances so that you don't end up succeeding in 20 years at something you don't want any more. So set your goals carefully, review them annually, and in between put it on autopilot and let the plan proceed. If your strategy is sound then the little wiggles of the markets will either be buying opportunities or have no effect on you. And the best part is all the nights of sound sleeping that you will get!

11 comments: said...

You are so right! I think it's worth reciting the study which showed that the average US mutual fund return double digit returns during the 90's, but the average US mutual fund INVESTOR managed a 4.x% average rate of return because they were chasing performance (and always a step behind). Human psychology is so important when it comes to investing. Remember, for stocks to trade lower - someone has to buy what you are selling - and it's usually the PRO's doing the buying - happy to take your stock off your hands and sell it right back to you when you want it later (and after it has re-appreciated). said...

I don't know Diva. I have some reservations about a blanket statement that one should always stick to ones strategies. While I believe that you are entirely correct in suggesting that we often abandon our goals and efforts too easily and too quickly I think it can also be said that we often get involved in bad decisions that we stick with too long. The problem is having the wisdom to tell the difference. There is no easy fix for that other than thinking carefully about what we are doing.

Over the years one of the things that has impressed me about investing is that there is a lot of psychology involved and struggling with ones self. There is always a great temptation to get caught up in the emotion of the herd mentality when everyone else is panicking or conversely euphoric in the marketplace. It is necessary to remind ones self often that in order to do well financially, avoiding the herd mentality is exactly what is most necessary. When it comes to money one has to be a lot like the old Star Trek's Dr. Spock. Completely unemotional and totally analytical.

Dividend Growth Investor said...

That's a great article Money Diva. Changing strategies without letting one particular strategy work out for you for the long run is simply compounding your mistakes faster and leads to dissapointment!

Best Regards,

Dividend Growth Investor

Anonymous said...

Bailout 2008, a poem by David Jeffrey

Like a bloodied warrior,
laying broken and torn.

Like a dying soldier, hopeless and forlorn.

But the blood, it be green,
the color of money.

And the soldier is an economy,
and it is anything but funny.

Broken are it’s people and shattered are their dreams.

Thanks to the ultra rich and their full proof schemes.

It is a tragedy with more pain to come.

Finance will be Hell, and their wills will be done.

Catharine said...

as a realtor in Toronto I totally endorse your comment about owning for a minimum of 5 years and you'll weather any market condition. Very sound planning.

I've just earned the equivalent of 2 years salary in 4 months working in what most are calling "a recession' here in Toronto. that's a bunch of nonsense.

What we had in the Toronto Housing market for the last 10 years was Not Normal.

We are simply in a buyers market and what we have now is normal. And I believe we have bottomed out.

Now is the time to buy a 2nd property. While everyone "thinks" the market is down.

I hated the fear and smear media comments. Comparing every single piece of real state date to month to 2007 when in fact 2007 was record breaking sales, month after month after month.

and things will begin to creep up again, this summer, this fall.

as to selling to renovating your primary residence, here's a few thoughts for you.

Do you consider energy as a factor? A 35 year old might be more inclined to take on the task. A 55-60 year old, might consider their personal energy a major piece of the equation. Over 25 years I've heard it over and over, they did a major renovation once, and will never do it again.

and after 25 years of being a real skeptic and watching and seeing every day what is on the market, here's another option.

Forget the designers, and interior decorators, and contractors. But have a real good look at the Stagers! Most of them made all the real estate in Leaside look the same for two years. Apparently there was a color palette that was very popular.

but I did follow the work of one Stager. Saw the property before, in fact went after the listing, and didn't get it. And saw it after as well. Amazing. And the property sold for $35k MORE than the vendors ask, and about $40k more than I appraised it at. And it wasn't all cosmetic either. She'd done real work for her cost of $2500 incl. painting.

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Property Management Calgary said...

There is always a great temptation to get caught up in the emotion of the herd mentality when everyone else is panicking or conversely euphoric in the marketplace. Nice post!

Timothy said...

The question is with such a low return on mutual funds and safe stocks is it really worth the time and money to invest there. Why not just take your chances with a diversified high to medium risk portfolio.

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