Lynne Twist, a popular author who writes on everyone’s favourite topic of money, tells a story about visiting Mother Teresa. Several years ago, she went to see the old nun at her orphanage in the slums of Calcutta. Even before she reached the building, there was drama: she saw a bundle of newspaper on the ground – with a newborn baby wrapped inside. She brought it into the orphanage, and handed it gently to one of the nuns.

And when Lynne was finally able to meet the saintly lady, another incident happened. A well-dressed couple, obviously wealthy, charged toward them, the bejewelled woman insisting on having her photograph taken with Mother Teresa. She actually grabbed hold of the frail old lady, demanding that Lynne take the picture. After they had both stormed off, Lynne was outraged at what she perceived as a terrible affront to the famous nun.

Afterwards, Lynne Twist and Mother Teresa stayed in touch by letter. Mother Teresa knew that Lynne wrote about money issues, and she gave her this advice: “Try to have more compassion for the rich. The problems of the poor, she said, were usually obvious. The sufferings of the rich are much harder to see.”

I’ve never met any living saints myself; but my own experience with the wealthy is that most are really very nice people, having little in common with that boorish couple. What they often do share, though, are problems that are invisible to the rest of us.

Of course, most people would be quick to point out that THEY wouldn’t mind the difficulties of being very rich. But consider this: once you have a lot of money, you always have to worry about losing it. You worry about investing it – walking that fine line between being aggressive enough to maximize opportunity, but not so aggressive that you lose your capital.

Another real worry is spoiling your children with your wealth. Having a lot of money before you acquire useful life or work skills does neither parent nor child any good. In the case of extremely wealthy parents, they even have to worry about the physical safety of their kids: some whackjob nutbar could always decide to kidnap little Johnny for ransom.

Common issues such as estate planning and charitable giving become much more complex as the amount of money gets bigger. Worthy causes dog your footsteps; relatives with their hands out are there at every turn.

We all lead busy lives, but the wealthy have to devote even more of their time to the task of managing their money. Just ask Bill Gates: he’s had to give up his day job to act as steward to all his investments.

As you can see, the problems of having a lot of money are very real. The challenge of turning wealth into genuine security and opportunities for you and your family takes a lot of planning, not to mention communication.

I usually suggest a structured financial approach to my clients – the main one of which is to identify your main family goals. If you have a clear goal in mind, the right team of experts can help you to turn it into an efficient plan of action.

Alan MacDonald is an investment advisor who helps high tech entrepreneurs make smart decisions about money. Contact Alan at Alan.Macdonald@RichardsonGMP.com.

During more than two decades working in financial services, I’ve met no fewer than four lottery winners. Their wins weren’t small; the least was $2 million, and the greatest was $8 million. But today, all four families are broke – and worse off financially than before their big wins. They took varying amounts of time to work through their windfalls of cash, but all managed to blow it eventually.

I often share this story with the participants in my planning workshops, and they typically react with wonder and disbelief. The wonder increases to amazement when I tell them about a study by an American psychologist, who found that life satisfaction among lottery winners is generally below that of quadriplegics.

The disbelief fades, though, when people start to think about the situation of instant wealth. We’ve all read stories about sports legends who command multi-million-dollar salaries or prize purses, but still declare bankruptcy when their careers end. Even family wealth (arguably the most stable kind there is) often survives only a few generations, as sons and grandsons burn through the wealth that’s passed on to them.

All these people – lottery winners, sports legends and fourth-generation inheritors – face the same problem: lack of knowledge of how to successfully manage wealth. It doesn’t really matter how much money you have or make, if you don’t have the financial stewardship skills to prevent it from leaving your hands. In the case of those lottery winners, for instance, their financial falls had nothing to do with the investments they selected.

If you’re wondering now about your own skills, consider these questions:

Did you make more money than you spent in the last month? How about in the last year?

Do you have financial goals for your life? If you have a partner, does he/she know your goals? Do you know your partner’s goals?

Do you know exactly what you pay for your financial services?

That last point is a particularly important one: many service fees are hidden, and they can add up. Over the long haul, they can remove up to 60% of your earnings.

Creating wealth – through your own efforts, rather than by just being lucky – requires one set of skills; but managing that wealth calls for very different talents. A huge amount of attention is generally given to investment selection; yet picking the right investments is only a small part of managing wealth.

So take some time to build a written management framework for your family assets. It should include details about cash flow, financial goals, appropriate time frames, and an overall investment discipline.

That way, if you’re ever lucky enough to win the lottery, you can be sure you’ll manage your windfall wealth better than those other unlucky souls.

Alan MacDonald is an investment advisor who helps high tech entrepreneurs make smart decisions about money. Contact Alan at Alan.Macdonald@RichardsonGMP.com or visit him online at www.alanmacdonald.ca.

Jack and Tom are walking in the jungle when Jack spots a tiger stalking them. He yells a warning to Tom, who breaks into a run. “Tom, don’t be an idiot!” Jack shouts. “No one can outrun a tiger!”

But Tom doesn’t plan to outrun the tiger. He knows all he needs to do is just outrun Jack.

Tom may be a terrible friend, but he had the right idea about minimizing risk. When it comes to managing your investments, we all tend to assume that the main objective is to “beat the market.” But is this assumption even correct?

The objective of beating benchmarks comes from the institutional world of investing, where managers are hired and fired on their ability to outperform markets. Same with mutual funds: managers compare benchmarks to persuade the public to buy one fund rather than another. Since most investors are smart people who want to do what’s best for their portfolios (and their families), the strategy of beating benchmarks has become almost an industry standard.

But does that “beating the market” investment objective really nail down what’s important to you? When individual investors try to beat the market, their results are generally dismal. The very act of trying to time markets, engage in trading, find the “hot” fund, etc., usually ends up penalizing the investor.

In my opinion, beating the stock market is often just a default objective. Most investors aren’t really concerned about it; they just want reliable investment results. And in fact, trying to beat the market is potentially dangerous: it requires you to take risks that are way in excess of the usual market risk. Those risks don’t help you meet your financial goals, and could potentially cost you a good part of your net worth.

There’s an expression I like: “Having the right answer is nothing; asking the right question is everything.” Think of Tom and Jack: framing a problem properly makes a big difference to the final outcome.

That’s why the best way to realize your investment objectives is by setting realistic personal goals, and using them as benchmarks for measuring your portfolio performance. Don’t be tempted by a high-risk portfolio – in the investment world, that could well be the equivalent of trying to outrun the tiger.

Alan MacDonald is an investment advisor who helps high tech entrepreneurs make smart decisions about money. Contact Alan at Alan.Macdonald@RichardsonGMP.com or visit him online at www.alanmacdonald.ca.

Over the past decade, there’s been an explosion in the quantity of information available to help you decide where to invest your money. On TV and radio, in newspapers and magazines, in financial reports and on the Internet – prognosticators everywhere are all rushing to recommend seemingly contradictory options.

But consider this radical notion: what if no one really knew what was going to happen next?

What if no forecaster could ever predict which way interest rates would move; no mutual-fund manager had any idea what sector you should invest in; no pundit could ever accurately assess what the xxxx xxxs are doing; and no newspaper story about “hot stocks” was worth the paper it was printed on?

From my point of view, this “what if” scenario is not just 100% true – it’s also really good news for investors. That may sound strange, but think about it: acknowledging this fact relieves everyone of the enormous burden of having to navigate the constant avalanche of market data out there.

There’s no point in worrying about whether your portfolio will be up or down next week, for the simple reason that you can’t do anything about it anyway. For the last hundred years, the vast majority of market research indicates that nobody really has any idea what the market is going to do tomorrow.

Not convinced? Well, just consider what would happen if the conventional wisdom were actually true. Imagine that there really were a few select people, somewhere in the world, who could reliably and consistently predict the market, outperforming all trends and competition.

Where might you expect to find these investing superstars? In any business, people who are best at what they do are usually the biggest fish in the pond. Well, in the investment world, the biggest fish are the huge pension funds that control hundreds of billions of dollars. The money managers of these funds collect millions of dollars in fees every year. So if anyone could reliably beat the markets, surely that’s what they’d be doing, right?

With that in mind, take a look at the graph below. It shows the results of the top pension funds in the United States, relative to a “passive” investing strategy of just buying the S&P 500 index and a bond index. As you can see, even before their fees are factored in, 90% of the world’s top pension managers still under-perform this benchmark – year after year! Even the few that do rise above the basic market indices can’t do it consistently; they change practically each year.

So if even these top experts can’t accurately predict when to get in and when to get out, why are so many ordinary investors still trying to do it? The truth is, there are some things that simply can’t be predicted.

Now for the good news: once you’re able to ignore the media barrage about what’s going to happen tomorrow, you can focus your time and attention where it can do most good: on the things you can control. You can start work today on achieving your long-term financial goals as effectively as possible.

Alan MacDonald is an investment advisor who helps high tech entrepreneurs make smart decisions about money. Contact Alan at Alan.Macdonald@RichardsonGMP.com or visit him online at www.alanmacdonald.ca.

Putting your financial house in order can feel like negotiating a maze. You have planning issues, products to compare, assets to protect, professionals to engage, and goals to win.

You can make the whole process a little easier by first organizing your thinking around your finances. By breaking the big picture down into smaller components, you can tackle the individual pieces and keep track of how well you are progressing.

The diagram below represents three different areas of financial independence that most people face. The issues are broadly divided into the areas of wealth creation, wealth management and wealth preservation.

These three areas can overlap. For example, you may have an insurance policy that has a component of wealth management. Thinking about the areas separately, however, can bring some clarity.

Wealth creation is different from wealth management. If you take a room full of wealthy people and ask them where their wealth came from, you will get answers such as the sale of a business, savings from my salary, involvement in a successful partnership, or a large inheritance. While these wealthy people may all own stocks, bonds and bank deposits to manage the wealth, the wealth was created elsewhere.

I believe that thinking about wealth creation as something different from wealth management may help investors avoid the pitfalls of day trading, stock tips or whatever get-rich-quick scheme they may be presented with.

Wealth preservation involves issues such as will planning. The successful investor may spend years on wealth management.  Those years, however, could be wasted if adequate time is not devoted to wealth preservation. Issues such as will planning or insurance may well decide what kind of legacy moves to the next generation.

So take a moment and scan through the checklist. If one of the boxes, such as will planning, needs attention, give us a call. We will help or refer you to a professional.

Imagine the following scenario: you have the chance to earn some money based on the flip of a coin. The rules of the game are simple – you hire a coin flipper, and each time the coin comes up heads, you get paid three dollars. When the coin comes up tails, you lose one dollar. You, as the participant, only know past track records; you have no guarantee that the past will repeat itself.

You hire the first professional coin tosser and the first three tosses are all tails. You appear to have the wrong flipper, so you talk to a friend who has a more successful relationship. In fact, your friend has experienced three tosses and got three heads in a row. It’s hard to argue with such a track record so, at some expense, you switch to the superior tosser.

For some reason, as soon as you show up, tails start coming up everywhere. To make matters worse, the flipper you just fired got named Coin Flipper of the Year based on a remarkable string of heads attributed to a superior technique. You give up the game in disgust and advise all others to do the same if they value their nest eggs.

If we look at the game objectively, it’s a sure winner. The coin tosses will inevitably even out and the heads pay off three times the rate of losses from tails. Since it is only a matter of time before the inevitable 50/50 pattern establishes itself, your job is really to hang on long enough.

The coin tossing analogy has a few things in common with investing in the stock market. Historically, the market goes up about three times as often as it goes down. You cannot predict the short-term direction of the market any more than you can predict a coin toss, and investing in the market has random elements that require inordinate amounts of patience from investors.

There’s more to investing in stocks than flipping coins, but what every investor needs to separate out is what parts of investment management are skill and what parts are, essentially, random circumstance.

A University of Chicago researcher, Kenneth French, undertook a study on this very subject. Professor French is a finance researcher and statistician who set out to find how many observations it takes to eliminate what is known in the statistics world as noise. In other words, how long do you need to measure stock portfolios before the observations reveal something that is true versus something that is just statistical noise?

The news is not good for people looking to make accurate decisions in short time periods. Professor French’s study concludes that it takes a minimum of 15 years before you can be assured that you are measuring something besides random patterns. So even stellar track records of 10 years could be nothing more than a portfolio that happened to be in growth stocks when growth stocks were having a good run.

Kenneth French goes on to observe that many of the things we take for granted about capital markets – stocks earn more over time, value stocks earn more than growth stocks, and bonds do worse at fighting inflation compared to stocks – are absolutely true only if the time period is long enough. Bonds, for example, will out-perform stocks over five years about 30% of the time. Value stocks return the most over the long run, but there will be extended periods where value stocks dramatically underperform growth stocks. Stocks beat inflation over the long haul but a quick look at the charts will tell you that, in the short term, stocks don’t like inflation any more than bonds do.

So what can an investor do to avoid chasing the equivalent of the hot coin flipper? Here are a few suggestions:

1)         No one knows where stocks will go in the short term, so don’t buy them for the short term.

2)         A broadly diversified portfolio of value stocks with good dividend yields will continue to be an excellent long-term investment.

3)         The shorter your time horizon, the more conservative you need to become.

4)         Inflation will take away half your money every twenty years, so don’t buy short-term investments to fight long-term inflation.

5)         Finally, stay invested long enough to let the random noise disappear.

Alan MacDonald is an investment advisor who helps high tech entrepreneurs make smart decisions about money. Contact Alan at Alan.Macdonald@RichardsonGMP.com or visit him online at www.alanmacdonald.ca.

There are two great risks when it comes to investing. The first is that you take too much risk, and lose your money. The second is that you take too little risk, and fail to make the most of your assets. When that happens, inflation and taxes gradually eat away at your money.

Everyone understands the first risk, which gets enormous amounts of attention. But the slow and sure erosion by inflation tends to get relatively little press – despite its relentless effect on investors.

“How we perceive risk” is the subject of many studies in the behavioural sciences, and in the world of finance as well. These studies show that while we usually make rational choices to avoid risk, we also often prefer some types of risk-taking behaviour over others.

For example, we all feel safe in our cars; so many people will choose driving over flying – despite the fact that flying kills only a few hundred people every year, while driving kills over 44,000 in the United States alone. The point is, we feel in control of our own vehicles, and that makes us feel safe. Conversely, our inability to control a jet plane makes us nervous.

There’s also the immediacy issue: we’re much more afraid of risks that have an element of the unknown. Think of bird flu, which killed precisely no one around here last year, but made headlines everywhere. At the same time, we munch contentedly on cheeseburgers and ice cream, ignoring the heart disease that’s the real killer in our Western world.

Our perception of risk is heavily influenced by several factors, one of which is our relatively primitive brain. People are trying to cope with a modern world with brains that haven’t changed significantly since early man was hunting mastodons.

In our civilized modern society, we’re free of predators, and most of us don’t face starvation. But our brains and nervous systems don’t know this – so we live with the same flip next fight-or-flight responses, and the same fat storage mechanisms, that kept us alive two million years ago.

What does all this have to do with investing? Well, it means that both advisors and clients are hard-wired to assess risk in a certain way. We dread the prospect of our portfolios declining, but we pay scant attention to the effect of inflation – because its gradual erosion doesn’t trigger our fear instincts.

We also tend to prefer activities that give us a feeling of being in control. Many people are comfortable with online trading for just that reason: you feel in the driver’s seat. The fact that frequent trades are unprofitable, from both a taxation and an investment-return perspective, is less important to many investors than the feeling of control that comes from actively trading.

So how do you (and your advisors) deal with our primitive, hard-wired assessment of market risk? One reasonable way is to openly acknowledge the fact that the intuitive approach may not be in your best interest. In other words, don’t make a habit of trusting your gut feelings.

Here’s a tip: draft a “policy statement” that rationally assesses the various risks that you face. It’s like driving versus flying: we may viscerally prefer the one to the other, but our rational minds can examine the data and conclude that driving is in fact less safe.

It’s the same with investing. We can instinctively sell when we think the market is going down, and buy when we think it’s going up – or else we can rationally decide that there are more reliable strategies.

The risk-assessment instincts that once kept us safe on the savannah may help you to run faster through a dark alley if you sense danger. But to make sure you have a portfolio that suits your needs, the hard facts are the best things to guide you to your financial goals.

Alan MacDonald is an investment advisor who helps high tech entrepreneurs make smart decisions about money. Contact Alan at Alan.Macdonald@RichardsonGMP.com or visit him online at www.alanmacdonald.ca.