Investing with a Wii Bit of Balance
Posted by Gail | Filed under Balance, Investing
This is not part of the Tuesday investment series. Stay tuned for that tomorrow. Just some other thoughts I had.
For my last birthday, I bought myself Wii Fit. The two things I love most about this game are the yoga and the balance games. One morning as I stood on the board, slowly rocking my body to and fro to get those little marbles into the holes, I thought about how like investing this is.
If you move too dramatically in one direction the marbles skitter off the board. If you move too slowly, you lose time. To make the most points you have to balance what you’re trying to achieve against the trepidation of making a mistake and watching your marbles plummet into nothingness.
Investing is a little like that. You’re goal is to balance the return you are trying to achieve against your fear of loss. If you come up with the right balance, you’ll have a portfolio that let’s you sleep at night while you earn a return you can live with.
Speaking of a decent return, this means different things to different people. I get a lot — and I mean a LOT — of letters from people asking for something safe with a “decent” return. Hey, what do YOU mean my “decent?” While the very aggressive, growth-oriented investor won’t settle for less than the highest the markets can offer, conservative investors are more concerned with maintaining the safety of the principal; return comes second. Knowing who you are as an investor is key to creating a investment portfolio that works for you. Being swayed by the latest news or jumping on the get-rich-quick party train with all your friends is a sure way to end up watching your marbles disappear down the hole.
Many of the letters I get ask me how to invest so to make lots of money fast. I never answer these questions. Most of these people haven’t got a clue about investing, but their greed has them moving dramatically in one direction and then the next, depending on whose advice they’re seeking. With little thought to their overall needs, their investment time horizon, or their investment risk tolerance, they’re willing to throw their money at the wall and hope that something sticks.
It seldom does! Ouch! And so you end up with people whining about how badly “the markets” have treated them. You can’t blame the markets when a body jumps into the fray eyes closed holding its breath. If you want to be an investor, if you want to make your money work really hard for you, you’re going to have to put a considerable amount of time into getting educated and staying informed. Or you can hire a body that knows what it’s doing to manage your investing for you. This doesn’t remove the need to know what’s going on, it just takes off the day-to-day pressure.
Standing on my Wii board and watching those balls move this way and that, I eventually get the knack of how to balance earning lots of points (my greed) against the potential of losing a ball over the edge (my fear). Learning to invest takes time too. Moving too quickly is a bad idea unless you’re prepared to watch your money evaporate. But not moving at all – giving into the fear – means you never score any points.
There are times when Fear has a strong foothold in our psyche. At the beginning of 2009, the markets were behaving so badly that people considered putting money into the markets as throwing it away. The folks who still saw the benefit went in anyway and reaped their rewards. With markets on a steady upward trend, Fear gives way to Greed, and everything begins to look like a sure bet. Just remember that today’s sure bets can quickly become tomorrow’s hangovers re-teaching the lesson that nothing in life or investing is certain.
You don’t ever get somethin’ for nothin’. A strong, well-performing investment portfolio doesn’t just happen, it takes work. It takes research, education and commitment. There’s no magic. And there’s no sure thing. The guys who make it look easy are busting their butts to know everything that’s going on so they can make informed decisions about what to do with their money. They’re working 70-, 80- or 90-hour weeks reading research, visiting companies, meeting with the leaders of the companies in which they are investing. They’re looking for small — very small – signals of what will come next so they can take advantage of those opportunities. So it isn’t easy. It just looks easy from where we sit.
Speaking of making it look easy, when I give families those big numbers on the growth of their savings, using anywhere from 5% to 7% as my return factor (depending on the year in which the show was taped), that’s not based on a “savings” account. It’s based on a moderately invested portfolio. The great returns comes from the loads of time some of these couples have. Hey, 30, 35 or 40 years goes a long way to making your portfolio really sing. My numbers also assume they are reinvesting any tax benefit they derive from their retirement savings plans. So if you want to put the “easy” factor to work for you, start early, be consistent and keep learning. As you achieve a new level, you’ll have to acquire new skills to keep those balls moving the way you want them to. But that’s part of the fun, right?
April 12, 2010 at 6:47 am
it took us awhile to achieve balance in our investments. I think we have gotten tthere. I have passive funds and active funds and some very conservative funds and some emerging market all over the place funds.
I think we are doing ok. we rebalance every so often to ensure it doesn’t get out of wack and unbalanced. For most people our ages we have more socked away.
regards,
Jason
April 12, 2010 at 8:32 am
We’re teachers so are relying on the Ontario Teachers’ Pension Plan Board to provide good returns for us. I also have a small Spousal RRSP which has a balanced blend of investments plus some dividend paying funds. Mostly we invest in restoring and renovating our downtown Toronto 1919 home. Since we bought it 7 yrs ago it has increased in value by over $200K – which is an excellent return, better than our former mutual funds. Our other investments are in ourselves – our health…and our children (their education).
April 12, 2010 at 9:23 am
Diversification is key to any good investment portfolio because Gail is right, there isn’t one sure bet when it comes to investing. The key to building wealth over the long-term is being fully diversified and greedy when people are fearful and fearful when people are being greedy.
The last two years has provided tremendous opportunity in the investment world with many people fearful the sky was going to fall. I was so happy to see the market fall as it provided me a great opportunity to dump a lot of money into the market for the long-term.
There’s not quick way to make money, period. The key is to have a plan and to put strategies in place to help you stay on track so that you can achieve all of your goals.
April 12, 2010 at 9:35 am
I love the message here! And what a perfect comparison!
April 12, 2010 at 9:51 am
@ Doreen – a house is not an investment. The value of a house (unlike a company) can not be fairly assessed, except on one day: the day it sells. There are many people in the US who have lived to see the “equity” in their house literally disappear overnight. Your teacher’s plan, on the otherhand, is an excellent investment to rely on.
As for the posting today, I think low-cost index funds (aka ‘passive’ investing) is as close to investing without spending hours researching as I’ve found.
April 12, 2010 at 10:24 am
Geoff – we are considering raising our duplex to double the size and then rent out most of the newly created basement. I would consider that an investment.
April 12, 2010 at 10:48 am
@ Geoff @ Stephanie While improving your home is an investment in money, time and energy and real estate is considered an investment by the multitude, it does not automatically transfer into a “good investment”. Technically, I call you both right
@ Doreen The perceived increase in your home value, would be applicable if you intended to move to a different less expensive local once you retire (in addition to the point Geoff makes that real estate may not be as nice later on).
Don’t forget, with all the global warming, weather phenomen happening, who knows where it will be “good real estate value”.
April 12, 2010 at 10:51 am
@ Doreen – you’d be right there, as long as as total ROI > money spent. I’ve known people who have a condo that costs them $1500 a month (taxes, mortgage, repairs, etc) and then rent it out at $1200 a month, which only works when home prices rise each year (and at some point, you cash out). the counter position is that yes there’s a shortfall, but it’s like owning a second property for only $300/month. But if the value of the total investmetn drops 30% one day, eventually that $300 shortfall becomes a real freaking problem
I just find that people refer to houses and especially ‘home equity’ as being investments, when in fact they’re more specifically paper gains/paper losses. People also sometimes have emotional beliefs about their houses that I find questionable, ever watch that show ‘buy me’? It’s a great education in this — the logic goes something like “I bought the house for $300,000, put in $300,000 in renos, so it must be worth at least $700,000 because I need some profit.” When in fact, it’s buyers who set prices, not vendors. I don’t care how much someone paid for something once upon a time and I don’t care about someone else’s “need” for profit. (Not saying this is what you are doing, just that people do it).
I’m reminded of this when I read that Adam Smith put shelter in the same category as ‘clothes, furniture, food’ — in other words, necessities but not investments.
April 12, 2010 at 11:09 am
My father who ran a small business for over 40 years – sucessfully always said this…what you own, including your home, is worth exactly as much as someone is willing to pay for it at the time you want to sell it. Period. Captialism 101 made simple.
April 12, 2010 at 11:17 am
Re: our home as one of our investments – This is our 3rd home. We usually live in them for 10+ years – renovate them ourselves (which saves tons of $) and rent out the basement which augments our ‘forced savings’ of 20% a year – to allow us a 5th year off work with a steady stream of income. The first house gave us $45K profit (tax free) after one year. The 2nd house doubled in value after 15 yrs. We plan to downsize in about 8 yrs (will have owned the home for 15 yrs then) and move to a smaller town. So YES – for us this is a good investment. Others are welcome to their own views – but for me investments are not just funds, but in quality of life. Besides renovating houses is the glue to our marriage.
April 12, 2010 at 11:20 am
Great analogy! I love that balancing wii game lol.
April 12, 2010 at 11:59 am
Honestly, my definition of “decent” returns is ANYTHING that will return more than inflation consistantly. My “high interest” savings is laughable, my GIC’s are pathetic and my diversified mustual funds are just now clawing back from those huge losses, so I feel like staying true to my risk-tolerance-profile is COSTING me these days and at the same time I couldn’t sleep at night if I was high risk!
April 12, 2010 at 12:00 pm
and now I want a wii…. why doesn’t the PS3 offer great stuff like that?
April 12, 2010 at 12:09 pm
@Doreen: I agree. There are many factors to take into account when deeming real estate an investment or not. I would only encourage others to make sure they do the numbers at the end of the day and ensure all costs incurred while owning the home (house, condo whatever) are taken into account…maintenance costs, renovation, interest on mortgage and any LOC (plus any private loans from family friends) for home related costs, taxes, insurance, etc. I guess as a business owner you do this naturally. Im sure most do this as it’s common sense but thought I would just put it out there. I think this is where some may be miscalculating the amount “profit’ made post-sale. But even if you break even, if where you live brings you some joy and good memories then it was still a good ‘investment’.
April 12, 2010 at 1:03 pm
Just reading the real estate comments and find them to be quite interesting. Most people do not really understand the ins and outs of real estate investing. If I told you that I purchased my first rental property for $350 (cost of home inspection) would you say that was a good or bad investment? The mortgage was for $189,000, however, the entire deal was done on borrowed money with the rent being paid on the property covering the mortgage payment, property tax, property manager and p&i payments to the line of credit. Needless to say, when I sell this house in 20 years, it will be free and clear, the line of credit will be paid off and there will be a capital gain to pay with the mortgage and capital costs being used as the cost base.
There’s a reason why many successful people include real estate in their portfolio.
April 12, 2010 at 1:05 pm
I try to invest in index funds wherever possible. Unfortunately my company’s group RRSP does not have enough index fund options for me to invest in only those — but its worth making sub-optimal investments to get the company’s matching contribution, i.e. free $$$.
I don’t worry too much about investing in the “right” funds. I have a pretty risky investment profile for retirement, but I’ve also got over 40 years to go. I don’t really care about the ups and downs in the market over the next few decades. I’m sure my investments will crash horribly at least a few times in that period; I’ve just got to suck it up and ride it out.
Sometimes people make investing seem scarier and more complicated than it is. Read some books/articles, figure out what kind of investments fit your risk tolerance and time horizon, and then just start investing. It’s not rocket science. Like everything else in life, I make some good decisions and some bad ones in investing. But overall I’m certain that I’m better off investing than hiding my money in my mattress!
April 12, 2010 at 1:13 pm
Investing is all about making a plan today for a future obligation. Risk can not be measured as it’s a term that means different things to different people.
Find out what works for you, focus on the long-term, ignore all the interim things that will happen in the market going forward and enjoy knowing that you’re planning for down the road
April 12, 2010 at 1:30 pm
@Rebecca – re: your group rrsp from your company.
Funny that, my group RRSP from my company sent a “financial advisor” (free!!) to help us spend our money. That lady was very convincing when she insisted that we can only invest in certain things using our RRSP. She insisted that all funds I was interested in have front load and back load fees, etc.
Anyway, turns out most of her stuff was fiction, designed to get me to buy the funds she wanted. I found out by doing a little more research that I had a lot more choice even through my company’s group RRSP. On the rrsp web page for the group rrsp company, I found the list of the stocks/funds available, with lots of index mutual funds to choose from – including from other institutions.
April 12, 2010 at 2:32 pm
There are many different ways to invest…so to just right off real estate as an investment is closed minded…Warren Buffet is very rich and has made some of his millions on investing in real estate…and there are many ways to invest in real estate, not just buying and selling houses.
I am relatively new to the investment game myself but I know my risk tolerance, my timeline and have invested in stocks, mutual funds and ETF’s at prices I am comfortable with…I have jumped off the wagon too soon on a couple of stocks and missed out on some profit, as well as gotten into one Mutual Fund that has bitten the proverbial dust, but overall I am happy with where my money has gone to and what it is in.
Read some books, find some advice that makes sense and Just do it!! My husband has done better on his own than what his bank was able to do for him!!
April 12, 2010 at 3:28 pm
I really liked the title and analogy, Gail! The title made me very intrigued. Now I feel better just letting time do its thing… and I want to save for a Wii!
April 12, 2010 at 10:59 pm
You must find the middle way, grasshopper!
April 13, 2010 at 8:45 am
@Financial coach: Agreed. The bottom line is…is about the bottom line. Did incoming cashflow exceed outgoing cashflow when all said and done. Ive known some who have done similar to you and come out ahead and others who have not and used a different investment / cash management strategy and are VERY successful. Both of have done extremely well. Some of us shy away from rental properties because we dont want to play the role landlord. If we get to the same end which is financial security and, find a way to make our money work for us for the longterm…I say great. We are fortunate to have access to those who have taken different paths but been very, very successful. We share information and it’s a win-win. I will say we also know those who have very modest income and lifestyles and some would say are lacking but are very content and happy with their lives and dont suffer from priorities driven by MORE. They know what’s important and are grateful for it. Good luck all.
April 13, 2010 at 12:09 pm
@ioana – yes, we had that same thing happen with our OLD company RRSP, before we were bought out. I actually find that the new system is MUCH better without a financial adviser getting in my way.
I do everything online with the new system, but still our fund choices are VERY limited
April 13, 2010 at 1:55 pm
I, too, love my Wii Fit, but be CAREFUL! On Friday, I was trying to beat my son’s score on Advanced Step and rolled my ankle, spent 3 hours in emergency and now have crutches and an air cast for the next 2 weeks. YUCK!
April 14, 2010 at 7:34 pm
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