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What's Really Important? In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well. — J. Kenfield Morley Before you start reading this, I want you to ask yourself a simple question. It’s this: What is your number one investment priority' If you’ve never stopped to think about it, now is the time. Is your main goal to beat the market averages? Is it to find the next hot stock so you can double your money overnight' Is it to retire at age 50? Perhaps it’s to make big profits so you can brag about them at cocktail parties, in which case you could be suffering from ego deprivation. More modestly, maybe you want nothing more than to earn 10 percent on your money every year.
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Pause for a minute to consider your answer. Got it? Okay. If you said something like “to get rich” or if you found yourself nodding in agreement at any of my suggestions, you need to go off to a quiet corner and rethink your whole approach to money management. Why? Because the number one goal of every investor should actually be to sleep comfortably at night. Sounds simplistic? Sure it is! Is it easy? Absurdly so. And I promise you this: If you adopt my Sleep-Easy investing philosophy as your own and make all future financial decisions on how well they meet the Sleep-Easy test, both your health and your wealth will benefit. Here’s your starting point. Beginning right now, whenever you are faced with a financial decision, ask yourself: “Is this likely to cause me any regrets down the road?” If the answer is “yes” or even “possibly,” pass. There are lots of other places for your money. I get emails all the time from people who didn’t take this approach when faced with a major financial decision and ended up deeply regretting it. One came from a couple in their early 60s who had been persuaded to take out a home equity line of credit and invest the money in mutual funds. They were down $10,000 within the first three months. The wife was desperate to bail out, even though it would cost them thousands of dollars in deferred sales charges on top of their capital loss. The husband wanted to stick it out. How well do you suppose those folks were sleeping at night? What kind of conversations were they having at the dinner table? Who needs that kind of aggravation?—life is tough enough. Another email came from a man who had ignored all the warnings about aggressive tax shelters, including official press releases from the Canada Revenue Agency (CRA). Instead, he put a lot of money in a questionable scheme that promised to send him a charitable donation receipt for an amount far in excess of what he actually paid. He contacted me after his deduction had been disallowed by the CRA and he had been served notice that his account would be audited. As you might expect, he was desperate and was hoping I could come up with some miracle advice that would bail him out. No such luck—he’d made his own bed and now the tax people were going to make him lie in it. It was a tough lesson learned. But if he had applied the Sleep-Easy test at the time, he would have avoided all the misery. Many of us have bought stocks that we knew little about, on the basis of a tip from a friend or a persuasive broker because, we were assured, it was about to take off. In most cases, “crash land” would have been a more accurate prediction. Using the Sleep-Easy test before making the purchase would have saved both worry and money. Over the decades that I have been writing about money, I’ve met and communicated with thousands of people. I can honestly say that very few—perhaps 5 percent at best—have a rational approach to handling money. The rest fall into three main camps. The Greedy. These folks approach investing in the same way they would play a Las Vegas slot machine. They keep feeding in money and pressing the buttons in the hope that they’ll hit the jackpot and become an instant millionaire. They’re also the same people who tie up the checkout at the local convenience store for 20 minutes while they decide which lottery tickets to buy. These are the people who are most likely to get into big trouble because they can’t resist a sales pitch. Sit them down at a desk and explain how they can put their cash into a sure thing and earn fat profits overnight, and they’ll bite every time. They can’t see any potential downside risk because they’re too convinced that the big score is just around the corner. The Blissfully Ignorant. These people don’t pay any attention to money—until they suddenly find themselves in deep doo-doo. They spend virtually every cent they earn, and when they do save a little, they typically toss it into an RRSP to get the tax break without bothering to ask what the money will be invested in. They’re the ones who complain to me years later that their retirement savings have hardly grown at all. You have to wonder what they expected from a 3 percent guaranteed investment certificate. I am always amazed at the number of people who really don’t want to know what’s happening to their money. A couple of years ago, I received an email from a woman who said she was in her mid-50s. She had lost half the money in her investment account and asked my advice on where to put what was left so that she didn’t have to pay any attention to it. My answer was: “If you had taken the trouble to learn a little about investing and paid attention to what was happening, you wouldn’t have lost half your money. You would have reacted quickly when you saw what was happening and done something about it. If you want to invest, for heaven’s sake, devote a little time to learning about it. How much time do you spend researching when you buy a television set?” Blissfully ignorant folks may sleep well for a time, but it is the sleep of naïveté. At one point, they wake up a panic, as was the case here. By then it’s often too late to fill in the financial hole they’ve dug for themselves. The Fearful. These people don’t sleep well because they’re always afraid. If they put their money in a bank, they worry that the bank will go belly up. If they bury it in the backyard, they worry the dog will dig it up. If they keep it under the mattress, it creates uncomfortable lumps. Of course, I’m exaggerating here but only to emphasize the point. The Sleep-Easy philosophy does not involve fretting over every aspect of your financial life. On the contrary, my approach is designed to eliminate financial worries almost entirely. Kids, sex, global warming, and health provide enough issues to be anxious about. I want you to take money off that list. Granted, you can always find plenty of financial issues to worry about if you put your mind to it. There’s always something in the headlines to set your nerves on edge. For example, as I write this book, North American stock markets are hitting record highs. You’d think everyone would be rejoicing, but no. Gasoline prices have climbed to over a dollar a litre, leaving consumers grumbling and politicians threatening action against the big, bad energy companies. The Bank of Canada is warning that interest rates will have to start rising again because of inflation concerns, causing jitters in the bond markets and tension in families that are already overextended on their mortgage payments. The Canadian dollar is posting 30-year highs, which may be good news for snowbirds but is causing widespread angst among our manufacturers. In the United States, the business press is lamenting the collapse of the subprime housing market and warning of its implications for that country’s lacklustre economy. Even in boom times, we can find things to keep us awake if we try hard enough. Of course, when things are bad, as they were during the millennium bear market that kicked off this century, losing sleep is simple—just watch the news right before going to bed and you’re guaranteed a night of tossing and turning, with a few nightmares mixed in once you do manage to drift off. But what if I told you that I know people who slept soundly every night right through those tough three years? Why? Because while most people were watching their net worth dwindle away, they were actually becoming richer—not because they had gambled, but because they hadn’t. They were therefore immune to the hair-trigger tension created by the plunging stock market. So what does it take to become a Sleep-Easy investor? That’s what this book is all about, but I’ll give you a sneak preview right now. Balance. The ancient Greeks understood that moderation in all things is the key to contentment. Euripides went so far as to call it “the noblest gift of heaven.” Well, that’s certainly true when it comes to money. Taking a balanced approach to investing is the single most important thing you can do to guarantee yourself a good night’s sleep. It sounds easy, but I can assure you it is not. You have to work hard at it. I’ll explain how later in the book. Common sense. I can’t count the number of times people have come to me with screwball ideas about how to make money. Here’s one example. I offer a free question-and-answer service on my website at www.buildingwealth.ca. Recently, a young man sent in this query: I was told I should invest in a non-registered money market fund using my line of credit and pay the monthly interest charged by the bank. Just before the RRSP deadline in the following year, I should terminate my investment account, pay off my line of credit, and invest the excess earnings into my RRSP. In addition, the interest I pay for my line of credit is tax deductible. Is this true? With no disrespect to the correspondent, it was immediately clear to me that he was so intrigued by the idea of making extra money while sticking it to the tax department that his common sense had gone right out the window. This is how I replied: Yes, it’s true. Whether it makes any sense is another matter. Let’s apply a little math. The average Canadian money market fund returned 3.23 percent over the latest one-year period. Since interest rates are creeping up, let’s assume that over the next 12 months you’ll earn 3.5 percent. So for every $1,000 you invest, you’ll receive $35 in interest. The typical bank interest rate on a home equity line of credit is prime plus a quarter-point. If the line of credit is unsecured, it will be higher. The bank prime rate is currently 6 percent, so we’ll assume you pay 6.25 percent on the loan. Over a year, you’ll shell out $62.50 for every $1,000 you borrow. As you have been told, the interest is tax deductible because you have used the money to invest. If your marginal tax rate is 40 percent, that means your after-tax interest cost per $1,000 borrowed will be reduced to $37.50. But that is still more than you have earned on the money market fund. To make matters worse, the interest on the money fund is taxable. At a 40 percent rate, this means you’ll be left with $21 in your pocket for every $1,000 invested. If he had just used a little common sense, he would have figured this out for himself. Give him a little credit, though. At least he asked for someone else’s advice before plunging ahead. Attention to detail. I know people who suffer from what I call detail deficiency when it comes to money management. They can’t stick to a budget, never manage to make ends meet, have zero savings, are always behind on paying their bills, and manage to run up big credit card debts without even realizing they’re doing so. If you are an incurable victim of detail deficiency, my advice is to hand complete responsibility for all financial matters to your spouse or partner. If you don’t have one, or if he or she suffers from the same malady, hire a professional to look after your money. Yes, it will be an added expense, but believe me, it will be worth it. Sleep-Easy advice: Balance, common sense, and attention to detail are the keys to my Sleep-Easy philosophy. Of course, there is more to it than that, otherwise I wouldn’t have written an entire book on the subject. But those are the basic ingredients. Think about the extent to which you’ve applied these three disciplines to managing your money until now—most people will come up short in at least one area—and then move on to the next chapter. | |||