2019

A Wealth of Awareness

Happy Friday,

One of my favourite courses in university was psychology.  I’ve been asked on multiple occasions what courses I thought students should take to enter the financial services industry and/or to have success building wealth through investing.  The assumption is that the best approach is to focus on economics, accounting, and math.  While these types of courses are important, I believe psychology and communication courses could prove even more valuable.

Readers know I often write about the psychology behind investing.  I do not do so because I enjoyed psychology courses in school, but rather because I’m reminded on a daily basis of how much impact human behaviour has on the financial markets and how much impact it can have on the success or lack thereof for investors.  I see it every morning when I open my Bloomberg app, and I regularly hear about client conversations from many of our company’s advisors.

I believe building wealth is a state of mind and genetics, upbringing, and life experiences all contribute to results.  Every human being is different and it’s important to recognize how you yourself think and react to experiences and gauge your degree of comfort. 

Outside of inheriting large wealth or having businesses passed down, generally speaking, the most financially successful people in the world are those who understood, managed and took risks.  Ask yourself: Am I willing to leave my well-paying job or sell my current business to start a business in an industry with massive upside even though I know that most have failed in such attempts?  Am I willing to mortgage my house to add to my already declining stocks at a time when everybody is panic selling them?  Am I willing to sell my assets and invest in start-up companies that I understand, but know that the risk of loss is great?

The level of financial risk we take impacts our degree of financial success.  Understanding the way we think and react in certain situations can help us find the Goldilocks of our risk comfort and execute accordingly.  Unfortunately, this is easier said than done which is why many investors, unfortunately, behave irrationally.  In addition, understanding the motivations and behavioural patterns of others can help us get closer to our goals in business and personal investing.  This too is something that takes time and/or comes easier to some than it does to others. 

Some investors should recognize that their personalities aren’t suited to invest in equities while others might do better to hold only a small allocation in volatile investments.  In both scenarios, these investors need to be content with a lower level of financial gain. 

Here’s a quote from Warrant Buffett’s Squawk Box interview in February of 2018:

“Some people should not own stocks at all because they just get too upset with price fluctuations. If you’re gonna do dumb things because your stock goes down, you shouldn’t own a stock at all,” Buffett told “Squawk Box” in February 2018.

“Some people are not actually emotionally or psychologically fit to own stocks, but I think that more of them would be,” Buffett said, “if they were more educated on what they were really buying, which is part of a business.”

As with every financial institution, we have many low risk or risk adverse investors and while bonds aren’t what they once were, we seek to build suitable solutions for this group.  Our private debt pool and our American Apartment LPs were born out of understanding investor psychology, and we’re just getting started.

Stay tuned.

 

Daniel Popescu CFP, CIM, FMA, FCSI

President & CEO

 

 

“I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone and may not reflect the views of Harbourfront Wealth Management. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by Harbourfront Wealth Management Inc.”

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