#133 Part 1 – The Itsy Bitsy Spider





Emotions can provoke powerful instinctive responses with potentially life-saving results. Like when you sense danger. You become scared, your breathing increases and you become more alert as your body prepares itself for a fight-or-flight response. On the other hand, however, emotional reactions can also be unproductive and distracting. Sometimes they can even be counterproductive, causing more harm than good.


For example, today is a Tuesday. Normally I write my columns in the afternoon on Mondays. But I didn’t write yesterday afternoon. In fact, I didn’t do much of anything yesterday afternoon. My issue started around 2PM, when my mentor Brad called. Brad follows me on twitter, which I have been using as an outlet for hysteria. To tease, Brad started singing “the itsy bitsy spider” to me on the phone. I was laughing at him because he forgot some of the words, when my eyes caught movement above me. Sitting on the beam above my windows was a big friggin spider. Naturally, I screamed.  


Despite Andrea’s valiant attempts to kill the accoster, he got away.


I know he’s still in here. Somewhere. Waiting.


And that’s why I didn’t get much work done yesterday.


While I believe, for the most part, that we are all in control of our own emotions, sometimes we don’t get a choice. I don’t want to be afraid of spiders. I understand they’re just little and probably won’t eat me. But there is something about them I don’t like. Something I don’t trust.


Yesterday I lost three hours of productive work time because of my strong and irrepressible emotional reactions to spiders. In 2008, many investors lost months of productive market growth because they had strong adverse reactions to seeing their portfolios butchered.


One of the best ways to prevent emotional reactions is to remove yourself from the situations that create them. And you can do this by turning your beliefs into processes. In my office, that means spritzing citrus essential oil around my windows every morning. In the investment world, that means adhering to a written investment philosophy.


To assist investors in understanding my investment philosophy (and maybe even to help them understand their own) with a top-down approach over the next four columns, I’m going to share mine with you. This column will be Part One – a goals-based approach.


Goals-based investing is the integration financial planning with investment management. Traditional investment management starts by defining your risk tolerance, and then advisors attempt to produce exceptional returns within that realm. In goals-based investment management we first define your immediate and long term income objectives, and then we manage possible risks as they relate to these goals. By using a goals-based approach we shifts the focus of the investment process from “beating the markets” to actually tracking real and measurable progress.


One of the sound-bites I’ve become quite fond of is “we don’t make people rich. We make sure they don’t become poor”. Our intent is not to beat some pedantic benchmark, but to relate the way investments are managed to things people are actually trying to accomplish. As an example, using traditional investment management, if the markets dropped 30%, and an investor only lost 20%, then they’ve beat their market index by 10%. Switching to Goals-based investing we understand that if that investor is relying on their portfolio for income, a 20% loss is unacceptable. The investor is going to be very upset, fight or flight will kick in, most often that investor will make the emotional decision to pull everything out of the markets and buy GICs, locking in their losses and introducing interest rate anemia.


With goals-based investing, beating the markets doesn’t matter. And it shouldn’t. In order to know what matters, you have to define success. Because once you know what you are trying to accomplish, you will know why you are investing. Your “why” needs to be your anchor – a speed governor during strong markets, but a provider of invaluable stability when the waters get rough. 


Once your why is defined, your investment portfolio needs to incorporate a target balance risk and stability designed to serve your why. This balance is called your Target Strategic Asset Allocation (SAA), and it is viewed from three different angles. The first is your own risk tolerance and comfort – how much risk are you willing to accept? The second is your portfolio’s capacity to handle risk – what asset allocation is most suitable for your goals? And the third is where you actually are – what is the current asset allocation of your portfolio? Once these three layers are clarified, your target strategic asset allocation can be set.


Your target strategic asset allocation should be synonymous with your why. As your speed governor during strong markets, rebalancing back down to your SAA will protect your growth, which protects you from emotional reactions that can come from market corrections. As your anchor during choppy waters, rebalancing back into rebound-ready equities can set you up for above-average returns, increasing the chances of reaching your goals sooner.


Many studies show that because of emotional decision making, the average retail investor underperforms the products that they own by two percent or more. By focusing on your goals instead of the markets you can control your environment and mitigate the severity of your emotional reactions. This can help you reach your goals faster, and with a more enjoyable journey. So instead of trying to kill each spider as you see it, make sure they can’t come inside to begin with. Fill the cracks in your walls, spray your window trim with citrus oil, and control your environment with goals-based decisions.


Quick tips for investors

  • Build your target Strategic Asset Allocation from short-term to long-term. Develop an emergency fund first, then a cash wedge for the next 5 years’ income. The rest can be allocated to long term investing.
  • Maintain a minimum cushion in fixed-income that can be rebalanced back to equities during market corrections.
  • Figure out the minimum rate of return that will lead you to your goals and the strategic asset allocation most likely to get you there. Understand that a more aggressive SAA will add unnecessary risk.
  • Watch your home bias. Any more than a third invested in Canada can lead to some serious concentration risk.

If you’re looking for an advisor to beat the markets every year, or to even try, then a Financial Planner is not the right fit for you. If you’re looking for a customized and integrated portfolio that is consistent with your risk tolerance and your personal objectives, or for more information on how to establish a goals-based target strategic asset allocation, speak with a CERTIFIED FINANCIAL PLANNER® today.

Written by Meagan S. Balaneski, CFP, R.F.P CERTIFIED FINANCIAL PLANNER®
Advantage Insurance & Investment Advisors

Investment Funds Representative
Manulife Securities Investment Services Inc.

The opinions expressed are those of Meagan S. Balaneski and may not necessarily reflect the views of Manulife Securities Investment Services Inc.

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