Human behaviour is sometimes mystifies me. On occasions (and sometimes very important occasions), we are so easily distracted from the task at hand by noise that is, at best, irrelevant and at worst, misleading. I’ve had the opportunity over many years to observe client/advisor interactions and discussions, and I’ve now become so sensitive to these rabbit holes that I find myself reacting in a manner similar to when I hear my son crack his knuckles, or hearing fingernails being dragged across a chalkboard (there, you just felt it, didn’t you!?). Adventures in missing the point.

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Let me illustrate with an analogy. You have looked forward to this vacation for a long time, and you are finally in the departure lounge with your loved ones in eager anticipation of getting on board your flight and underway. After what seems like forever, your flight is announced for boarding and you line up to show that flattering passport photo of yourself to the gate attendant. As you proceed through the gate and down the corridor to the waiting aircraft, you notice a slight log-jam of passengers ahead. The airline has placed a table on each side of the hallway and as you approach, your mind eventually recognizes that on the table to your left are laid out a selection of parachutes. The contents of the right hand table are more easily recognized as inflatable life vests.

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Thankfully, there is a flight attendant providing instructions. In the interests of enhanced safety, the airline is giving passengers their choice of safety device to take with them to the plane – the parachute or the life jacket. You have to choose one, not both.

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Which one will you choose? I’ve played this scenario out to audiences of both financial advisors and the general public, and am no longer surprised by the typical response. Most “passengers” select the parachute. I suppose the image of gently drifting back to earth under a canopy of silk following a mid-air emergency trumps the thought of enduring an emergency landing in the ocean and thrashing about in cold water awaiting rescue. It’s the most common response, and a perfect illustration of how, when we fail to identify the real issue, we are prone to head down the wrong path.

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What’s wrong with the parachute option, you ask? Well, if you’ve never tried to jump out of a 136 000 kg cigar tube with wings hurtling through the air at 780 km/h, up to 41 000 ft above the ground, I would recommend against it. First, if the rarified air at that altitude doesn’t do you in, the -60 degree temperature will… that is if you survive being slammed in the chest with a 800 km/h wall of wind.

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Aircraft are designed – and pilots are trained – to make emergency landings on water. That’s why it’s not a parachute stored under your seat, but a yellow, inflatable life vest. The point is that most people, failing to think through what the REAL issue is, choose the parachute.

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OK, Rick, what’s your point?? Here it is: too often clients and their financial advisors get caught in the tail-chasing exercise of weighing the pros and cons of using derivatives and hedge fund accounts, painstakingly agonizing over the equity component versus how much of those always-surprising bonds the portfolio should hold. And don’t get me started about Europe! It doesn’t matter whose fault it is or who initiates this excursion down the rabbit hole, as long as someone has the wherewithal to speak truth into the situation.

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And the truth is this: in many cases (not all…!) we’re worrying about the minutiae of an investment portfolio when the real issue is that we are not saving enough.

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[quote]If you want to have money someday, you need to start saving today.[/quote]
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A recent study by Stats Canada shows that Canadians, once known for their disciplined saving habits, now have a savings rate of 3%. Once upon a time, it was firmly in the double digits. And with so many of us hurtling toward retirement at an astounding rate, this spells trouble. Once upon a time, common sense was common…save 10% of your gross income and you’ll be OK. Decide to say “no” to yourself to afford yourself the financial margin to send some money- enough money – to your future-self. Give me someone who will faithfully save 10% of their income in a tin can buried in the back yard. They have a higher likelihood of enjoying financial freedom in the future than most of their neighbours who are relying on investment wizardry to make up for their 3% savings rate.

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I believe the financial services industry bears much of the responsibility. We’ve made credit so easy and inexpensive that, like the frog in the kettle, we can live in denial of the credit lifestyle… for the moment. Then, when interest rates rise (as they are sure to someday) there will be no savings to allow people to de-leverage (i.e. get out of debt without selling off important assets). Also, some myopic investment salespeople make unsustainable promises of inrealistic returns on investment over which they have no control in an effort to claim a competitive advantage over other salespeople or advisors. This is the financial wizardry that I spoke of. If it sounds too good to be true, you’re right…

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Managing expectations is key. I make it clear to my clients that I am not the one responsible to make money for them. That’s the job of the market. The advisor’s role is to know you well enough to assist you finding your right place in the market, given your risk tolerance, timeframe and investment goals. Then let capitalism and the market do their thing. Pretty simple.

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But in all that, don’t forget what’s at the very core of attaining financial freedom. In the words of a man I greatly admire, Bob Owens, CEO of the Owens MacFadyen Group in Moncton, NB, “if you want to have money someday, you have to start saving today.” It doesn’t need to be fancy or complex…to start, any tin can will do.

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Visit the Globe and Mail article if you want more information on the trend in savings rates of Canadians.
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