15 Oct Selective Amnesia
I had an interesting meeting the other day with some new clients. We previously had spoken on the phone a few years back when they were considering seeking advice. I had kept a file note of this discussion which I reviewed before getting together with them. In our meeting, we went through the usual routine of gathering information about their financial position including their superannuation balances, investments and life insurance.
I noted that their superannuation balances were almost double what they were when they had first made contact a few years ago. I assumed they had made some additional voluntary contributions to super over this time and commended them as the strategy had clearly paid off. I was amazed when they told me that they hadn’t made additional contributions at all. In fact, the increase in their super balances was attributable to their standard employer contributions and investment returns alone.
Our discussion turned to their investment preferences, in particular their experience with property and shares. They had bought an apartment five years ago but they weren’t that happy with how it had performed. It had given them some good tax deductions which had made their Accountant happy, but no capital growth. They hadn’t had a good experience with shares either. They had bought some shares on Commsec around 10 years ago , but following the initial purchases, they hadn’t paid too much attention to them. When the GFC hit, they were horrified by the drop in value and finally sold most of them at a loss. All that were left were some penny stocks which were not worth selling because of the brokerage costs.
So they were gun shy of going back into the share market again given their past experience. They told me that they prefer property which they understood to be much more stable and rarely (if ever) fall in value.
Now this post is not about debating the merits of shares vs property – they both have their pros and cons. However, it is interesting to observe how people’s past experiences affect their decision making. Clearly, buying some direct shares before the GFC had not turned out well. There had been some good companies (NAB, CBA, Telstra and Woolworths), mixed in with some blue-sky “high-tech” shares which turned out to be duds. My clients know that I advocate proactive management of investments as opposed to a “set and forget” strategy. Having said that, the timing of the onset of the GFC probably had a larger impact on their experience.
And what about their superannuation? I pointed out that their superannuation had been invested almost entirely in Australian and international shares over the past few years. The power of regular investing (super contributions) and rising, albeit volatile markets had nearly doubled their retirement savings over a fairly short time frame. N.B this was a particularly strong period for shares which I am not suggesting will be replicated over the coming years.
And their investment property? Well, it hadn’t gone up in value but then again, it hadn’t really fallen either (although truth be told they will never know this for sure until they sell it). They were prepared to have another crack at buying a property using the equity they had built up in their current home.
It struck me that we all, have our experiences, biases and beliefs which influence the decisions we make. We also place more emphasis on bad experiences than good ones. In their case, the gains they made in their (share based) superannuation fund over the last few years were outweighed by the pain they felt in losing money on shares during the GFC. Being in their late 30s, they also saw their superannuation as a long-term strategy and were not emotionally affected by its return, as they were by investment in their own name. Whilst being somewhat disappointed by their stagnant investment property, they still felt that borrowing to buy another property was a valid strategy.
Please don’t think I am poking fun at my clients. We all have our beliefs and unique interpretation of past events which influences our decision making. That is why it is always a good idea to have a third party as a sounding board before making those big financial decisions. There is a much better chance that you will see a blind spot when you receive feedback from others
The outcome? The clients have re-engaged us to help them decide the best path forward. We will be open about their various options, including both shares and property. We won’t try to change their beliefs – but we will provide them with a framework for making financial decisions which will help them reach their objectives.
[i] Disclaimer: This is not a real life actual case study. I would never betray my client’s personal story whether I mention their names or not. However, it is a common theme I encounter with many clients each year.
About Reuben Zelwer
Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.