Care… but not that much

The little-known secret to getting ahead financially

Over the many years that I’ve helped people get ahead financially, I’ve noticed that certain principles keep coming back. One of those principles is to care… but not that much. Those that earn the most, care about their money, but not that much. At least that’s the case when it comes to the day-to-day fluctuations.

Years ago, I owned a cassette tape on Negotiating, (remember those?) by author Herb Cohen who shared some very valuable lessons. One of them was based on this same principle: the very best negotiators care… but not that much. From a negotiating standpoint, the concept was that if you cared too much you would be willing to pay any price to get what you wanted. So having a more cavalier attitude and a willingness to walk away are needed in order to negotiate the best possible deal.

When making financial decisions one can take a similar approach, albeit for a slightly different reason. In finance I believe that it’s more about seeing the bigger picture than it is about being cavalier. In finance, this is demonstrated more by having a willingness to accept prudent risk with your money. Caring about the long term, but not being overly concerned with the short-term fluctuations.

Let’s just look at two options to illustrate my point. 

John and Yoko are both 30 and working for Electronic Arts making $100,000 per year testing games. They are each thinking about retirement and approach us for a consultation. 

With both parties, we explain a little bit about portfolio construction. Stocks are bits of ownership in companies. The owners get to participate in profits through dividend payments, and typically also by selling the shares later on at a higher price than they paid. This comes at the cost of significant fluctuation in values, but generally healthy returns. Bonds (or fixed-income instruments) are much more stable but provide lower, less tax-efficient returns. We place bonds in a portfolio to make it less volatile. 

We go on to explain that the stock market regularly drops by a third before going on to new highs and that once in a blue moon (about once in a generation) it drops even more than that. However, during this time, owners are usually still paid dividends in the range of 3 to 5 percent. We also explain that we can limit the risk of catastrophic loss of capital by diversifying (holding many companies instead of putting all your eggs into one basket and hoping for the best) and that we can mitigate the ups and downs by adding in fixed income, but that comes at the cost of return.  

John is worried about stock market declines and losing money in the next couple of years. He indicates that he is very uncomfortable with that kind of risk even if it will make him more money in the long haul. After a detailed discussion, we place his funds in a balanced portfolio with 40 percent in bonds and 60 percent in equities. A very reasonable portfolio for him and one that many people land on. 

When we explain the above to Yoko, her response is, “Of course I care about my money, but not so much that I will let day-to-day or even year-to-year fluctuations dictate my decisions. What is the best place for my money given that it has 35 years to grow before retirement and much of it will probably have another 30 more after that?” After further discussion, we place her funds in an all-equity portfolio with no fixed income at all.

For the sake of this example, we’ll assume a reasonable average annual rate of return of 6 percent on an all-equity portfolio and a 4.5 percent average return on a balanced portfolio. If they each start out with an even $100,000 and don’t ever add any more for 35 years, John (earning 4.5 percent on average) will have $466,735 by the time he’s 65, and Yoko (making a 6 percent average) will end up with $768,609. That’s $301,874, or 64 percent, more than John has. 

If at age 65 Yoko decides to make her portfolio more conservative (let’s say exactly like John’s), she will start retirement with 64 percent more than John, and it follows that she will be able to take an income 64 percent greater than John’s.

What allowed Yoko to do that was her ability to care… but not that much. To have a perspective on her money that allows her to hold it loosely. One that allows her to live easily with the short-term fluctuations knowing that it’s best for her in the long term.

I’ve seen it time and time again. Caring too much about money leads people to be afraid of losing it, which in turn leads them to being more conservative than they need to be or should be, ultimately resulting in having less of it. Having the perspective that “it’s only money” let’s people take prudent risks, and that ultimately leads to ending up with more.

Next time you meet with your advisor ask them, “Is my portfolio positioned to make the most amount of money without taking undo risks for someone in my circumstances? Or is it where it is because I’ve been overly concerned with short-term fluctuations?” Then be quiet and pay attention to what they say. Their answer may surprise you.

Arnold Machel, CFP® lives, works, and worships in the White Rock/South Surrey area. He is a Certified Financial Planner® with IPC Investment Corporation, is the Founder of Visionvest Financial Planning & Services, and sits on the board of Abundance Canada. In 2022 he was named as one of BCs Top Wealth Advisors by The Globe & Mail. Visionvest (his firm) has been voted Best Investment/Financial Advisor by Peace Arch News readers for the past two years in a row.

Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of IPC Investment Corporation. While every attempt is made to ensure accuracy, facts and figures are not guaranteed. 

Arnold is now accepting a limited number of invitations to speak. If you are interested in having him speak to your congregation or other group regarding money matters, please contact us at admin@visionvest.ca or (604) 542-2818 with your preferred date and time.