1)   INTRODUCTION:

François Doyon La Rochelle: You’re listening to Capital Topics, episode #54! This is a monthly podcast about passive asset management and financial and tax planning ideas for the long-term investor.

Your hosts for this podcast are James Parkyn and me François Doyon La Rochelle, both portfolio managers with PWL Capital.

In this episode, we will review the latest eBook authored by James titled Investing Life Skills For Early Savers.

Enjoy!

2)   INVESTING LIFE SKILLS FOR EARLY SAVERS :

François Doyon La Rochelle: In today’s Podcast, we will cover only one Topic which is a Review of the latest eBook Authored by you James titled INVESTING LIFE SKILLS FOR EARLY SAVERS. This ebook is available on the Capital Topics website and in our Team’s section on the PWL Capital website. This has been a major effort and, in our Team, we made a strategic decision a few years back to add Next Generation clients to our Practice which includes the children of our current clients. 

James Parkyn: Yes, this has been a major undertaking as these younger clients are, in many cases, in the early stages of learning about saving and investing.  In some cases, their thinking and experience are surprisingly advanced.  In the case of the children of our clients, the parents were very happy we are undertaking this initiative.  For them, it is part of their family values to help them develop what they consider to be an essential life skill going forward in their lives.  Many of them also realize they wish they had started much younger than they did.

François Doyon La Rochelle: For our Listeners, this is an eBook format, so it is relatively short at 28 pages with a lot of pictures and graphic illustrations and, is meant to be an easy jargon-free read. James, what is the main message you are trying to get across to Early Savers?

James Parkyn: My main message is about the importance of starting early. 

It is a life skill that will serve you well on the road of life and will give you the confidence to make smart money decisions. Just to be clear for our listeners, what we mean by 'Life Skills' are the skills you need to make the most out of life. Any skill that is useful in your life can be considered a life skill. Early savers need to make this a high priority. 

François Doyon La Rochelle: You have had a lot of meetings with Early Savers over the last few years and what did you learn? 

James Parkyn: First off, I had to connect with them, so I decided to start the conversation from the vantage point of “Start with Why”.  The idea comes from Author Simon Sinek who wrote a highly regarded book on the topic. 

François Doyon La Rochelle: What else resonates for them?

James Parkyn: Well, I always like to connect with anecdotes about music. I mention the song “Time” by Pink Floyd from the seminal album “Dark Side of the Moon published in the early 1970s”. 

François Doyon La Rochelle: Ok, but this music is from their Parents' generation. There is another song on that album called “Money”, but the lyrics are mostly political.  

James Parkyn: To my surprise, many know Pink Floyd and the song.  What I like about the lyrics from the song “Time” is that they convey a key message about the importance of starting early. I suspect the Band probably did not realize it when they wrote the words but somehow, they related a fundamental lesson about learning Investing Life Skills early.

François Doyon La Rochelle: What do the lyrics say?

James Parkyn: “Ticking away the moments that make up a dull day. Fritter and waste the hours in an offhand way. Kicking around on a piece of ground in your hometown. Waiting for someone or something to show you the way. Tired of lying in the sunshine, staying home to watch the rain. You are young and life is long, and there is time to kill today.  And then one day you find ten years have got behind you. No one told you when to run, you missed the starting gun.”

François Doyon La Rochelle: Wow, that’s incredible how relevant the message is to our Topic.  This new eBook is trying to help Early Savers to understand the importance of starting now.  There will be no one to fire a starting gun to tell you to start learning and investing.

James Parkyn: Exactly Francois. For me personally the joy of seeing the light go on about Investing in Life Skills is because they realize the concepts are really “accessible”. 

François Doyon La Rochelle: I like your choice of the word “Accessible” because it is very empowering to know and really feel “I can do this!”.  So, James let’s get into the meat of the eBook content. What are the Life Skills Early Savers need to develop?

James Parkyn: We cover seven Investing Life Skills.  The first Life Skill is Getting started. Investing in some Early Savers can be scary: “Where do I start? It is so complicated!” Even worse, some Early Savers may wonder “Why do I need to pay attention now? I have all my life ahead of me!” When you’re starting, it’s not easy to find the best route to achieving the financial goals you have set for yourself and your family. There are so many competing priorities to consider and only limited resources to commit to any one of them.

François Doyon La Rochelle: Adding to the challenge in today’s wired world with the internet and social media ever present, Early Savers have way too much information at their fingertips and in fact, what they are seeking is real knowledge and practical information that they can use to get started and to help them on this new journey they are starting.

James Parkyn: I agree which is why we explain key concepts to help Early Savers take the first critical steps on their financial journey. And yes, Francois, we hope they will learn how to make good decisions and avoid major mistakes.

François Doyon La Rochelle:  Getting started is all about explaining the magic of compound interest.  Maybe you can explain to our listeners what compound interest is.

James Parkyn: Compounding is no small thing. Albert Einstein is reputed to have called it the eighth wonder of the world. It’s the interest on the interest you’ve already earned. In other words, compounding is the money you earn on your original investment, plus the money you earn on the returns already accumulated over time.

François Doyon La Rochelle:  There’s another important reason for getting started early on your investing journey. You will be getting into the habit of saving while learning the principles of investing and building your confidence.

James Parkyn: Precisely!  When you have lived through many bear markets and as you know Francois, we have had four since 2000, then your experience as an Investor with a Long-Term Mindset you will be less likely to panic sell because you have a well-engineered diversified portfolio is that you will recover and go on to grow in value.

François Doyon La Rochelle:  What’s a good way to get started?

James Parkyn: Early Savers should set up an automatic withdrawal from their bank account that goes directly to an investment account. That’s called paying yourself first (before all your other expenses), and it works because you naturally adjust your spending to the amount of money you have on hand.

François Doyon La Rochelle: James let’s discuss the second Life Skill Early Savers need to develop: Managing your Human Capital.

James Parkyn: Many people are unaware of their most valuable asset. It remains hidden in plain sight because it’s taken for granted. What is this asset? Your potential to generate income over your lifetime. It’s called your human capital and can be defined as the present value of all your future earnings. For most people, that works out to a huge number, especially if you’re young. Your human capital is even more valuable because it’s a hedge against inflation. Earnings tend to rise with the cost of living.

François Doyon La Rochelle: James the term “present value of all your future earnings” is jargon for many Listeners and Early Savers. 

James Parkyn: Human capital is the present value of all future wages from working.  You can increase your human capital by continuing your education or going for on-the-job training.  Think of all your future expected earnings that you will take home as compensation up to the time you will retire from working.  Then, estimate what it would be worth as a lump sum of investment capital.

François Doyon La Rochelle: As it grows, you also need to protect your human capital in the same way you safeguard other important assets.

James Parkyn: If you’re like most people, you’ll be rich in human capital when you start out in your working life, but poor in financial capital. As you move through your career, your goal should be to convert your human capital into financial capital by earning, saving and making good investment decisions. Both forms of capital are important, give them both the attention they deserve.

François Doyon La Rochelle: When you add into the mix the compound return on both Human and Financial Capital that is how you get to financial independence however you may define it. James let’s now discuss the third skill Early Savers need to develop: Cultivating an Investor Mindset.

James Parkyn: Many people approach investing as if it were a game of chance that can be won by placing bets on the latest hot stock or investment fad. Blackrock Asset Management surveyed in 2015, 51% of Canadians said at the time that they believe investing is like gambling.  While investing and gambling both involve risking money in hopes of realizing a financial gain, that’s where the similarity ends. Investing – when done right – is about buying assets that have a positive expected return thanks to the income they pay and/or their long-term capital appreciation.

François Doyon La Rochelle: We have covered this concept in a past Podcast. The difference between Investing and Speculating sometimes is a question of perspective and timeline.  Speculation often means you expect short-term easy gains. This is a question that challenges even us professionals.

James Parkyn: I agree.  But for Early Savers, the Life Skill to develop is patiently sticking to a broadly diversified portfolio that reflects their risk tolerance and accepting that it may not produce the excitement of trying to hit the jackpot on a hot stock or a cryptocurrency. But they shouldn’t be investing for thrills. Your aim should be to achieve your long-term goals, and that’s not something to gamble on.  I have heard the expression it is ok to lose money when you are young you can make it up later in life.  I hate that and tell Early Savers to beware as if you look at the loss based on the effect of compounding over multiple decades of your lifespan then the loss is massively larger.

François Doyon La Rochelle: Next up is the fourth Life Skill Early Savers need to develop: Keeping Your Eye on the Long Term.  What is your message about this Life Skill?

James Parkyn: Successful investors make consistent, smart money decisions and stick with them through market ups and downs over a period of decades. That requires discipline, an essential skill to learn early in your investing life. Develop your Plan and stick to it.

François Doyon La Rochelle: This is about not falling prey to the noise in the financial media and trading based on short-term capital market events and economic news. We have talked often on our Podcast about avoiding “market timing”.  Researchers have found it’s one of the worst wealth-destroying mistakes you can make. A sharp downturn in the markets can be particularly difficult for some people to stomach. They talk themselves into the idea that they can pull out now and get back in when things get better.

James Parkyn: However, trying to time the market presents at least two problems.  First, if you sell now, when will you know it’s safe to buy back into the market? Second, you risk missing out on gains while you’re on the sidelines and that can have a huge impact on your long-term returns. While it can be challenging, the best investment strategy – as supported by decades of academic research – is to hold a portfolio of broadly diversified, passively managed investments through good times and bad. Why passively managed? Because research clearly shows that most active fund managers underperform their index benchmark in any given year.

François Doyon La Rochelle: The fifth Life Skill Early Savers need to develop: Understanding Human Biases.  James, what do you say to Early savers about the psychological aspects of Investing?

James Parkyn: I tell them they need to understand how their basic human instincts can cause them to make poor financial decisions.  We all fall prey to mental and emotional biases that can lead to serious investing errors.

François Doyon La Rochelle: To control the influence of mental and emotional biases, you must first be aware of them and then guide yourself back to rational thinking and good decision-making processes. What are some of the key biases?

James Parkyn: Behavioral economics has been a huge growth area with two major Nobel Prizes being awarded to academics for their work in the past 20 years or so. There is an amazing amount of research that deals with Behavioral biases. I highlight the top 4 that I believe Early Savers should watch out for in your thinking about investments. 

1. Recency Bias: This is the tendency to give greater importance to events that have occurred in the recent past. Recency bias can cause you to depart from your investment plan to jump on a hot market trend or sell during a market downturn.

2. Over-Confidence: It’s common for people to develop unwarranted confidence in their abilities, including their ability to make exceptional profits in financial markets. Overconfidence can lead investors to make risky bets based on a misguided belief in their ability to predict the future.

3. Confirmation Bias: This occurs when investors seek out information that confirms their point of view and discount divergent opinions.

4. Loss Aversion: Behavioral finance researchers have determined that people feel the pain of a loss about twice as strong as the pleasure they get from an equivalent gain. Loss aversion is another bias that can distort your decision-making by causing you to prioritize avoiding losses over earning gains.

François Doyon La Rochelle: Good investment advice and processes such as annual portfolio reviews, automatic contributions, and periodic portfolio rebalancing can help Early Savers keep their emotions in check and keep them on track with their Long-Term Investment plan. The sixth Life Skill Early Savers need to develop: Diversifying to Reduce Your Risk.  This is another topic we address often on our Podcast.  What is the message of this Life Skill?

James Parkyn: Diversifying your portfolio by holding many investments in different markets is a fundamental strategy for successful investing. Noble Prize-winning economist Harry Markowitz famously described it as “the only free lunch in finance.”

François Doyon La Rochelle: Markowitz demonstrated that when you combine assets that perform differently over time you lower the overall riskiness of your portfolio without reducing expected returns.

James Parkyn: It comes down to not putting all your eggs in one basket. When you own just a few stocks, the failure of any one of those companies can lead to a permanent loss of your savings. But when you own many stocks—ideally all of them in a given market— the poor performance of some will be offset by the better performance of others.

François Doyon La Rochelle: A word of caution: This doesn’t mean you will never lose, but your gains and losses will reflect those of the overall market. You’ve removed what’s known as unsystematic risk – the risk unique to a specific company or industry.

James Parkyn: The same principle applies to holding different asset types such as stocks, bonds, and real estate. Each produces different returns in any given period and by combining them in a portfolio you reduce its riskiness.

François Doyon La Rochelle: It may come as a surprise, but research shows that many investors hold woefully under-diversified portfolios.

James Parkyn: Fortunately, Early Savers can avoid this basic investing error by owning passively managed funds that allow you to broadly diversify at a very low cost.

François Doyon La Rochelle: The seventh and last Life Skill Early Savers need to develop: Controlling Your Emotions. James, how is this Life Skill different compared to learning about Human cognitive biases?

James Parkyn: Great Question Francois.  As you said earlier, here is the message I want to convey is to pay attention to how you react emotionally to market volatility.  Among the most important of these is to tune out media noise about the day-to-day movements in the markets and focus instead on your long-term Investment plan. It should have asset allocation targets that reflect your objectives and risk tolerance. As markets move up or down, you periodically rebalance your portfolio back to your target asset allocations and keep your faith that the process works overtime.

François Doyon La Rochelle: As we have stated before, The Financial Services industry and the Financial Media promote active management which pushes us to do a lot of trading.  Think of all the industry advertising showing someone in front of a trading screen of stock quotes. Unfortunately, many Investors equate trading with adding value.

James Parkyn: I have a great quote from a longtime collaborator of Warrant Buffett, Louis Simpson, who oversaw investments at Berkshire Hathaway’s giant GEICO insurance subsidiary.  He once said: “We do a lot of thinking and not a lot of acting. A lot of investors do a lot of acting and not a lot of thinking.”  For me, this, in a nutshell, reflects how we manage our clients’ money and how we are different from most of the financial services industry. We buy very carefully; we hold and defer tax and rebalance when it makes sense to do so. We do this all while sticking to the Clients’ well-thought-out plans. 

François Doyon La Rochelle: I love this quote too.  Louis A. Simpson was one of Warren Buffett’s favorite fund managers and a one-time potential successor.  He was much lesser known than Buffett or Charlie Munger.  Sadly, he passed away at the beginning of 2022 at age 85.  We should point out to our Listeners that by acting a lot he means trading a lot. So now, let’s get back to the Investing Life Skill of Controlling Your Emotions.  When markets go up it’s relatively easy to keep your emotions in check for most investors when your portfolio goes up every day.

James Parkyn: Down markets are a fact of life when you invest. Taking a controlled amount of risk is what allows you to earn returns and build your wealth. However, falling markets can create anxiety and pressure to act which can feel overwhelming at times. This is when investors must control their emotions to avoid making errors that will lead to a permanent loss of capital.

François Doyon La Rochelle: All Investors must guard against the fact their thoughts can deceive them. You may think you’re making rational decisions when in fact your actions are being driven by fear. That’s why you should prepare yourself for market downturns by striving to recognize when you’re feeling under stress and cultivating strategies to deal with unhealthy emotions. James, you also provide recommendations for Books.  What do you recommend?

James Parkyn: First, I recommend that the Early Savers read our eBook “7 Deadly Sins of Investing” that we published in 2021. It is in some ways a companion piece to this new eBook.   

I also recommend two must-reads for Early Savers who want to develop a deeper level of knowledge:

1. The Psychology of Money by Morgan Housel: This is a very popular book and it is very useful to both Professional Investors and Individuals. award-winning author Morgan Housel shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life’s most important topics.

2. Think, Act, and Invest Like Warren Buffett by Larry E. Swedroe Think, act and invest like the best investor out there: Warren Buffett. While you can’t invest exactly like he does, Think, Act, and Invest Like Warren Buffett provides a solid, sensible investing approach based on Buffett’s advice regarding investment strategies.

François Doyon La Rochelle: James, you also provide recommendations for Books for Parents. What Books do you recommend for them?

James Parkyn: I recommend two very good but different books:

1. It Makes Total Cents by Tom Henske. He is an American author. Some material in this book is specific to Americans Investors and reflects US tax laws. It Makes Total Cents (spelled with a “c” as a play on words) is a short, easy-to-read bite-size guide to help parents. This concise book is meant to be read a chapter per month covering the 12 most important money topics that a child should understand before going to university or college.

2. The Wisest Investment by Robin Taub. She is a Canadian and her book is about teaching your kids to be responsible, independent, and money smart. Robin Taub lays out a roadmap for teaching your kids about money.

Financial literacy has been a long-ignored subject and the result has been generation after generation entering adulthood without a grasp of money basics. This eventually leads to unnecessary stress in adulthood and ultimately causes stress leading to health issues.

3) CONCLUSION:

François Doyon La Rochelle: So, this is it for today’s podcast Investing Life Skills for Early savers. Thank you, James Parkyn for sharing your expertise and your knowledge. 

James Parkyn: You are welcome, Francois.

François Doyon La Rochelle: That’s it for episode #54 of Capital Topics!

Do not forget, if you would like to submit questions or suggestions for the show, please email us at:capitaltopics@pwlcapital.com

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Again, thank you for tuning in and please join us for our next episode to be released on August 2nd. 

See you soon!