Investing in property

Posted on January 2, 2011 by Kim Stephenson

I’ve recently been reading “expert” predictions for the housing market in 2011.


It’s really entertaining.  They are all trying to be positive and say that it is a good market.  At the same time, they don’t want to look stupid so they are all saying “assuming interest rates stay low” and “if the trend continues”.  So they are making sure that when (not if) their prediction is proven to be wrong, they can say, “oh, well I did say that it depended on….”, “X happened that wasn’t anticipated” and “Y wasn’t as high/low as predicted, that’s why I was wrong!”


It would be interesting to take all these experts and go back over their predictions for the last 20 years.  In theory, they might be good because the theory assumes things don’t change.  The tricky bit is predicting what will actually happen in real, very changeable, life.  


That’s where the predictions come unstuck. Professor Fama, the Chicago economist explained in mocking terms how the word bubble made him annoyed and that the housing market was trustworthy.  Alan Greenspan the head of the US federal reserve was convinced a bubble in housing was impossible.  They are both experts with international reputations, not just C-list programme presenters in Britain.  And of course, they were totally wrong when they were talking in 2007, just before the US property market tanked.


In a way, we can all predict the future – we can predict that things won’t stay the same forever and that the changes that occur will have unexpected consequences that make all other predictions look stupid.  And we can probably predict that after the changes, all the “experts” will tell us how it was inevitable that this would have happened, to try to divert the rest of us from asking why, if it was inevitable, they didn’t predict it in advance!


So all the “experts” and celebrities and “media gurus” can say “if this continues as it is, and this trend continues, and nothing changes, then I can draw a line on a graph to predict the future”.   And that straight line will be a great prediction, if nothing changes.


And we can all predict that things will change and their prediction based on a straight line graph is not going to be an accurate prediction of the future.


Those predictions, much as the media love them, are a waste of time, breath and energy.  I wouldn’t bother to listen to any of them, just invest so that you aren’t gambling on picking the pundit who is lucky enough to have been right this time round. 


Remember, when a journalist calls somebody a guru, pundit or genius, it is because their spell checker isn’t working and they can’t spell charlatan without it!



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Symbols

Posted on December 29, 2010 by Kim Stephenson

When we look at money we don’t see the money – or the real things that we want.  Sometimes we think we see happiness .  Other times we think we are getting something we want.  But often what we’re seeing is a symbol.


There are all sorts of ways to categorise what our symbols for money are.  One that I find useful is that people often use money to get one of four things:


  • Power/Status
  • Security
  • Love
  • Freedom



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That categorisation comes from this book – where the authors go into quite a bit of depth of sub-categories and definitions of specific symbols.   I find it very interesting, but then I would since it is my “specialist subject”!   For you, and for most people it’s usually enough to think about what you want from money and see whether it fits into one of those categories. 


For example, if you tend to “keep score” with your money and you judge yourself by whether you’ve got more than your siblings or friends, maybe what you see in money is power.  Perhaps if you want to “avoid ever being poor”, what you want is security. 


You might want to think about it.  If you got the power, the security, etc. would that make you happy?  Or would you get used to things (as here, about how money fails to satisfy long term).  So if you had as much power as you currently want, would you then be miserable because you didn’t have as much as a bank CEO, or the President of the USA?  If you had enough money to be secure in terms of a home, income etc., would you be content with that, or would you then start thinking that “if only” you had a bit more money, you could have a better home, more income and so on?


There’s often a gender difference in the symbols people see in money.  If you look at what you want to use it for and compare it to what your opposite sex partner wants, don’t be surprised if the same “goal”, (the house, the car, the holiday etc.) represents a different symbol to you.


But either way, think about what you want, see if it fits into those categories.  And whether those things will actually make you happy long term.  If you suspect that it would be like the proverbial Chinese meal, half an hour later you’d want something more, then maybe you want to think a bit harder about what would really make you happy.  Perhaps look at what your real values are and compare them to the symbols you use. 


It will help you understand what you see in money.


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A fair day’s work for a fair day’s bonus

Posted on December 23, 2010 by Kim Stephenson

Bankers’ bonuses.  Are they fair?


That’s not necessarily about “personal finance”.  But it is a lot about psychology, in terms of “what is fair” – and also, what is a fair reward to pay somebody to invest your money for you?


When there are suggestions to cut or limit bankers’ bonuses, the argument is that “they bring in billions, if we don’t pay them well, they’ll go abroad and be lost to us”.


But think about  “they bring in billions”.  Banks make money on deals.  If they take one quarter of one per cent on each deal, and the deals are big enough, they’ll make millions every day.  By contrast, a financial manager in an NHS Trust might be a genius, she or he may save the trust 30% more than anybody else could do.  But their total budget is only a few million over the year, so even an exceptional person can only “make” a few thousand by saving a huge percentage.  But we pay bankers huge bonuses because, apparently, they play with large amounts of money, not because they are necessarily better than anybody else.  Should the Chancellor be paid millions because the company (UK plc) trades billions every day and he or she could claim to have “earned” a percentage?


By the same logic of “they make billions, therefore they should be rewarded in millions”, the person who cleans the toilets at a premier league football ground or a merchant bank should be paid a thousand times more than the person who cleans the toilets in an NHS hospital.   There is more money around, therefore what they do must be more valuable – or is that unfair?


If bonus was based on the “top” person actually producing more than somebody else doing the same job, they might justify being paid in proportion to the extra they bring in.  But that would be by contrast to the “next best”, not in comparison to what anybody could make given that they are going to get a percentage of several billion anyway.  


The problem with the comparison is, how much better are the top performers than the next person? 


I’ve said elsewhere that people often have trouble understanding what is luck and what is skill.  So perhaps you could actually let the bankers go, let somebody else pay them huge bonuses, employ somebody cheaper, and get very similar results for a lot less money.


And is “better performance” not simply “lucky performance” but “riskier performance”?   The New Economics Foundation said (in a TV programme, I can’t find the written reference) that several of the banks lost more in about six months than they made in the previous 20 years. 


Everybody thought the banks were doing well.  Gordon Brown was so impressed that he had Fred Goodwin knighted, and got him voted European Banker of the Year.   Nobody (regulators, media, economists, politicians etc.) said – “he’s a chancer, he’s been lucky so far, he’s taking too many risks, he’s greedy and pushing his luck”.  Everybody said Mr (sorry, Sir Fred) Goodwin was a genius.  And two years later Gordon Brown and everybody else was saying that he was a chancer, he’d taken too many risks, he was greedy etc. 


It is easy to be wise after the event.  If those same regulators, media, politicians, economists etc. want to claim that the current lot of bankers deserve bonuses, how long will it be before they are Knighted, made European Banker of the Year etc.  And how long will it be before they are condemned for taking too many risks, being chancers, fools, greedy etc.?


I don’t know.  I just think that with your own finances it would be wise to ask yourself:

  1. Is the banker, fund manager or other investment “expert” getting paid on the basis of the amount of money they handle, rather than their actual skill?
  2. Am I (or is anybody) prepared to stake my fortune on the fact that they show skill not luck in having a good track record?
  3. If their performance is actually better than the “next best” and it is definitely due to skill, am I (or is anybody) prepared to stake my fortune that the better performance isn’t due to taking more risks, that nobody has worked out are risks yet but that sooner or later will turn out to have been risks that didn’t pay off?


And when you’ve got answers, let me know – because I’m not convinced that anybody knows and in the absence of evidence, the scientist in me says that maybe the bonus system needs a bit more thought.






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Keeping up to date

Posted on December 12, 2010 by Kim Stephenson

Are your wills, insurance, provision for children – up to date?  It is easy to arrange finances as a couple, then forget about what you’ve arranged. 


That’s understandable.  You don’t have to be a psychologist to know that nobody wants to think about their own death or injury or how they’ll be missed when they’re gone. The standard advice is that people should make wills at the latest when they buy property, have children or get married, whichever comes first.  It’s still a good idea.  But you can’t simply leave it there ever after.


Take property – what is the ownership?   If you have property with your partner and it is set up as “tenants in common”, the shares you have in the property don’t go to the partner on death they go to your estate.  That makes it easier to deal with a break up, you’ve each got your own share of the property that is separate.  And if you’re not married, and don’t have a will, your estate doesn’t automatically go to your partner.  That might be great, for now.  What if you make a will, then get married (which invalidates the will) or you get married, but still don’t make a will?    Different orders of events will often result in  completely different situations, and the chances of the result being what either of you wanted to happen are pretty slim.


Or look at children.  As an unmarried couple, you might have rights of access to the children, but without a will you don’t necessarily have rights to your partner’s money to look after those children if your partner dies, even if they wanted you to.  Maybe you are brave, get it sorted out and make a will and plan all the right things, not just what happens to your money and property, but your wishes about your children’s education, guardians in case you and your partner die at the same time, insurance to make sure finance is there for care for the children and so on.  And the children grow up.  Do they still need guardians?  Is the trust fund intended to help them after university still appropriate when they decide to leave school at 16.  Or do you still want them to get access to the money at 18 if they decide at 17 to go travelling for a few years – do you want your appointed guardians to have no power to protect them from their youthful enthusiasm and have to watch the money you put aside for them to make a start in life if you weren’t there to help them, squandered?


So unpleasant as it is, think about what you want to have happen if you and/or your partner die.  Make sure there is money there for the survivor and any children, and that what happens to your property, your partner and your children fits with what you and your partner want now, not what you wanted 20 years ago.


So when you have a plan, make sure that you review it  – when you change the relationship (marry, divorce etc.) when you buy, sell or change property and when children are born (or, sadly, die) and when they reach an age or a decision that changes what you’d want to happen.  You don’t have to make change for the sake of it – you just need to put aside your fears and reluctance to consider death, and make sure that if it happens, you don’t bequeath the people you love a problem besides having to cope without you.



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Seasonal spending

Posted on December 7, 2010 by Kim Stephenson

 

This is an article that appeared in the December issue of the RBS magazine, Sense – it’s about Taming the Pound at Christmas.

 

They’ve taken it off the site now, so here it is:

 

Merry Christmas – Ho, Ho, ……Oh!

 

What’s the best thing about Christmas?  According to a 2006 poll, nine out of ten people said the chance to be with family and friends.  Only one in fifty thought it  was getting presents.  But one in fifteen thought the worst thing was family rows and nearly half that financial pressure was the worst. 

 

We evidently like getting together, to have fun, not arguments, and aren’t too bothered about receiving “things”, but worry about paying for them! 

But with billions spent at Christmas on product advertising that starts earlier every year, there is a lot of pressure to overspend, focus on the presents and money and to be stressed as a result.  Here are some ways to reduce the financial pressure, without creating yet more stress.

 

The unknown is more frightening than any monster (ask Alfred Hitchcock) and we all use the past as a guide to the future. 

 

However, we tend think in emotional terms such as, “I always spend too much at Christmas” rather than practical ones like, “can I use last year’s spending as a budgeting tool?”  So work out a budget.  Who are you buying for? How much do you have?  Look at last year’s bills to get an idea of what you spent, work out what your budget is for this year, allocate it appropriately, and stick to it.

 

Research what you’re going to buy and how much.  Bulk buying, two for one, etc. are only useful if you will use the bulk, otherwise buy only what you need of a cheaper brand.  Advertisers know how we think, “special deals” are designed to make us believe we are economising, that we are being sensible and saving money.

 
But we need to focus on the money spent not on mythical savings, “three for the price of two” is spending on two, it isn’t saving on one.  And buy what you value not labels – if nobody can tell Cava from Champagne, why pay more?  If friends judge you by what you spend not what they taste, are they friends?

 

In our evolutionary past status was very important for survival – the “haves” ended to attract more mates than the “have-nots”.  It doesn’t matter in that way now but we still compete for status, still try to “keep up with the Jones’s”, particularly with conspicuous spending. 

 

And that means you can end up buying ever more expensive items to compete with friends and family.  You are better off sticking with your individual values instead of following the trend.  Set spending limits on presents for everybody’s use – “it’s £X for friends children, £Y for nieces and nephews, £Z for adults” or whatever. 

 

Also, ensure everybody is clear on who is being bought for, it is embarrassing to have your children bought gifts when you have nothing for the giver or their children. 

 

And make a “wish list” and get others to do so too.  If you must get people surprises, keep these to close family members or people that you know (and who know you) really well.  Then you are likely to get something novel that one another actually like and since you might buy several things (such as for your children) you can buy the main things from their list and have a smaller item as a surprise.  That way people get what they really value, costs don’t escalate and you can work out what it all will cost in advance.

 

 

We tend to regard the person who sees the “big picture” as better than the “nit-picker”, and we want to be seen as visionary, and not as one who “can’t see the wood for the trees”.  But try to look at purchases as if they are all separate, focus on the trees not the wood. 

It’s easy to buy something for £19.99 (within a £20 limit), then find that you “might as well”, get the extra batteries for “only” £2.50, the alternate colour stick-on for “only” £1 and so on.  But the extras that each cost a few pence can add up to 30% or more of the original cost.

 

With a camera, time and a computer you can give personalised and artistic cards instead of mass produced ones.  In the same way, making presents is a great way to show you thought about the friend or relative.  And which would you rather have, a gift that says you are worth some effort or a mass produced (but expensive)  present wrapped by the company?  If you are creative it is a way to give something really personal and precious, your own skill, time and care, while saving money. 

 

Most of us want to bring something to say thank you when we travel for Christmas, but if we aren’t sure what to bring, we tend to fall back on standards like flowers or wine.  As host, most of us want to appear well-organised and not need help.  So if you are hosting, let people know what you would like, and if you are travelling, ask what would be useful.  If people bring utensils, food items, etc. that are needed, everybody gets the pleasure of helping, the day runs better and the host(ess) saves a lot of hassle and expense.  It also produces social interaction, which has been shown to increase happiness and to reduce stress.

 

Similarly, involve children in shopping, preparations, cooking and particularly in buying for favourite relatives and selecting what they truly want themselves. 
It teaches them about limited resources and gets them used to prioritising early on (money is not endless, none of us can have all the things we want).  It also gives most children more fun to be treated like adults and to have an important role to fulfil than to be treated like automated present smashers. 

 

Try to give (and appreciate) experiences rather than “things”. 

Material things don’t make people happy – in fact materialistic attitudes are linked to unhappiness.  Every family has stories; like the time the party extended into the street and in and out of neighbours houses, the time Uncle Ebenezer sneezed and knocked over the tree.  We don’t tell stories about or remember the expensive gifts, we remember the experiences of sharing and companionship.  Those are what bind us together, form our memories and make us happy – and Christmas is supposed to be a happy occasion.

 

 

 

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It’s a million to one shot, but it might just work.

Posted on December 5, 2010 by Kim Stephenson

Some people, particularly those involved in finance, seem to have a lot of trouble understanding chance.  


Imagine that on holiday in Australia you bump into your distant cousin that you only met at Pat’s wedding fifteen years ago and it turns out that she’s called her daughter the same name as you’ve called your daughter.  What an amazing, unlikely coincidence, you think.


Now imagine that you are playing a game about the toss of a coin.  You make a prediction of a pattern and toss the coin three times.  There are eight possible series of three coin tosses.  With heads as H and tails as T you can get:

HHH

HHT

HTH

HTT

THH

THT

TTH

TTT


Say you “bet” on HHH.   All the eight sequences are as likely to come up as one another since it is a fair coin.  So your odds are 1/8. 


Now imagine that there are 7 other people playing.  Each one bets on a different order.  One bets on HHT, one on HTH and so on.  Whatever order comes up, somebody wins.  The chances of somebody winning are 8 out of 8, absolute certainty.  But the odds of you or anybody else in particular winning are still 1 in 8.


The thing is, something happening on one occasion, predicted beforehand, might be very unlikely – but the chance of something happening when there are loads of repeats and opportunities for it to happen are pretty much certain, however unlikely it is at first sight. 


This applies to “coincidental” meetings, you meet your cousin in Australia, but you might have met them somewhere else, on another occasion.  You might meet a cousin, an old school friend, a former colleague and you might have in common the name of a daughter, a dog, the same camera – millions of chances for a “one in a million” occurrence.


It applies to the lottery, it is about 14 million to one against you winning but it is very likely that somebody does.


And it applies to investment funds.  The chances of any particular fund being “above average” for 10 years running by pure chance are only 1 in 1,024, but there are over 6,000 funds in the UK, so some ought to do it sometimes – just like sometimes people win the lottery and sometimes you meet your cousin in Australia.  They don’t.


But there is still a perception that there are great fund managers whose performance is nothing to do with chance and that you have a good chance to tell which ones they are beforehand.


Like I said, some people seem to have a bit of a problem with chance.

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Responsible pocket money

Posted on December 2, 2010 by Kim Stephenson

I’d mentioned to one of my psychologist friends that I’d set up this site.  I’m glad to say he not only liked it but, having children, offered to share a bit of practical psychology for dealing with pocket money that might be useful to you.  What he does is give the children pocket money, and once given, it is the children’s, so if they want to spend it, they can.  However, the children have come to realise that once it is spent, the money is gone and  that’s that!  Both children tend to save now for the things they really want, and it saves any arguing about money.


Maybe you think that is obvious – if so, that’s great.  But maybe you had the same response to that idea that I got once when I proposed a psychologically useful way of teaching children about handling money.  I suggested that as they get older, you should involve them in buying clothes, paying mobile phone bills, organising money, setting budgets for school trips etc. and let them handle increasing responsibility, and take the consequences.   Some of my audience reacted as if I’d grown a second head!  But it works. 


It’s a similar principle to allowing children to explore the world a bit.  Maybe they get grazed knees or something once in a while, but they learn how to deal with the world as it really is, in a situation where they are only going to get a few scrapes or bruises, not get themselves badly hurt. 


With money, if they get things wrong (they spend money on sweets that should have bought them lunch on the school trip) they will learn that they get the consequences (like being hungry most of the day).  You know that they learn from something that is less serious and not going to produce a huge problem (like blowing their whole university allowance and student loan in the first two weeks because they’ve never learned to handle a budget).


Think about it.  It does work, both in theory and in practice.

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Happiness Index

Posted on November 29, 2010 by Kim Stephenson

Opinion seems to be divided about the idea of the happiness index. 


I’d welcome it with open arms if it actually meant the Government was going to take it seriously – it’s what I’ve been suggesting for a few years (for example Buying happiness, Establishing values, What is money for?).   And bearing in mind what is possible for charities and this site to do for nothing, £2 million could give some pretty impressive results!


The sceptical part of me sees three issues.  What is probably going to happen is:

  1. The people in charge will be political appointments who don’t know anything about psychology at all.  Like the people who present property investment programmes on TV they’ll be big on celebrity status and small on actual knowledge of the subject.  That will mean they get lots of “good TV”, warm and fuzzy rubbish and ignore the science (see the Diener/Biswas-Diener book in the values section of resources)
  2. Or they’ll be political appointments who think they know all about it and will ignore the existing research (see the Seligman and Csikszentmihaly books in the values section of resources) and devise their own “index of happiness”. 
  3. And the political appointee will probably have great credentials so they will be made to look like an expert, but any expertise is in the wrong area.  So, like the Conservative party bringing in US advisers on behavioural economics, they’ll forget that they have UK psychology expertise available on happiness.


So the worry is that, since they are already talking to Lord Layard, who is a professor of economics, not psychology, they are already going down the “it is politically expedient rather than useful” route.   I’m sure Lord Layard is a very clever chap, but economists do tend towards a “the average family has 2.4 children therefore policy should be….” approach, when I’m not sure anybody has ever seen a family with 2.4 children!  It ignores individual differences which are a standard part of psychology – everybody is unique, so what makes one person happy will bore or irritate another, but economics doesn’t have the tools to deal with that because it isn’t the science of behaviour or people, it is the science of money. 


And it isn’t simple to “measure happiness”.  Seligman, Csikszentmihaly etc. spent years working out methods to do it accurately, Diener is a world authority on “subjective measures” (i.e. how people feel) about happiness so there is a lot of expertise available that a lot of people in the UK have.  But they are psychologists (like me) not economists and certainly not people who have the ear of political appointees.


So the Prime Minister has the chance to set policy that is really useful, that prioritises the happiness of the population, that uses UK resources and knowledge and that recognises genuine expertise.  It would be nice if that’s what he did, rather than go for “the usual suspects” and make the whole exercise one of futile political point scoring, wasted money and superficial “happiness promotion”.


So come on Mr Cameron – have the courage to use the expertise that exists, don’t settle for the “Tony’s cronies” approach and stick with your political mates.



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George and the Crystal Ball failure

Posted on November 26, 2010 by Kim Stephenson

I feel quite sorry for George Osborne.  Not that I take much notice of politicians normally, but he’s been made the poster boy for the blind stupidity of politicians everywhere with the reports of his “I’m going to Ireland to listen and learn” comment.  He even got a few minutes of mockery in, “Have I Got News For You”.


I don’t comment much on international economics because it isn’t my area, I focus on personal finance.  That’s the bit that I know something about and that I assume is of interest to the average person who looks at the site.  After all, it is hard enough to control your own mind and money, how are you going to make any difference to national or international policy? 


But the story of Mr Osborne is interesting because it follows the standard pattern of everybody failing dismally to predict the future, then assuming in hindsight that they understand what happens and are entitled to mock those who also failed to predict.


George thought the Irish economy was doing well.  Just like all the journalists, economists, fund managers etc. he thought he could read the signs.  But he didn’t have a crystal ball and, like everybody else, his investment (in his case, his reputation) went down rather than up.  Now the journalists are mocking him and saying that he should have realised that the problem was the failure to regulate the banks.  The journalists think they can understand exactly what went wrong, regulation was weak, so they think their crystal ball will work and they can predict what will happen in future.


The trouble is, the future can’t be read from the past any more than it can be read from a crystal ball.  Regulation won’t work, until we get some recognition that the way people think about their money is more important than the money itself, the regulations about the money or what the politicians or journalists say about the money.


And until we get some recognition of the fact that the thinking styles, decision making processes, biases, psychological hang ups (like refusing to accept that their crystal ball isn’t uniquely accurate) of regulators is just as important as the “man on the Clapham” omnibus – in other words that everybody’s thinking is the same and “experts” aren’t somehow better than all of us, we’re going to carry on having problems.






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Establishing values

Posted on November 23, 2010 by Kim Stephenson

There’s quite a bit about values on the site.  What do you value?


I’m assuming you know what you think money is for (if not, have a think about it now – maybe read this and consider what you believe).


If you’re going to work out what you value, there are lots of ways to do it and lots of different techniques you can use.  There are several more in my book but here are a couple.  It doesn’t matter which one(s) you do (one, both, others, ones you make up) choose those that appeal the most, that stimulate you to think.  Make notes on your answers.  Be honest about what you really want (this is where sharing with your partner can be helpful for some people, and inhibiting for others).


Have any notes you made about “What is money for” to hand, but don’t worry about them for the moment.  What do you value?


  • Imagine you’re famous and you get to write your own obituary.  What are you famous for?  What does the Times obituary say about you?  What do your favourite actor, your grandchildren, the friends who knew you say in their eulogies to you at your memorial service at St Paul’s?


What do you value? 


And/or try this:


  • Think about what you value and enjoy
  • Do you value/enjoy your job? 
  • Do you value/enjoy your hobbies?
  • Do you value/enjoy time with your children/family? 
  • Do you value/enjoy things to make people jealous? 
  • Do you value/enjoy your memories of holidays or other experiences?
  • Do you value/enjoy your computer games, Sky subscription or cigarettes?
  • What else do you really value/enjoy?


How much time, effort and money do you put into each of these things? 


  • Is the amount of time, effort and money you put into these things proportionate to how much you value/enjoy them?
  • How many of them feature in your ideal obituary?


Many people spend their time, money and effort on things they feel are worthless, and little or no time on the things they say they value and/or enjoy.  Is that something that you do?


What is your life about – what do you want to be remembered for?  And how much time do you want to spend on things you think are valueless, and how much time on things that are important to you?



It doesn’t matter what I think, what do you (and maybe you partner) value?


Posted in Values | Leave a comment