How to alleviate anxiety, and F.E.A.R.

With all the attention on the bad practices of the banking and financial services industry, it was quite a change for me this week when I spoke at the Barron’s conference in Sydney. Barron’s is a US-based financial magazine that has entered the Australian market with the purpose of creating greater focus on “the top 1% of advisers” rather than, as they put it, the royal commission focusing on the “bottom 1%”.

When asked to speak, I had no hesitation. However, as seems to be my pattern, I have major regrets around 24 hours before the event. I generally enjoy public speaking – especially on the topic of client engagement and financial planning – but it doesn’t stop me feeling a little nervous, and it always seems to be 24 hours before. Subconsciously, there is obviously concern about making a fool of myself.

There is no logic to my fear – and that’s the point. As soon as I become more logical, the anxiety dissipates completely. Over the years, I have learned to recognise when it’s happening and have developed two simple techniques to deal with it.

The first is to simulate the experience. I pretend it’s a movie and watch myself walking up to the stage, turning to face the audience, beginning to speak and as I move more and more into my topic, speaking to each person in the audience as if it’s a one-on-one discussion.

The second technique I use is to think about the worst thing that could possibly happen: I could forget what I wanted to say, the technology could fail completely, or I could say something ridiculous. By going through this process I come out the other end feeling not only relaxed, but looking forward to getting up there.

We’re mostly unrealistic

The acronym F.E.A.R. stands for False Evidence Appearing Real, and the best way to prove that the “evidence” is false is to simulate the possible futures, including the worst case. Human beings naturally begin solving problems when they are addressed directly.

Exactly the same process occurs around money. Whether it’s a fall in the stock market, a loss of a job, or any other potential financial concern, the worst thing to do is to worry about it at a high level. There’s no logic in just worrying about something and getting anxious. It doesn’t help.

Having said that, to some extent I’m grateful that there are so many people out there that worry about money. Without that innate concern, we’d have no role to play.

New clients especially, worry about lots of things. There are often real issues but sometimes, they worry about what they are worried about. They often ask: “Is this a common problem? or “Do other people also worry about this?”

Glass half full, or empty?

One of the American speakers at the event had an exercise that apparently identifies people as either optimists or pessimists. The optimists are the “glass half full” people and the pessimists are “glass half empty” people. Interestingly enough, when the speaker asked for a show of hands for those that considered themselves pessimists, not one hand was raised. It’s not “cool” to be regarded as a pessimist. But the truth is, one is not better than the other, and both have blind spots.

The optimists can be overly confident about the future and therefore unrealistic about the assumptions being made. As the pessimists would say, the optimists may get a nasty surprise sometime in the future.

Pessimists on the other hand could be equally unrealistic in their assumptions, resulting in a life of unnecessary frugality.

These outlooks come from various sources – genetic, wiring, and learned behaviour. They’re mostly not a choice but can still be very limiting.

It creates a sense of freedom

The ultimate purpose of course is to be free at both a practical and psychological level to live the life that you most want. In order to achieve this level of freedom in an unpredictable future, simulation and scenario planning can have a significant impact.

Just as I simulate my presentation and allow myself to deal with the unexpected, it is even more powerful to simulate the potential impact of external factors on cash flows. It is a wonderful way to alleviate anxiety.

When doing so, it’s worth contemplating all the possible risks including worst case, the potential implications should they occur, and how these risks can be reduced or avoided.

We all wired differently – some optimists, others more pessimistic. Neither is perfect and each can cause problems that can be neutralised with some simple techniques. Being aware of your default outlook, and then simulating the opposite, creates a sense of freedom that allows for a real enjoyment of an experience. And as is often the case, I was on a real high after the presentation. None of my concerns became reality.

Programming your autopilot

When I first wake up in the morning, I think I would describe myself as being a little stupid. On occasion, I have gone to work without my belt, tie and sometimes even my wallet. It doesn’t happen that often but over the years, I have learned I just can’t trust myself first thing in the morning. I’m clearly not much of an early morning person.

Immediately after waking up, I’m slow and I have to remember too many things when trying to get ready for work. I need a simple process and I don’t want to be thinking about small things – especially if my mind is already getting focused on the day.

So I have developed a method to make this stage of the day easy and reliable. When I get home from work, at the same time that I change out of my work clothes, I select the clothes I will wear the next day and hang them separately. Everything is ready.

I have a similar problem with travel. For many years, it took me way too long to decide what to pack, and I’ve then either taken too much, or too little. I know why it happened – I wanted to be absolutely optimal with what I took on a trip. Not too much, but everything I wanted. That desire to optimise has cost me time, so I developed a formula and checklist to make it simple. The formula depends on whether the trip is for business or pleasure, and the number of nights away. But it’s now pretty easy.

Believe it or not, I am not that organised. I still get distracted by too many things, and still have some habits I would like to change, but at least I have reduced the number of unnecessary errors and time-wasting practices.

To be strong, know your weaknesses

Getting to know yourself around money is more important. Research shows that the cost of an average investor’s behavioural errors is 4% of their investment portfolio per year. That’s a lot of money. From my personal experience with thousands of clients over 36 years, I’m convinced that the single biggest contributor to financial success is personal financial awareness. The most successful people, financially, know their strengths and weaknesses and how they react to various financial stimuli.

There is also an inverse correlation between knowing yourself and financial anxiety. The better people know themselves, the less financial anxiety they experience. The less aware, the greater the anxiety.

Knowing yourself means more than just knowing that you find it hard to change a habit that is not good for you. It’s more than just knowing that you struggle to control your spending or that you can’t help yourself looking at the value of your portfolio daily. It’s not good enough to just know the actions that are harming you. To know yourself to the extent where your habits won’t damage your success means understanding the origin of the problem, and having a system to neutralise any negative impacts.

The catalyst, tool, and process

Getting to really know yourself is not difficult. First, it requires an understanding of the “pain“. How bad is it? Nothing is going to change unless there’s enough pain.

Next, understand the circumstances in which it occurs, or the catalyst. Often, people who live hand-to-mouth feel relief and freedom when there’s money in the bank, and that catalyst means they then spend more. Others panic when the value of their portfolio falls, and they need to change something. Fear of running out and status anxiety are also common drivers of errors.

Designing a suitable process involves a catalyst, a tool, and a process. My catalyst is my suit jacket. When I hang it up, it triggers the process of taking out clothes for the next day. An investor I know uses a 15% fall in the market to trigger a complete sell. He cannot accept the anxiety and accepts the potential underperformance in the longer term.

The final step is the process itself. It needs to be simple and designed to take over when you can’t think for yourself. The assumption is that you’re either stressed or ‘stupid’ so the process has to be simple. It can’t rely on you thinking at the time. My default investment process when prices fall is ‘income, quality and price paid’. Returns over three years or comparing to benchmarks are other ways.

Being self-aware is no guarantee to avoiding errors but being able to observe your own behaviour around money is a critical component to success, not only to avoid errors but also to alleviate stress.

To what extent are decisions influenced by context?

I was lucky enough to be invited on a small tour of the Art Gallery of NSW operations area. It involved speaking to the experts and understanding how they rejuvenate and protect the works. There is so much to it – I had no idea.

In the framing department, we were introduced to a very wide variety of frames, and a lady who has been in this department for something like 30 years made a very interesting comment: “The frame is not supposed to disturb the viewer”, which I took to mean the frame shouldn’t distract the viewer from the real focus – the painting.

Difficult to avoid
The same can be said of financial decisions, and topics. The context in which a financial decision is made shouldn’t affect the decision itself, but in almost every case, it does.

Think, for example, about investors evaluating their returns. It makes a big difference if the frame is the past 10 years or the past year. Similarly, there is a big difference if the returns are critical to lifestyle or not. Making a loan to someone very important to you is different to making one to a stranger for purely commercial reasons.

Evidence confirms it
In the recent edition of the Journal of Behavioural Finance, two papers relate to this topic. In his paper Stock Returns and the Tone of Marketplace Information: Does context matter? Nicholas Mangee of Georgia Southern University explains how impossible it is for anyone to know in advance when and in what ways different variables will matter in predicting stock market prices. However, prices will be totally affected by how different market participants interpret the information they deem to be relevant. “Simply put, context is what gives information meaning for investors,” he says. In other words, stock prices will be affected by investors’ perception (framing) of the information.

He goes further to explain how the “textual tone” of market reports mimics the current feeling of the participants and therefore influence the way information is interpreted. The marketplace context and information-based sentiment are the key factors for explaining stock price returns.

In the past, researchers concluded that investor sentiment was not directly related to prices, but the present research shows that sentiment and tone have a direct impact on behaviour.

In another paper, Aggregate Investor Confidence in the Stock Market, Chris Meier concluded that overconfidence is directly associated with excessive trading and risk taking. He shows how various impulses affect investors’ beliefs about their ability to predict security prices and interestingly enough, also how this increased confidence results in higher trading for around two months. As this overconfidence subsides, trading reverses in the third month implying that rational traders correct the initial overreaction. The first frame is replaced by another.

Use framing to win debates
From a social perspective, it is easy to win debates with friends or family by simply changing the frame. When we hear somebody with a strong opinion who has based their view on their own anecdotal evidence, by quoting broad-based statistics or some alternative anecdotal evidence, the argument can be easily won. Millennials are regarded as being impatient, and have a ‘frame’ – “I need it now“ – that often results in overspending.

From a financial perspective, the topic of framing is so important because it has a massive influence on all short-term decisions, and this is where most cost is incurred. People often make decisions about money based on short-term information, and long-term implications are seldom effectively analysed.

Every day we encounter facts and then make up stories to get these facts into some order so they make sense. The problem with this natural behaviour is that it creates frames, and given our natural inclination to find the shortest way to an answer, we repeat the frames at potentially the wrong time.
A useful antidote is to change or remove the frame. Let’s say your portfolio produced a 20% return. Based on average returns, you conclude it’s good and you’re very happy. If you reframe it by looking at similar portfolios and find they averaged 25%, it now makes you unhappy. Alternatively, you can simply remove the frame and just accept the fact that the returns are 20%.
Removing the frame and accepting the facts as they are is possibly too difficult a step for most people. To some extent, it requires us to suspend thought and evaluation – and this is challenging. Context is always going to affect decisions whether we like it or not. It’s more about being aware of the context and how it’s influencing the decision, and being clear about the ultimate purpose, in order to make appropriate decisions.

Australia day & Australia’s future

It’s Australia Day weekend, and time for festivities. It’s a time to stop to appreciate the good in Australia, and equally, time to contemplate what it means to be Australian. As a relatively new citizen that’s only been here for 20 years, I always find this a time to reflect and appreciate.

Life is good in this country, and we are very lucky. But, how do we ensure that the people who come after us feel the same way in 20, 30 or even 50 years? When I reflect, I think about how it came to be so good. What have been the key ingredients and how do we keep the good and change the bad? First, we need to be able to analyse without bias. This is not easy when involved, but important.

My views may be wrong, but the way I see it is that:

  • We were born with it – the resources under the ground have had a lot to do with success
  • Right place, right time – the rapid and massive growth of China has helped fuel our own development
  • Having the right relations – being part of the Commonwealth during the days of ‘growing up’ must have had a useful effect
  • Good education — education isn’t behind a barrier for Australians
  • Experienced tough times, and learned
  • Tolerance
  • Invested for the long view — the Sydney Harbour Bridge, for example.

During the times of plenty over the past 30 years, there has been some neglect, in the areas of infrastructure and education in particular. We have potentially also lived beyond our means. The debt levels are unacceptable.

Countries need to be looked after, because they can and do degrade if they are not curated and developed effectively.

While it is natural for matter to form, grow and then disintegrate — and it occurs with humans, companies and countries — prevention is achieved through growth. We’ve had a wonderful recent history but the challenge now is to beat the odds and make our recent run of good times persist.

So what will it take? 

First of all, I’d be happy if Australia is as good as this in 50 years. Most people around the world would do anything to live in this country. Many do. That means we have choice around what skills we need and should grow.

I would love to hear one of our leaders describe their vision for the country. With an election coming up, it would be a wonderful start. It is important because vision dictates strategy.

In addition, I think we should continue to appreciate and be grateful for what we have, while remaining self-sufficient, and independent of others.

We need to educate, educate, educate. This is how we will develop the skills we will need to build our country of the future.
And then there are things we need to be aware of, that mirror or emulate the behaviours of a successful investor — because that us what we are doing, investing in the Australia of the future.

We need to accept that tougher times aren’t necessarily bad, because it is in tough times that opportunities can be found.

We also need to focus on the vision, and long-term view— while enjoying the journey and living in the present.

Any investment is ultimately only as good as the country in which it resides. Financial success needs an honest assessment of where we are and how we got here – good or bad. But the foundations on which they are built significantly impact investment returns.

Celebrating Australia Day is better if done at both a superficial and fun level, as well as at a deeper level.

Better to wade, or plunge?

With summer now in full swing, the ocean has warmed up sufficiently for me to commence my annual ‘swim season’. I’ve always enjoyed body-surfing – once I’m in, that is. Not being one for cold water, getting in is the problem.
There are many who are advocates of the plunge in and get it over with approach. My view is avoid unnecessary ‘pain’ whenever possible, so I’ve developed a process that involves, what I would call, a phased approach. I get used to the water up to knee level, then waist, then a splash around the face and neck, and then all in. It works for me and while in my younger days I had to accept the peer scrutiny that came with it, over time I learned that it worked.
Be comfortable with your way
When entering the investment markets, there’s no perfect way to do it. What’s most important is to be comfortable with your way. Investor behaviour is the greatest contributor to investment performance and regret is one of the key influences of investor error. So being comfortable with the prices paid for investments will go a long way to avoiding bad decisions later.
Investment data exists in various forms for up to 200 years and for the US markets we have very detailed data back to 1926. Over this time, it would have generally been statistically better to have ‘plunged’ into the markets most of the time. It makes sense because market prices have risen over this time so the sooner the investment is made, the greater the return.
Balance statistics with specifics
However, investors have individual investment horizons – statistics only provide guidance around broad principles. Investors invest real dollars over a real lifetime – not statistical averages. So, whether to plunge in or wade in will depend on several factors, including:

  • Risk propensity and risk tolerance – how comfortable the investor is with taking risk compared to how much loss can be tolerated before a change is required. Losses are felt twice as great as gains, and ‘pain’ usually causes a change in strategy.
  • The price at the time – it is logically easier to invest quicker but emotionally more difficult after major price falls, 
  •  Time horizon – the longer the time horizon the more rapid the plunge. A 25-year-old investing their superannuation wouldn’t be phasing. 

Phasing in is all about regret avoidance – i.e. avoiding feeling that the original decision was wrong. It’s as simple as applying whatever method makes sense logically and wouldn’t be regretted no matter the outcome. 
Many methods
There are many methods to making investments. Plunge or phase is overly simplistic. For example, phasing could take various forms including:

  • ‘dollar-cost-averaging’ – a very common and regularly recommended method where the investment is made over a fixed time horizon in equal instalments at regular intervals.
  • ‘value averaging’  –  based on phasing in over a period, but where the primary trigger for determining exactly when the next investment is made is price. If the price falls, more money is invested. If it rises, less.

In both cases, the total investment will be completed within the agreed time frame. 
As we continue through this period of increased volatility, for those with money to invest it has become that much more important to be comfortable with the method and timing of investments.
I seldom regret my method of entering the ocean for a swim – there’s no real downside. However, investment returns are definitely impacted by time and timing and just like an ocean swim, you have to be very careful about choosing the most appropriate waves to catch to have the most fun without getting injured. Sometimes it’s necessary to just hold your breath and wait for the froth to pass overhead.  


As the US investigates the recent pipe bombs being sent around their country, the authorities are reminding US citizens that “terror only works if you let it work”. At the same time, the stock markets worldwide are more volatile than for a few years and the media reports, although mostly factual, can cause unnecessary alarm – if allowed to do so.


Some of the possible reasons for the volatility include rising interest rates, trade wars, political uncertainty and the slowdown of the Chinese economy. The primary reason is that investor psychology – prices are a function of investors confidence in the future.


As most of our clients know, as prices rose over the last few years we at SentinelWealth have been expecting more volatility and have restructured our portfolios to be as prepared as possible. What’s required now, is a continued implementation of the strategy.



It’s early days, but the changes we made look like they will work well


Over the last two years we moved portfolios more defensively. Greater exposure to cash and bonds has been common and these assets will dampen the volatility of the stock markets. By using floating rate bonds, term deposits and bond funds, we believe we have created the best possible ‘defences’ to the expected volatility.


Ironically, when recommending these changes, many clients expressed concerns about the low interest rates on cash. Our justification always was that low interest would look very good against falling asset prices – and  it does.  In addition, we regularly observed that many investors were in our view, under-pricing risk whilst chasing returns.


Another significant change has been to active managers and in the Australian stock market exposure, away from banks. In our global portfolios, we moved away from the tech stocks and into managers with a focus on more stable value stocks.

All of these strategies are proving to be good for portfolios on a relative basis and although we may still experience negative returns, they won’t be as bad as they would have been.


The focus now


Prices don’t necessarily reflect the value of an asset. The real value of companies doesn’t change as rapidly as the stock market suggests. The value of the underlying assets hasn’t actually changed – as opposed to the perception.


It’s time to be more focused on the yield. It’s unlikely to change very much and ultimately, it’s the income from assets (the yield) that counts.


We have had a major emphasis on ensuring that the underlying companies owned in the portfolios are of high ‘quality’. Our definition of  ‘quality’ in this context is companies with low debt and high, consistent profitability. The assumption is that ‘quality’ companies will not only be better equipped to manage a downturn, but will also be able to take advantage of others more precariously placed.


The portfolios are also well diversified, not only across asset classes but also within each asset class. We have significant exposures to Australian and Global shares but also to bonds and cash. Within each there are sub-asset class and risk factor exposures.


The investor’s behaviour is critical


We expect the volatility to continue and as it does we will continually re-balance portfolios as best we can. It will be equally important for investors to be ‘keep the faith’ in the strategy. This largely means that we need you to:


  • Accept that stock market falls are big news for the media but don’t necessarily reflect what’s happening in any specific portfolio,
  • Constantly remind yourself to focus on income not price, that you own quality, well-diversified assets and that there is a process in place to monitor and manage your assets.


Our process will also provide indications when to start buying back into the markets and we can be sure that when this happens it is likely to be at a time when negativity is rife. It’s always difficult to buy assets that have done badly for someone else but that’s exactly the best time.


If you have any concerns, please don’t hesitate to contact your adviser.




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