November 9, 2008

HOW AN ACTUARY INVESTS


Many financial bloggers write about investing. Despite regular contact with investment advisors at different firms and access to other experts like fund managers, I keep my thoughts to myself. 

Months ago, a reporter for a major newspaper asked how I invested. I explained but my approach lacked pizazz. You can judge for yourself from the notes I prepared for the interview.

Occupation
Actuaries measure and manage risk. I focus on financial risks. Here are the four "obvious" ones:
  1. living too long (longevity)
  2. dying too soon (mortality)
  3. getting sick (morbidity)
  4. getting disabled (disability)
A fifth risk often gets overlooked: overpaying taxes through ignorance or inertia (taxevity). Few realize how effective life insurance can be when properly structured.

Portfolio
Mainly mutual funds bought years ago. I use two investment advisors in London Ontario. I've never met them. I'd like to consolidate with one advisor in town but have not found the right person. Rather than investing more, we've focused on paying off our mortgage to increase cashflow for investing. On my own, I invest through universal life insurance, which allows tax-free growth like RRSPs (but without the restrictions on maximum deposits or forced withdrawals).

Start of Career
In 1984, I graduated from the actuarial science program at The University of Western Ontario. I worked at several major life insurance companies, starting with Metropolitan Life in Ottawa. I specialized in the design, manufacture and marketing of life & health insurance products. In mid-2005, I switched to a nontraditional actuarial role: helping advisors reduce the financial risks of their key clients. I donate time to help the general public by writing this blog. There is very little similar content online.

Start of Investing
My parents gave me a solid grounding in the importance of saving. As a child in the 1970s, I started putting money into a savings account and then GICs. My 14 year old son is following this pattern too. He likes compounding: your interest earns interest.

Thanks to scholarships, summer jobs and support from my parents, I graduated from university debt-free in 1984. I started working and making maximum RRSP contributions. I found an investment advisor by walking into an investment firm (a reverse cold call) and began investing nonregistered savings in mutual funds. As a novice, I didn't realize that loads were negotiable. I got charged a hefty 9% up front. I didn't know that investment advisors got hidden perks like cruises. I thought my advisor had the training and obligation to put my interests first. When I smartened up, I switched to my family's investment advisor in London, ON. This new fellow advised me to buy "can't lose" shares, options and warrants. And lost. By the late 1980s, I decided to stick with mutual funds.

Investment Strategies
Unclear. Over the years, I have known many experts: investors, investment advisors, fund managers, etc. I see many different approaches to investing. Each has merits but they conflict. No one knows what's going to happen. For example, we knew that gas prices could only go up (diminishing supply, insatiable worldwide demand) but now gas has dropped below 90 cents a litre again. 

Emotion leads to bad decisions.  We're reluctant to sell and buy at the "right" times. Yet we get excited about investments and agitated by blips in the returns. Many want to "get rich quick". At the 2007 Real Estate and Wealth Expo in Toronto, audience members were enticed to buy foolproof investing secrets for $995 or more. It is better to learn investment basics, sow seeds, nurture them and wait for the harvest.

Portfolio Returns
Unknown. I generally buy/hold but will make changes on the rare occasions where my investment advisor makes recommendations (one does, the other doesn't).

Stages Of Life
I've had a lifelong fear of outliving my savings during retirement. How horrible to have nothing left because we are living longer. What if an illness strikes or we need expensive long term care? A lifetime of savings can quickly disappear. How horrible. This fear of poverty --- the most basic of the six fears Napoleon Hill identified --- provides a strong incentive to save, spend prudently and increase earnings. 

Best Decision
Real estate. We changed our principal residence three times during down markets. We are close to paying off our mortgage. This would give a great sense of accomplishment ... unless we move again.

Worst Decision
Trusting my first investment advisor to put my interests first. I deserved unbiased advice but got high fees and poor returns. My advisor got nice commissions and hidden incentives like cruises. Where's the sport in taking advantage of someone who know less?

Investment Hero
Probably Warren Buffett. He invests for the long term, skips fads, shares his insights and understands insurance. I favour passive over active, low MERs over high, indexes over mutual funds. 

Who can I really trust for investment principles? I have decided that's going to me and I am learning. I'm reading financial blogsand classic books like The Richest Man in Babylon. The general advice is 
  • pay yourself first: live on less than you earn
  • invest
  • never spend the invested money
  • harness the power of compound interest
My extension is to invest inside universal life where growth is tax-sheltered (like RRSPs) and savings are accessible tax-free using bank loans. We will take advantage of the Tax-Free Savings Account too. None of this is exciting but neither is a financial rollercoaster.

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2 comments:

Big Cajun Man said...

Excellent post and excellent points, well written, and I may steal your graphic for my blog too, your explanation is very clear, keep up the excellent writing.

--C8j

Promod said...

Thanks for your comments Big Cajun Man. Feel free to use the graphic. I'm not sure where I found it.