Critical thinking

Isn’t it strange that every car in a used car dealership looks like an amazing deal? Why is it each time you speak with a mortgage broker there is “no better time to buy”? How come after a year of going to your chiropractor, there is still a slight misalignment that requires 12 extra bi-weekly visits? I don’t know, seems legit to me (I’m seeing Dr. Silverstein tomorrow). Anyways, for no apparent reason today’s post will be about critical thinking.

Critical thinking (or the ability to separate fact from fiction) is a fundamental skill that extends to all aspects of life. If there is one thing the world is lacking, its people who use personal research to make up their minds about important issues. For example, I don’t need to watch a 12 minute video to realize that things are bad in Africa. I KNOW things are bad (that’s why I vacation elsewhere) but how is sending $30 to an unproven charity going to help?

Don’t make any financial decisions until you have considered all of the alternatives and consulted multiple professionals (or blogs). Don’t be shy about asking how much commission these “advisors” will earn from playing around with your money. Don’t sign anything without consulting a lawyer first. Above all seek transparency, accountability and a sexy smile.

Seek a fee-based financial advisor who will charge you an initial fee for setting up a portfolio, provide tax shelter advice and give you the option of coming back annually to rebalanced your portfolio. Run-of-the-mill advisors will try and push products that pay them the highest commission, your needs for steady returns will be a secondary concern. View advisors as booty calls; when you need some advice, call them up, do the deed and be out the door before they can say “mutual fund”. Don’t stick around to cuddle, it ain’t worth it.

Sizing up your investments

So lets recap: you’ve got a fresh budget, expenses are being tracked online, spending limits are set and there’s a few extra benjamins winking at you with each paycheck.  It’s about time to consider investing.  Don’t let the cheddar sit idly in the bank, put it to work.

A good starting point in choosing an investment avenue is to consider Return On Investment (ROI).  This is a handy yardstick that sums up how efficient (profitable) an investment will be.  The formula is straightforward: 

ROI = (money being made – money being spent) / total money invested

Multiply the ROI by 100 and you will get a percentage, obviously the higher the ROI the better the investment but there are some exceptions.  ROIs do not reflect how much risk is involved and they do not take into account how much work is required.  For example, investing $10,000 in a conservative diversified portfolio may only produce an ROI of 5%-10%.  That’s as vanilla as Martha Stewart baking an apple pie.  Buying a rental property, taking on a mortgage and finding a tenant could produce a much higher ROI.  In this case you get to live out your fantasy of being a superintendent!  Smuggling cocaine from Columbia and pushing it onto the mean streets of Toronto could net an insane ROI.  This last case takes into account your willingness to spend the twilight years of your life sharing a cell with “Big Tyrese”.

The goal is to find that sweet spot.  Consider how much effort you are willing to put in and how much risk you can tolerate.  There are more important things in life than making money efficiently.  Sometimes it’s better to pick the lesser ROI, especially if it means not having to spend your evenings making shivs from toothbrushes and soap.