Financial information overload can be managed

Don’t believe everything you read and hear.  In some cases the information is someone’s opinion that may have a bias, or an alternative motive.  Decisions and reactions happen every day based on this pool of information regardless of its legitimacy.

Society today has a unquenchable thirst for information and it has infiltrated every part of our daily lives to the point that it has become excessive.  Last week I had an interesting conversation with the CEO of Basex, a US firm specializing in managing information overload.   One statistic he mentioned was that more information has been released in the last 25 years than in the previous 500 years.

Means of disseminating information has extended well beyond the traditional forms of television, radio, books, newspapers and magazines.  Smart phones, websites, and Internet search engines allow us to access information instantly.  E-mail, instant messaging, and social networking like Facebook, blogs and Twitter allow us to share this information.

How much time do you personally want to dedicate to your financial well being?  It is impossible to read everything when it comes to investments.  Determining how much time you want to spend is the first step in managing the volume of information.  Some people may choose to dedicate zero time, other than the brief conversations they have with their investment advisor.  At the other end of the spectrum are do-it-yourself investors who may be spending much of their spare time researching stocks.  The latter is fine if you truly enjoy it, have the knowledge, and have no other hobbies.

Most of our clients are between the two extremes noted above.   If you take an active role in managing your finances, with an advisor, we feel this is the best approach.   Blocking off an amount of time you feel comfortable with is the first step in managing financial information.

Does the law of diminishing returns apply with respect to the time you spend looking at financial material?  This is a tough question to answer.  One would like to think that the more financial information you read, the better your investment returns should be.  Unfortunately it is not that easy.  Up above we mentioned that we shouldn’t believe everything that we read and hear.   The key point to take away is whether or not you’re reading the right information.

The next step beyond blocking off the amount of time you want to dedicate to your finances, is to determine the type of information to read that benefits you the most.  We feel the first area of information that you should read, or gain an understanding of relates to financial planning.  Becoming educated in this area will help direct your financial resources.  Ten examples of planning questions you should know the answer to are:

  1. Should I make an RRSP contribution?
  2. Should I pay down debt or make an RRSP contribution?
  3. Should I open a Tax Free Savings Account?
  4. Would my family be protected if something happened to me?
  5. How much do I need to save to reach my financial goals?
  6. Should I convert my RRSP to a RRIF before age 71?
  7. Should I defer my property taxes?
  8. Should I collect CPP early?
  9. What are the different income generating investment options?
  10. What is the difference between capital gains, interest income, and dividends?

Understanding financial planning concepts helps you structure your finances.   This commitment of time can help you avoid the fundamental mistakes that so many people make.  The knowledge gained in the “planning” area of financial information should benefit you for a lifetime.

It can also assist you in preparing an Investment Policy Statement (IPS), including the percentages of your investments to be held in each asset class (cash, fixed income and equities).  Understanding the risks and rewards of each of these asset categories will help you with this very important financial decision.

A final part of financial information overload relates to specific investment options.  This is where decisions become less certain, even if you’re reading information.  The bulls may be recommending to buy a stock, while the bears are recommending to sell.  It is these conflicting opinions that create the market and make analysing financial information more challenging.

Monitoring investments is a full-time job throughout the year.  The efforts looking at investment options put in last week are partially lost this week as market conditions and information is constantly changing.  One of the reasons to have a financial advisor is to enable you to do other things, than research investments on your spare time.

A big part of an advisor’s job is dedicated to reading and assessing financial information.  An advisor is able to narrow down the volume of both planning and investment information that they feel is relevant for you to understand within the time you’re willing to dedicate.