Today’s post is a continuation on the effect of choice on our personal finances. Yesterday’s post dealt with how the paradox of choice impacts on our finances generally. Today’s post deals with the effect of too much choice on asset allocation and costs.

When an issuer launches new mutual funds or exchange traded funds, this is typically spun as a good thing for the investor. The conventional line of thinking is that more choice allows the investor to customize their portfolio better. However, as with most product launches, the issuer and their shareholders tend to be enriched often at the cost of the investor.

In particular, too much choice tends to wreck havoc on asset allocation and costs in several manners:

1. Drift towards greater equity allocation than desired. Regrettably, many investors buy based on the name of the fund (my initial mutual fund investments were based on this criteria). In good times, they purchase XYZ equity mutual fund or ETF.  In bad times, these same investors purchase a newly issued ABC balanced mutual fund which is supposed to protect their downside risk while giving a little upside. The problem is that ABC balanced fund has equities in it already and, combined with XYZ fund or ETF, pushes the investor into greater risk/reward than they may have intended. A 2001 study confirmed this fact. The more equity based products a retirement plan offered, the greater the participants had money invested in stocks.
2. Investing in higher fee products. If you believe increasing product advertising contributes to the concept of too much choice (after all, how else do you cut through the noise except by, umm, contributing to it…), it also directly impacts on costs paid by an investor. Richard Thaler and Cass Sunstein, in their excellent book Nudge, quoted a 2007 study that ads by the financial industry tended to result in investors investing in higher fee vehicles (how else was the Super Bowl ad paid for?), higher risk (again, more exposure to equities), trendy sectors and home bias., one begins to understand how many investors looked at their portfolio in late 2008 and discovered they were over exposed to their risk tolerance.
3. Too much cash/not invested enough. As cited yesterday, too much choice tends to lead to investors not investing at all.

In summary, what can too much choice do to your asset allocation? You end up in the same position as many investors in late 2008; one wakes up to find out their portfolio has drifted into much greater risk and with higher fees than desired.

What is a poor investor to do?

First and foremost, as mentioned yesterday, always go in with an investment goal and investment plan first. If you do not have one, think long and hard about what you want out of your life and money. Stick to the plan through thick and thin (assuming it is reasonable and realistic) and always put product in a lower priority than the plan.

To state this another way, the question is not “what product will make me a lot of money with little risk?” but “what strategy most aligns with what I want out of life?”

Second, you cannot avoid choice being pushed upon you these days, the point is to filter out as much as possible as quickly as possible. I read many excellent blogs and financial columnists but tend to gloss over any post or column about new product issues. There is no magic bullet solution to life. Why would there be one for your portfolio? If there is a product that fits within my goals and strategy, I will actively seek it out rather than being sold on it.

Third, eliminate the niche products from your radar screen. When experts are asked how to increase employee participation in company sponsored plans, one of the first suggestions is to eliminate the sector or niche products. The holdings are so specialized and sometimes risky that most average investors are better off not even contemplating them. An ETF focusing on a single developing country or sector is not going to make or break most portfolios.

Finally, embracing too much choice, by adding new products to an existing portfolio, is not going to solve the problem. Most under-performing portfolios suffer from overlap, high fee product and trendy products of yesteryear. Running towards more choice is often not the solution. It is tantamount to continuing to dig to get out of a hole (“no, no, dig up stupid!”-Chief Wiggum). The solution to too much choice may be to narrow down your holdings and your choices.

When I first took up running, I went into the store, looked at a wall of specialty shoes- stability, control, neutral cushioned, performance etc. etc.- and just blanked out. Were my feet so screwed up that I needed a special shoe? What if I bought these specialized shoes, at a whooping cost of $200, and didn’t like it? Why did I even need special shoes having run most of my life in “normal” footwear? Suffice to say, my feet may not have needed special shoes but my psyche just added a complex.

The conventional wisdom is that choice is good. It is empowering and gives the consumer a sense of control. But, in a universe where there are more mutual funds and exchange traded funds than publicly listed companies, can too much product choice actually be ruining our finances?

I tackle this issue in two separate posts. Today’s post deals with the larger issues with too many choices. Tomorrow’s post will deal with the result from an asset allocation and portfolio management perspective.

The study of the psychological effects of choice came to popular attention at the height of the dot com boom. In 2000, Barry Schwartz coined the term the paradox of choice (which he subsequently turned into the title of his 2004 book). In essence, the more choice a customer is given, the greater the expectation of return and the anticipation of regret that return will not meet expectations. If given more choice, the consumer has a more difficult time making a choice and such difficulty results in anxiety, sadness and, in some cases, depression. In other words, the opposite effect of what freedom of choice is supposed to give you.

Too much choice typically manifests itself in several ways. The first is analysis paralysis: the sheer amount of information overwhelms one’s ability to make a decision. A second is regret by focusing too much on missed opportunities rather than a focus on the potential of the choice made. The third is anxiety; being forced to make a decision is stressful for some.

In the personal finance realm, too much product choice tends to display itself in several behaviors:

1. Not investing at all. There has been a lot of criticism about the retail investor missing the rise of equities in 2009. Some of this inaction is attributed to fear but how much of this can be attributed to too much choice? In a 24-7 world of business news- all with their own experts touting their own hot investment product- how is any average investor to decipher all of this noise? The natural reaction may be to simply turtle- climb in one’s shell and do nothing.
2. Choice leads to declining participation rates. Vanguard Group found that 75% of employees participated in a 401(k) plan when 2 fund choices were presented. When the number rose to 10 choices, participation slipped to 70%. At over 60 fund choices, participation rates begin to decline steadily (if you think 60 fund choices is too much, consider that Ford Motor Company had over 120 fund choices in its 401(k) program at one point in time).
3. Poor execution of an investment strategy. I will address this issue tomorrow.

If too little choice and too much choice is bad, what exactly is the optimal amount of choice a person should have? A Dutch research paper suggested anywhere between 12- 24 choices produced the optimal balance between variety and happiness.

How does the average investor cope with an industry that works in quantity if not necessarily quality?

1. Set your goals first before looking at product. Choice selection is made easy if you set a goal. If your financial goal is not to lose money and to be conservative, you have automatically eliminated all high risk/high reward products.
2. Limit the information given to you based on your goal. It is easy to get off-track on your goals given the amount of information coming at you. In marketing lingo, every good marketer has a “call to action” to every marketing piece. Most calls to action are to buy (watch the “I buy your gold” commercials; despite the high cheese factor, they are brilliant at manipulating us).  By limiting calls to action, you limit the industry’s ability to reach out and distract you from your goal.
3. Pick the product sub-set that aligns with your goals the best. This is pretty self-explanatory.

Tomorrow, I will tackle asset allocation in a world with too much choice.

Congrats to Veselin who won a free copy of the QuickTax tax preparation software.

As many Canadian taxpayers know, the Home Renovation Tax Credit (HRTC) was a one year tax credit for eligible home renovation expenses incurred between January 27, 2009 to February 1, 2010. The 15% credit applies for eligible expenses between $1,000 to $10,000 (here is a full summary of the HRTC).

If you own a condo, the HRTC works on two levels: within the unit itself and on eligible expenses spent by the condo corporation. Since the condo corporation spent eligible expenses on behalf of the unit-holders/owners, the HRTC is passed down to each owner/taxpayer on a proportionate basis.

It is important to note that only owners are eligible and occupation of the condo is not necessary to be eligible for the HRTC.  The key is that the condo corporation spent money which, if it was within the condo unit itself, would be classified as an eligible expense.

The amount of the HRTC is determined by the share of your contribution to the total contribution of maintenance fee by all unit-holders/owners. For example, if a condo unit contributed to 1% of the total maintenance fees of the condo corporation, the taxpayers HRTC will be 1% of the eligible expenses.

It is possible to add up eligible expenses both within the unit and by the condo corporation to bump a taxpayer over the $1,000 threshold to claim the HRTC. For example, a taxpayer may have spent $900 on bathroom renovations inside the condo unit; given this is below the $1,000 minimum, this expense cannot be claimed under the HRTC. However, if the proportionate eligible expense incurred by the condo corporation and passed down to the unit-holder/owner is greater than $100, the taxpayer now qualifies for the HRTC.

To claim the HRTC, the condo corporation issues documentation which the taxpayer in the prescribed form. In other words, there is no need for the contractor to invoice each condo and ultimate responsibility for preparation of the HRTC receipt is the condo corporation.

Thus, it is important to ask your condo corporation when the documentation is available and to pick it up. Given the sheer amount of notices that go up in most condos, this may get lost in the shuffle so please do be aware of that condo owners are eligible for the HRTC on the condo corporation level as well. As always, please consult your accountant for specific accounting advice and questions.

I normally don’t post on Friday but I wanted to remind readers today is your last day to enter to win a free copy of QuickTax tax preparation software. To win, please post a comment in this week’s post announcing the draw. Winner announced Monday.

The Vancouver 2010 Winter Olympics drew to a close on Sunday night.  Everyone I knew who was there came home and got sick. Must have been quite a party! The problem with the coverage of the Olympics, any Olympics, is that they are subject to such hyperbole during the event and then quickly forgotten right afterwords for the next greatest event this century.  But these types of events always hold life and financial lessons for me. There are two I will take away from these games (Chasing Prosperity shares her lessons as well).

Firstly, life never occurs in a straight line. The script for these games was that Canada was going to dominate skiing, skating, the sled events, hockey and curling on route to winning the most amount of metals under the Own the Podium program. Canada fell flat on its face in skiing (literally and figuratively), a poor skeleton competitor ended up sobbing on national television apologizing to the nation for not winning and the Canadian men’s hockey team were taken to overtime by Switzerland and beaten by the Americans in the round robin.

Yet, Canada won the most amount of gold medals in any winter Olympics winning medals in events no one expected Canada to metal. Canada did, indeed, own the gold podium but not in a manner anyone expected. The morale of the story being that sometimes going from point A to point B is not a straight line but full of unexpected twists and turns.

Similarly, expectations of investing returns do not always go from expectation to result and getting what you want often does not happen in the way you thought it would turn out. The only thing to do at this point is make your adjustments (changing goalies or changing investment strategies) and keep plugging away.

The other lesson that came to light is the media’s growing obsession, in the 24-7 tabloid age, to create a story which is often wrong. Some members of the media questioned whether Canada would win enough medals and were calling the Olympics a disaster before the games were half over. Canada did very well in the medals count and most observers, even the grumpy English reporters, admitted that Vancouver threw a great party.  This seemed to shine light on the fact that some members of the media are taking the a small sample size of something, anything, and trying to blow it up into a story- even before the story has really developed.

Traditional media is in a tough bind. The internet has pulled the rug out from under them. To be relevant is to break a story and to break it faster than TMZ. It does not necessarily matter if the story is right. Just that it is broken and you grab attention.

In personal finance, we have whip sawed from terms such as  “economic miracle”, “unrivaled historical growth”, “never ending good times,” to “depression”, “bubbles”, “economic collapse” in a short period of time. Both sets of terms were hyperbole to the extreme.

Things are never as good as a salesperson makes it to be or as bad as a lawyer would have you believe. I sometimes think we may be better off as investors not reading the headlines and going straight to the financial reports.

Have a great weekend.

For anyone who is interested in investing in real estate, one undoubtedly runs across individuals or groups who speak or write about cash flow positive joint ventures or some other variation of this phrase linking real estate, passive income and investment returns.

The pitches tend to have a familiar refrain: there a generalized notion of positive cash flow related to real estate. However, there are very rarely little specifics mentioned. Read positively, it follows standard sales and marketing tactics: sell benefits and not details. Read negatively, the generality of the pitch seems evasive and troublesome.

Several years ago, I briefly investigated the possibility of investing in real estate. For a wide variety of reasons, I took a pass. Nevertheless, it was interesting to discover just what some of these vehicles were.

The following is by no means an exhaustive over-view of the topic; some of these may not be favor anymore or tweaked to reflect the market. I readily admit this may not be current information and I am more than happy to be corrected for the education of all concerned. But, to dis-spell the mystery of cash flow positive vehicles,  here are some nuts and bolts of some private real estate investment vehicles being offered. I have avoided real estate related securities (other than the one exception below). I have added some quick and dirty pros and cons.

1. Investing in 2^nd (or 3^rd mortgages): Million Dollar Journey had a thorough post on investing in 2^nd mortgages. These types of deals are typically found through mortgage brokers or real estate lawyers. Pros: mortgage grants you security to your investment. Returns can be higher than stock returns (8%-12% for 2^nd mortgages 12% + for 3^rd mortgages). Steady cash flow. Can be invested through RRSP and income received on a tax deferred basis. Cons. 2nd mortgage is, practically speaking, not fully recoverable if the appraised value of the home drops or the borrower is not significantly paying down principal on mortgages (in other words, beware the interest only mortgages in an uncertain real estate market). RRSP administrators are known to be difficult.  High returns = higher risks. Some key factors to consider: Borrower’s financial standing and understanding of historical appreciation rates of real estate in that localized area.
2. Co-ownership with a “finder.” In a nutshell, finder has found an income producing property and has secured financing but requires some more money to meet the lenders financing conditions. Investor contributes the remaining down payment in return for a proportionate interest of title and cash flow after finder takes a property management fee.  Pros: Participate in both monthly cash flow and appreciation of real estate. If finder performs property management functions, income is as passive as one can get. Cons. As partial owner, if the roof needs replacing, you may need to make a capital contribution to the property. Cash flow return may be quite modest after expenses and property management fees are paid (mid to low single digits). There are a certain politics involved in determining the finder’s value. Some key factors to consider: Do you trust the finder to be reliable? Understanding the rental market in that localized area. What’s the exit strategy (needs to be formalized in a joint venture agreement).
3. Special purpose loan to a finder. This has multiple variations.  One variation is finder requires a loan for special purpose typically extra capital to acquire a property to flip or capital used to improve a home already acquired to rent out. Investor loans money which can be secured or unsecured depending on negotiations with a quick exit event (sale of home, refinancing once home is improved and can be reappraised etc). Sometimes there is a bonus payment to the investor on exit. Pros: Rate of return can be high given short use of funds. Cons: Is the actual exit event realistic or pie in the sky? Some key factors to consider. Due diligence on possibility of exit is key. For example, can the property actually be flipped for the appreciation claims? Can the units be rented out for what the finder says it can be?
4. Limited partnership units. A quasi real estate and securities investment. A general partner (GP) has identified a property which it will acquire and manage. Limited partners (LP) contribute money to make the down payment. In income producing properties, LP’s receive distributions proportionate to their interests. The GP assumes the liability of the project. The LP’s loss is limited to its investment. Pros. Ability to invest in more sophisticated projects. Losses are capped at money invested. Limited partner offerings can fall under securities law legislation meaning a relatively high level of financial disclosure. Projects tend to be larger scale (apartments, entire condos, commercial premises). If structured properly, can be quite tax efficient. Cons. Depending on jurisdiction, it is only offered to accredited investors (hence it is more popular in Western Canada where the threshold of an accredited investor is lower). Much larger cash contribution required. Cash calls can occur and, given the larger scale of the project, they can be quite substantial per unit. Less control given larger pool of LP holders and GP controls the entire project. Some key factors to consider. GP has the experience and knowledge to manage the project properly. Investor understands the financial statements provided in more sophisticated projects.

Four Pillars has a tangentially related post on purchasing foreclosed properties.

The level of due diligence has to work on at least two levels- on the individual the investor is partnering with (or the potential borrower) and with the property itself. One could argue that it is better invest in real estate with a Grade A partner and a Grade B property than the other way around.

At the end of the day, real estate investing is much like stock investing. One has to conduct its own due diligence thoroughly. Just because the investor can touch and see the investment does not mean there is less opportunity for abuse by the intermediary or it is a good investment. Good luck.

Life has little absolutes- death, taxes and change come to mind- but, yet, the discussion between active management vs. passive management assumes that one absolutely has to be in one corner or the other. Either one is an active portfolio manager in an attempt to outperform the market or one makes as little decisions as possible by tracking broad based equity and fixed income indexes.

However, life is not that simple. Few investors start with a combination of a blank slate and adequate cash to begin an purely active and passive management approach (and how lucky are you if you have both). Others, like me, have to wait out early redemption penalties before selling mutual funds, leading to an in-transition portfolio.

As Rob Carrick pointed out recently, institutional investors do engage in both active and passive management strategies as a way to mitigate against the downside risks of both approaches.  Carrick suggests that retail investors adopt a similar strategy by dividing their assets 50/50 between both approaches.

For institutional investors employing a mixture of both strategies, what are they actually doing? A recent surveys reveals that pension funds were passively managed when it came to U.S. equities but  active managers on non-U.S. equities (up to 75%).

This suggest when it comes to broad based equity markets, such as the S & P 500, where there is depth in quantity and quality of publicly listed companies, it is a fool’s errand to believe one can pick a winner from a loser.  One may be better off picking them all via a broad based index.

In smaller exchanges, with relatively less transparency, lack of shareholder rights and lack of quality on any given exchange, institutional investors may be trying to separate the wheat from the chaff.

What does this all mean for you and I?

1. Start from the assumption there is no objectively absolute “right” way to invest. I agree with passive investors and active investors- if it works for them. The concept of a “right” way to invest comes down to life-style, skill, experience (in life and investing) and comfort level. Know yourself well and decide accordingly.  It can be passive, active or both.
2. Having said that, the smaller your portfolio, the greater you should think about passive investing. This is where I disagree with Carrick- a 50/50 split between passive and active investing is too aggressive with a small portfolio. With a smaller portfolios, loss and costs are magnified on a relative basis which suggests an emphasis towards passive management.
3. The less knowledgeable you are, the greater you should think about passive investing. Active managing is not about picking the right stock per se. It is about understanding business. If you know little about how business works, have yet to mastered reading a financial statement or have no interest in doing either, passive management may be for you.
4. Passive management can become stupid management in a hurry. Exchange traded funds (ETFs) have become short-hand for passive management and there is some belief, promoted by the financial industry, that all you have to do is pick a bunch of ETFs and you are a successful passive manager of your money. The problem is that the excesses of the mutual fund industry have slipped into the ETF industry- bad product, rising fees, duplication to name a few. Remember the lesson of the institutional investors- passive management is based upon investing in BROAD based indexes and not niches. Do not equate passive management with no thinking management. One is still required to think about asset allocation, reallocation and product purchases to align with the foregoing. The number of decisions one has to make is less but you still have to think.
5. Finally… stick with a strategy. There is no harm in combining a mixed strategy as long (i) see number 1 and; (ii) stick with the strategy (I am going to defer to Carrick about product choices).  The same applies if you are moving from one strategy to another- don’t stop. If you allocate 30% of your portfolio in active management, stick with it. Don’t abandon it at the first sign of trouble and vice versa for passive management. Performance, for either approach, does rely in part on hold periods. Time is your friend in investing so don’t turn your back on your friend.

Although small business starts appear to be consistent regardless of the economic cycle, many people are forced into entrepreneurship during downturns. Some will succeed. Others will fail. Why a small business succeeds or fails is often a subject of great debate and academic research.

As a general comment, economic conditions, in and of itself, is not a prime reason for business failure. In fact, more than half of the 2009 Fortune 500 companies and nearly half of the 2008 of Inc. Magazine’s fastest growing companies were start up businesses which began during an economic downturn. Opportunity and risk are opposite sides of the same coin. More practically speaking, downturns tend to lower the cost of labor and goods- key expense controls for any business.

As to specific reasons why businesses fail, I would suggest the following as some major reasons:

Negative attitude of the owner manager. Owing a business is like being in a relationship. You can fake that everything is ok for so long but people will figure it out. Negative attitudes about business prospects, the good or product or, most importantly, self-image of the owner manager will doom the business. Ever meet an owner manager of a store who was rude to you? Most likely, it was because they do not like their business and they were taking it out on the customer. You would not shop at that shop again would you? Since it is a “soft skill”, it is often overlooked but successful entrepreneurs are positive (almost to a fault). Watch an interview with any successful business person. They are upbeat about themselves and their business. It is contiguous and their employees begin to emulate it too.

Failure to follow a plan- much less have one. Entrepreneurs typically figure out who among their colleagues are doing well. The successful ones have a really boring plan they are following with appropriate adjustments. The not as successful, but much more exciting, entrepreneurs are bouncing from plan to plan, idea to idea. Too often their emotions override a well-thought out plan, they don’t have the patience to follow a plan or they don’t have a plan in the first place. It is very similar to an investor with no investment plan. They just keep buying willy-nilly with often poor results.

The key is to think of the exit before you enter. Are you building to sell? Operating until you die? Building as a hobby which makes money? If an entrepreneur never had an exit strategy to start out with, best to think of one now and plan towards it.

Failure to understand the market. In the simplest sense, are you selling quantity or quality? If you sell quality, you should never engage in a race to the bottom in pricing and if you are selling quantity, you cannot necessarily spend too much time/money on the customer (this is why cell phone companies treat us properly; pricing wars have turned minutes/data into commodities. It has moved to a high volume, low margin business).

Determining the market is key since it should anchor how the business sells (mass advertising or targeted marketing-for example, Tiffany’s only advertises in high-end mediums), what expenses it incurs (retailer make little so they pay their staff little) and where it should expand.

Once this is figured out, what is the sales cycle of your customer/client? Is it fast (a dollar store), medium (website design) or long (selling anything to large corporate clients)? One needs to figure out sales cycle because…

Failure to understand cash flow cycles… dooms businesses from a dollars and cents perspective. For example, assume a business has accounts receivables aging, on average, at 45 days at a 95% realization rate (in other words, it takes, 45 days to be paid and 5% is never recovered), the business has to negotiate terms with suppliers or obtain credit from lenders or have sufficient cash to either pay the supplier on 45-60 day terms or have the cash or credit facilities to bridge between the time paying the supplier and when the business is paid. At a 95% realization rate, the business also cannot spend 100% of profit since not all sales will be collected. If the owner-manager is not a numbers person, it is strongly advisable to hire a good book-keeper who not only keeps the books but spots these trends (my belief has always been that a good book-keeper provides more value than a good accountant in the early days of a business since accountants are generally too backwards looking and the cash is all gone by the time they spot the mistake).

Lack of good talent management. This is my sin. Entrepreneurs are DIY to the extreme or, because they are so close to all facets of the business, they tend to delegate poorly or assume their employees have the same understanding and provide them with instructions under this assumption (he writes looking guilty).

The entrepreneurial saying is “sell what you are good at and buy what you are not.” It hurts to spend money on something the owner manager knows it can do but one has to leverage time properly towards the greatest revenue generating activities and nurture employees to support these activities.

Burnout. Entrepreneurs are, by heart, micro-managers. The issue with this is that taken at the extreme, it can cause the entrepreneur to resent the business (see negative attitude); King Henry VII of England notated and initialed every single ledger entry (mostly rent rolls from Crown lands) to ensure no one cheated him. He died the wealthiest King of England in centuries but was utterly miserable and alone.

My overarching advice is ask for help. Entrepreneurs as a community are always willing to help one of their own. One would be surprised how receptive entrepreneurs are to helping one another.

I also wanted to end with my favorite quote on entrepreneurship by Paul Gram: “Running a start-up is like being punched in the face repeatedly…But working for a large company is like being waterboarded.” Good luck to all the entrepreneurs out there.

The good folks at Intuit have provided to me their QuickTax tax preparation software (standard version). The software includes up to 8 returns and allows for importing of data from Ufile and other tax software. Retail value is $39.99.

If you want to win a free copy, simply post a comment. Canadian residents only are eligible for this giveaway.  I will draw a free copy on Friday March 5 at 6:00 pm (EST) and announce the winner next Monday. Email addresses will only be collected for the contest and for no other purpose. Intuit has provided the blog no monetary consideration for the giveaway.

Good luck.

Nouriel Roubini, arguably next to Ben Bernanke, is the world’s foremost media darling economist (to the extent any economist is appealing to the masses). It was Roubini who predicted the end of the global real estate bubble in 2006 and continues to believe that the worst is yet to come.  In March 2009 he predicated that the Dow Jones Industrial Average would fall below 7,800. It ended 2009 at 10,300.

Harry Dent predicated Japan’s economic fall and America’s boom in the 1990’s. Since then, he has sold a lot of books making widely inaccurate predictions based on his research. In 2006, Dent predicted the Dow Jones Industrial Average would hit 40,000 by the end of 2009 (it hovers around 10,000). After the bubble burst, he changed his tune and called for a great depression ahead.

Roubini and Dent are but two of the industry predicting our imminent economic doom. Not to be outdone, the U.S. government warned in 2001 that if 5 nuclear reactors were not built every year for the rest of the decade, the country would experience rolling brown outs. Yet the U.S. Energy Information Administration of the U.S. Department of Energy reports electricity prices are falling which contradicts price movement of a supposedly scare resource (not to mention the small detail that it takes many years to build a plant).

The fact of the matter is that even a broken clock is right twice a day. This is not to downplay the fact there are serious economic issues which need to be faced and the immediate future does not look so rosy as the not so pre-2008 past. However, lest one forgot, people do not attract media attention because they are right per se but because they are outrageous in their claim.

Underlying all these claims meant to attract headlines and stoke our fears is a call to action to do something. Typically, that something has to with the self-interest of the person predicating doom. We will run out of energy! Build nuclear plants cries the politician in the nuclear power’s pocket. The world is ending! Buy gold (oh, by the way, this television show is sponsored by a gold producing company). The demographics say bad things will happen! Here’s a mutual fund sponsored by me which will make you rich.

And, therein, lies the problem. The dooms day predictors either give terrible financial advice or are peddling product which enriches them at the expense of the investor. Roubini has been quoted as saying he is 95% in cash and 5% equity. He gets paid in USD as a professor at NYU. Assuming his cash holdings are in USD, and one of thesis is the American economy is shrinking, it seems like a strange asset allocation to concentrate holdings in a depreciating currency. Even if he is not substantially all in USD, this is a strange allocation for a 50 year old man.

Dent has a very spotty record peddling products associated with his research. In 1999, the AIM Dent Demographic Trends mutual fund was launched to great fanfare. Its investment philosophy would be based on Dent’s demographic trending and analysis (Dent acted as sub-advisor to the fund). Five years later, the fund was merged out of existence, partially due to poor performance.

Since we have short memories, Dent has launched an actively managed ETF (a walking misnomer) with a total expense ratio of 1.65%- well above many ETFs; one can only conclude that Dent’s research found that investors are suckers. True to form as a inaccurate predictor, the sucker/investor did not bite.  Its trading volume is so small (3,882 shares traded yesterday) that, barring a major turn-around, the ETF will likely be closed.

Sprott Asset Management may be one of the exceptions to the rule. But, even then, some of its mutual funds are charging management fees of 2.5%.

If the fundamental thesis of the doomsday industry is the economic system will collapse upon itself, why exactly do they need to make all this money?

If money has no value upon collapse,  what exactly are they accumulating it for? If our economic world was to end tomorrow, I am not sure I would be listening to the person telling me to buy gold or their mutual fund. Instead, I would be listening to the person telling me to find my family and friends and to cherish and protect them now and in the future. But I guess no one ever made money giving that advice.

Value is generally a subjective concept. What may be worth something for one person may mean relatively less to another. In the workplace, it is especially hard to prove value unless you are a salesperson, judged solely by how much money you can bring into the business, or recover money, measured by how much money you save the business. More practically speaking, your boss may, frankly, not have much time to think about you on a day to day basis. In economic down-times, many supervisors end up having too many people reporting to them or carrying out both managerial and operational roles at the same time.

How then do you prove your value in the workplace?

I recently handed my employees a blank piece of paper with two headings on it. At the top of the page, there was heading stating “skills learned” and on the middle of the page a heading stating “projects worked on.” My instructions for my employees was simple. Save the sheet on your computer and update it at your convenience. However, I fully expect at performance review to be completed.

It is not a complicated concept but the point of this exercise from the employee’s perspective is as follows:

1. Employee are tracking their development. Employees tend to stagnate for a wide variety of reasons. One reason is that they are no longer engaged at work, doing the same thing over and over again for a long period of thing will make even the best of employees perform poorly.  A simple log of skills learned and experiences can tell the employee whether they are growing or just going sideways.  It can be used to show your boss that (a) what you have done; (b) assuming you have mastered the skill, you need opportunities to spread your wings which, hopefully, aligns with the business as well.
2. Employee prove value to the employer. Skills and experiences not in your job description, working on projects above your pay grade or above what your contemporaries are doing, showing how you saved money or made money, are important in focusing the employer on your value to them and the business as a whole. As I indicated before, do not assume your boss is keeping track of your career development. They may appreciate you but until you show them (see below), they may not be focusing on your worth to them.
3. It shows you actually care. A friend once described his co-worker as follows: “she actually cares about the business. How many employees can you say that about?” In my experience, more employees are indifferently carrying out their job than those who display a passion for what they are doing. An employee who is actively engaged in improving themselves and logging how they are helping the business will tend to separate themselves from their peers (the key is not to pitch this log as purely a cash grab but as wanting to contribute to the business for fair compensation).
4. It makes it easier to update your resume. I am very realistic that my employees will not be life-time employees so my deal always is my employees should work hard and, in return, I will make sure they learn enough to make themselves employable in case they do leave; it creates goodwill, potential referral opportunities and it is just the right thing to do. But part of the issue for most people who have never written a resume, or not written one for a long time, is that they forget what they did.
5. Quantify the feeling you are providing value. This is most likely the largest disconnect between employers and employees. Employees feel they are under-appreciated or valued poorly. Employers look at statistics (the larger the company, the greater the reliance on “objective” factors). A work log showing that you are carrying out the job of 1.5 employees for the compensation of 1 employee may turn your boss’ mind towards your value.

Obviously, value also depends on “soft-skills” as well. For example, do you get along with your co-workers, do your customers ask for you or does your boss like you as a person? But with so many businesses trying to do a lot with a little, you need any edge to show your value and separate yourself from others. Good luck.