Book Review: Your Money & Your Brain

One of the problems with making sound investment decisions is the inability to make consistently rational decisions. The number of times I have made investment decisions (buy or sell) which I have subsequently viewed as being, for want of a better word, dumb is depressingly high. Buying into bubbles with regrettable frequency is my most common error of judgement.

Recognising that this is a common problem for investors, I picked up a copy of "Your Money & Your Brain" by Jason Zweig. Zweig explains why people make so many irrational decisions and provides some very basic advice for dealing with issues like overconfidence, group think and inaccurate risk assessment.

On the whole the book was useful and interesting. Behavioural economics is certainly a subject which it helps investors to have at least some basic knowledge of (Zweig uses the term "neuroeconomics) and this is a helpful introduction. The frequent case studies and summaries of psychology experiments served to illustrate the issues and helped frame the solutions. My one gripe is that Zweig included the much used but fatally flawed psychology experiment involving supposedly equivalent decisions about either saving part of a population from a disease or allowing part of the population to die.

Outrageously bad advice

The relationship manager at my bank invited me to meet a "wealth manager" to discuss possible ways to invest the cash balance in my account. I acquiesced but made it clear that I was not interested in insurance based products. I should have known better. The suggestions of the "wealth manager" were appalling:

1. I was offered life insurance. I repeated that I had no need of any further life insurance;

2. I was offered an annuity that would have required me to invest lump sums over three years, was projected to achieve a non-guaranteed break even after eight years and a non-guaranteed annualised return of 4% pa on maturity after 20 years. (Why it was called an annuity is beyond me.) I pointed out that an investment that showed a guaranteed loss for the first seven years was a really stupid idea and, in any case, I could buy bonds of similar duration which offered better yields as well as reasonably good liquidity;

3. I was offered an unlisted, closed end five year corporate bond fund which had a front end load of 3% and a management fee of 2% pa (I didn't bother trying to identify the other expenses). The projected annualised return was around 4% pa not guaranteed. I pointed out that I could get similar yields with greater potential upside by buying a portfolio of shares or higher yields with better liquidity by investing directly in high grade corporate bonds;

4. my relationship manager (who had been silent up to this point), then offered me a longish term bond issued by the bank which had a yield to maturity of above 7% pa and which was reasonably liquid. I refrained from pointing out that the bond had the same credit risk as the annuity, but a much better return which was guaranteed and reasonable liquidity making it impossible to justify investing in the annuity.

I really fail to see how anyone could even attempt to sell #2 and #3 to anyone (bearing in mind that the bank was in an advisory relationship with me).

India ETF purchased

Yesterday I added to my investment in the Sensex India ETF (2836) at HK$9.95 per unit. The purchase reduced my cash on hand balance back to about four years of living expenses. This is still way too much cash to hold in accounts which yield very little interest, but I am still nervous about near term economic conditions.

I gave considerable thought to investing in the Lyxor Russia ETF (2831), but was deterred by the more limited liquidity.