Our DURT Model
In my last post – Your Choice Context – I explained how your unique combination of history, beliefs, values and perspectives form your Choice Context. And how this – the environment in which you make the choices you do – is a key consideration for personalised, relevant financial advice.
In this post, I’m going to explore how the very individuality of your Choice Context directly feeds into the model I use when I’m advising people on their own money decisions.
And how it can mean that what’s right for you, may not be right for the next person.
Our DURT Model
Our DURT model is simply a model we use to capture the Downsides, Upsides, Risks and Trade-offs of our recommendations.
(If you’ve ever come across a SWOT analysis, it’s a similar concept).
When doing so, we look at each of the elements separately.
Downsides
These are the obvious negative impacts of proceeding with the decision.
So, for instance, some downsides for Claudia if she were to invest in a share portfolio include:
The money is ‘at risk’ – the market could move against her and that $100,000 might be worth $80,000 weeks after investing.
Her inexperience with investing, and discomfort with risk, could combine to make this process very uncomfortable.
The shares will need to be sold if/when Claudia needs the money. This will trigger brokerage charges and, potentially, a tax liability.
That $100,000 will no longer be saving her interest.
If she’s paying 6.5% a year, then that’s at least $6,500 in savings she’ll be foregoing.
At the same time, if Christine were to keep her funds in the offset account, then the downsides might include:
Not optimising her medium-to-long term financial position – that 6.5% savings could be beneficial, but not if her alternative share portfolio average 8% over the next 10 years.
Christine’s goal is retiring early – not paying down the mortgage. This option prioritises the latter, over the former.
-It’s a relatively boring strategy and, in my experience, bored people can make some bad financial decisions down the track.
It’s important to understand that listing all of the downsides and upsides of each decision can be onerous, if not impossible. So we tend to focus on the ones with the most predictable and substantial impacts.
Upsides
Then there are the upsides, and these are the benefits people can expect from making decisions. These are the benefits and features that most advertising puts front and centre (while putting the broader considerations in fine print).
So, for Claudia:
Investing in the share portfolio exposes her to the possibility that her $100,000 will grow over the long term.
She’ll be in line to start receiving dividends, often with franking attached, which can be a nice, tax effective way to build passive income.
It provides her with valuable investing experience.
And for Christine, keeping it in the offset:
Locks in that annual interest saving – a handy tax-free benefit.
It keeps her position very ‘liquid’, in that she can access that cash very easily without triggering brokerage or tax concerns.
It will help her clear her mortgage faster, which could indirectly help her achieve her ultimate financial goal.
(You may have noticed that upsides can often have corresponding downsides).
Risks
Thinking through what can go wrong with a particular financial decision is an important exercise.
There’s lots of nuance and detail around when it comes to proper risk assessment and management, so we won’t dig into that here.
But taking a moment to list out the risks of any financial recommendation can be invaluable in helping you make the ‘best’ decision*.
There are two key elements to keep in mind when assessing risk – the likelihood of the risk occurring, and the impact of it occurring. The combination of these two factors determine the overall importance of the risk, I believe.
For instance – there’s a very, very low likelihood of your house burning down. However, the impact of losing your home and all your worldly possessions is immense.
While there’s a relatively high likelihood of the share market falling 20% over a 12m period in the next ten years. But the impact of this – for properly prepared investors – should be relatively minor.
Defining, assessing and mitigating – or avoiding – risk is a huge part of financial advice. So let’s return to Claudia:
The risk is that the share market falls sharply after she invests her $100,000. A new GFC or similar type calamity can see that $100,000 become $80,000.
Another risk is that she’ll need access to that money for an unexpected expense – but it may be worth less than required when she needs it.
There’s also the risk that interest rates increase shortly after her investment. This will increase the interest savings she’ll have foregone by making the investment.
While, for Christine, there’s the risk:
That interest rates fall, diminishing the benefit of having $100,000 in her offset account.
That the share market booms, leaving her to lament not making the investment.
That her other savings are not sufficient to help her reach her goal of retiring early.
There are, of course, other, undefined risks we all face:
Redundancy. Illness. Divorce. Death.
These are universal, so should be considered, but we only list them as applicable risks when there’s a direct connection between the decision and the risk.
*How do you define ‘best’? Well, that’s where the magic of personalised advice really kicks in – it’s always individual and subjective!
Trade-Offs
Finally, there are the trade-offs for people to consider. These are the price of making the choice. Most financial decisions we face as we get older are zero-sum.
So, for each choice you make, you’re also making the choice of what not to do.
In Claudia’s case:
Investing in the share market is trading off those interest rate savings, liquidity and early repayment benefits off against the potential of higher, long-term returns.
She’ll also incur costs buying the shares and, when the time’s right, selling them.
For Christine, the trade-offs are almost completely opposite.
She’s trading off the potential long-term returns against the ‘safety’ of holding the funds in the predictable offset account.
There Is No Universally ‘Right’ Advice
What I like about this model – which underpins our entire approach to providing financial advice – is that it’s a comprehensive summary of the key considerations involved in financial decisions.
It’s not always a perfect fit – for decisions filled with easily quantifiable variables, I think it’s probably overkill – but it provides a handy way to think through the choices we’re recommending our clients take.
Hopefully it’s of some use for you as well in tackling your own financial choices.
Because, as much as it complicates our lives, the simple reality is that your life is so unique – your Choice Context <Insert Link to last post> so specifically ‘yours’ – that there is no ‘universally right’ advice.
Claudia and Christine are evidence of that, I believe.
Both options – invest, or offset – are viable options for people. And, in the right Choice Context, are the correct option for somebody to take.
But giving that sort of advice in the wrong Choice Context can lead to some negative outcomes.
Real, valuable financial advice is individualised and specific to your circumstances. Don’t settle for the cookie-cutter alternatives.