Are "Money Fears" Sabotaging Your Portfolio?
Hi Greg:
Here, let me throw this at you and see anything comes out of it.<vbg>
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The 8 Habits of Successful Investors!
By Dr. Paul B. Farrell, CBS MarketWatch
Last Update: 9:15 AM ET Oct 2, 1998
"Investing is a simple matter: Buy good stocks and hold on to them. Time will make you rich. This is the most common bit of advice given to beginning investors," says investment advisor and psychiatrist John Schott, author of Mind Over Money. "But if it's true that investing is so simple, then why do people wind up losing money on stocks, view the market as a major gamble, or feel too intimidated to invest in the first place?"
Why indeed: "Because every emotional drive associated with money gets played out in investing: The longing for security, the guilt engendered by greed, the quest for power and self-esteem, the fear of being abandoned, the search for love, the dream of omnipotence. And when these constellations of emotions intersect with the churning, manic depressive mood gyrations of the market itself, the result can be financially dangerous."
New Spirit of Individualism vs "Fears of Success."
In Megatrends, John Naisbitt's says that, "The great unifying theme of the 20th century is the triumph of the individual." Indeed, the 90's has created a new sense of independence and self-direction. We have little choice, as the recent crash proves. Today's investors no longer count on social security, pension plans, employers or Wall Street. They're not enough. Fortunately, 401(k) plans, IRAs, taxable investments and other pressures toward self-reliance are creating a new breed of do-it-yourself investor. Witness, for example, the fact that over 85% of the total money invested in U.S. stocks has been invested in the few years since 1990.
However, this new era of total independence also means you have to take total responsibility for your financial life. A two-edged sword bringing with it new anxieties. "There is a host of things we can do to distance ourselves from counter-productive feelings when making investment decisions. When we know that we are able to control our own self-defeating behaviors, we approach the market with a sense of comfort - and increase our success." First, Schott profiles six types of investor behavior that can consciously of unconsciously sabotage an investor's ability to build a successful portfolio. Then he outlines the eight habits of a confident investor.
Investor Type #1: The Certainty Seeker.
An Obsessive Demand For Perfection.
For some people the market is a haunted house filled with scary noises and demons out to get you. They may have suffered trauma and losses. They can't take much risk and seek safety. "To deal with the aversion to risk, an investor needs to remember that it is not necessary to be infallible in order to succeed in the market. There's no such thing as certainty in today's volatile markets. Think diversification. Think asset allocation. Try an independent investment advisor. Maybe bond funds instead of stocks. Learn to control your risks, and your emotions better.
Investor Type #2: The High Anxiety Investor.
Every Little Market Wiggle Triggers A Panic Attack.
The market goes up, they worry. The market goes down, they worry. Greenspan talks, they worry. They're playing the game, but they beat themselves unmercifully when they make the wrong decision. "A worrier needs to develop a system that involves making major decisions once, and only minor adjustments from then on - a system that will minimize investment anxiety." Stop orders might help. A sound asset allocation strategy and some top-performing mutual funds would also minimize the fears. And stop looking at the market daily.
Investor Type #3: The Impulse Investor.
Convinced He Has A Special Instinct About The Market
Ever feel like a stock or fund was "calling to you?" Like it "felt right?" In fact, your guts, your intuition, an inner voice loudly shouted, "buy this one, now!" Schott warns: "The danger of this ‘love-at-first-sight' approach is that one can fall out of love just as quickly, and sell in a way that is certain to lose money." Here's another view of the problem: Morningstar research shows that, in general, mutual fund investors have "lousy timing. Investors who move in and out of funds usually garner lower returns than could be had with a simple strategy of dollar-cost averaging."
Solution: Buy'n'hold. According to Schott, "An impulsive investor must allow for a period of investigation and reflection before acting on feeling." You can fall in love at first sight, just don't buy at first sight. Stop. Do your research. Monitor it for a while. Consult others. Just don't shoot from the hip, you might just put a bullet in your foot.
estor Type #4: The Power Player.
Sees The Market As An "Ego Booster."
Self-important, this "king of the jungle" acts as if they have no fears. External performance is the primary measure of their inner value. They need to control their world, in business and in relationships. And success in the market is just one more way of proving to others how powerful they are. They do well riding a SuperBull market, but are emotionally vulnerable to losses, bears and corrections. Losses reveal their flaws and weaken their confidence. As Adam Smith succinctly put it in The Money Game, "If you don't know who you are, the stock market is an expensive place to find out."
What can power players do to offset their vulnerability? Awareness is step one: "First is to make sure the stock market does not become the main area of self-esteem" Your confidence must come from within. Also, create a balanced portfolio, with minimum room for speculation. Remember: Your stocks and funds don't know that you own them. Nor do they personally care who you are. And neither does the market. The market is not an ego booster. In fact, the market enjoys humbling the mighty. Paradoxically, "in the financial market, the less powerful we try to be, the more successful we can truly become."
Investor Type #5: The Market Gambler.
Loves The Thrill Of Living "On The Edge."
Ah, the excitement of Vegas, the Irish Sweepstakes and the Lotto. Let's face it, all Americans secretly love gambling and taking risks, even if it's no more than an occasional buck on a World Series or Super Bowl office pool. And we love the thrill of playing the market. But it can become dangerously addictive to your portfolio's health. Many market timers fit this profile: "The gambler operates on hunches, and bets that certain outcomes will occur within a specific time frame. But even in favorable markets, gamblers often lose because they take extreme risks, and don't cover their risks sufficiently. I've never known a gambler who came out ahead in the long run, although many can remember some great trades."
What should this gambler do? Try some therapy: Get to the bottom of this need for thrills and quick fixes from investing. Learn how to live a more balanced life, at home and in the market. "The gambler should construct a portfolio in such a way as to make it as difficult or expensive to alter as possible. The harder it is to cash in stock or funds, the better." Obviously the new era of cheap online trading makes it easy to indulge in this addiction.
Investor Type #6: Inheritance Insecurity.
Suffering From Survivor's Guilt Over "Too Much Money."
Americans will inherit over $10 trillion over the next generation. "Inheriting money has the same emotional impact as winning the lottery - in fantasy, it's great; in reality, it can be fraught with problems." Inheritors often link their grief for their personal losses with a profound sense of survivor's guilt. Be aware of this tendency, and work on the psychological guilt. Work at being the best possible conservator of the money as possible. Inheritors, and indeed all investors should be warned "against strongly linking money and investment success with happiness," says Dr. Schott, "The basis elements that create happiness - love, self-esteem, fulfillment through work, close relationships - can be nurtured by money, but they do not stem from it...look elsewhere."
Goal: A New "Confident Investor."
The 8 Habits of Emotionally Secure Investors.
How to overcome and recover from some of these issues. Here are Schott's eight basic habits habit for successful investing. Tools any investor can use as a way of overcoming negative behaviors and becoming a confident investor:
1. Pick and consistently apply one investment style.
2. Trust in your own past knowledge and experience.
3. Keep it simple, investing is neither scary or complicated.
4. Accept risk and uncertainty as a natural part of the game.
5. Listen to others, but in the end, the responsibility is yours.
6. You have no competition, no one except you.
7. You will make mistakes, learn from them, move on.
8. Express daily gratitude knowing that you are growing rich.
One final word from the author of Mind over Money: "Trust is the common element of confident investor practice. Though spirituality is not much talked about in connection with investing, I believe the two are linked, because trust is, after all, a spiritual concept. By trusting, we give up complete control, don't fear the market fluctuations, and become comfortable. We learn that the ‘abiding faith' we seek is in ourselves."
Trust in the still small voice within. Trust.
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