**OT** YOUR MOOLAH AND YOUR MIND: A PSYCHOLOGICAL THRILLER
Thought the thread would enjoy this...
businessweek.com@@w0ViX4UAjQskhAIA/today.htm
<<Investing well has a lot to do with numbers -- earnings estimates, dividend yields, returns on capital. But it also has a psychological component, not just in anticipating the group-think most investors follow but also understanding your own: what risks you feel compelled to worry about and why.
With that in mind, and with so much to worry about in the world today, I began wondering recently whether there was some way to understand which risks are worth the concern of individual investors. And in talking with a variety of money managers and financial planners, up popped the work of Abraham Maslow.
Unless you paid close attention in Psych 101, you may not have heard of Maslow. Founder of what's called "Humanistic Psychology," Maslow died in 1970 but is well remembered for his "Hierarchy of Needs." Boiled down, Maslow's insight was this: We're all motivated by a series of unsatisfied needs, from physiological impulses such as securing a supply of food, through the need for love and self-esteem, to the highest callings, such as fulfilling our potential through artistic or philanthropic expression. Maslow arranged these needs in a pyramid to signify that humans satisfy their base needs before they can ascend to higher levels.
What does any of this have to do with investing? Only that it's a useful way also to think about the risks that are worth your worry. In other words, it's important to ensure that your basic risks are covered before you start worrying about Japanese bank reform or Brazilian fiscal restraint.
So, with apologies to Maslow, here's a Hierarchy of Worries. Look at it as a pyramid to climb. Hint: If you have free cash to invest, jump right to the middle level, Love:
PHYSIOLOGICAL: Just as Maslow noted that humans first need to ensure they have shelter and food, so do wise investors take care first not to endanger the rent. So don't bet on the S&P if your net worth is negative.
SAFETY: Next, humans look for security -- a safe home and the stability of society. The focused investor takes care to set up a secure income, some insurance against bad health, plus -- attention job-hoppers! -- a network of colleagues to help in case of layoff.
LOVE: Maslow theorized that once humans have their basic needs met, they long for acceptance. Investors, once they have their financial basics settled, need to get comfortable, to feel they "belong" in the strange and fickle world of Wall Street. Teen love itself never was more perplexing, but don't feel a wallflower if such terms as "Sharpe ratio" or "basis point" seem strange. Do fret if you can't say why you bought that real estate investment trust or explain what a REIT is. Matching investments to what you want in your life -- retirement income, say, or a boat -- and when you want them is the secret.
ESTEEM: Once loved, humans seek recognition and self-esteem. Investors generate that by mastering the tricky task of keeping their level of risk below average, while enjoying above-average returns. Extra points for doing so without unduly enriching a broker. Don't hate yourself if you're attracted to investing in places others avoid. Do consider a strategy makeover if you find your investments keep falling short of expectations. It may be that market-index mutual funds are the best way for you to keep risks and returns in line -- and avoid losing face.
SELF-ACTUALIZATION: To Maslow, the self-actualized human has reached full potential. Self-actualized investors have set their financial goals and calmly watch as they're met, often by exploiting others' mistakes. You are positioned to grab opportunities precisely because you've scaled the prior steps: With lower-level worries at bay, you can focus on higher risks. But beware hubris, the ultimate risk. Just consider Long-Term Capital Management, whose partners now find they've slipped down the pyramid to a fresh search for belonging.
Barker covers personal finance for Business Week from Melbourne Beach, Fla.
EDITED BY DOUGLAS HARBRECHT >>
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