Why Do We Make This So Hard?

This is a question I have pondered for more than 25 years of investing. While I don’t believe I will ever know the exact answer to this question, there are some things that seem obvious to me. The first is greed. Most of us would never admit to being greedy, but our actions towards investments many times say more than our words. Regardless of whether you hire an advisor or do it yourself the base motivation is the same. This one driving emotion will trump any logical explanation concerning investing. Greed will creep into your investment portfolio at every profit. There is always the potential for more and in reality greed in and of itself creates ‘bubbles’ in the market. The old adage of – “it’s different this time” continues to introduce itself into our investment vocabulary. It is important to learn what turns your greed factor higher and avoid it. Put into place disciplines to keep your outlook in check and keep your money safe from the disease.

In addition we make it hard by thinking there has to be a faster way of getting there (more money). The reality is time versus timing the markets have always proven to be successful. There are numerous examples of this fact and yet we continue to try and beat the odds. Simple investment education would go a long way in avoiding this getting it faster syndrome. This is actually the cousin to greed. We fail to educate ourselves about even the most basics of investment acumen. As I wrote in a previous post, if all you did was take the major indexes and develop a simple discipline to managing your money you would be successful over time. John Bogle has stated for years the simplicity of long term index investing. Warren Buffet has shown the advantages of owning quality companies producing quality products and services over the longer term are the key to financial success. The challenge is we procrastinate the starting point and therefore we are now trying to make up for lost time and that in and of itself introduces higher risk into the equation.

Speaking of risk, understanding risk management is imperative in conjunction with managing your money. I refer to this as a disciplined investment strategy. It has taken me years to learn there is no right way or wrong way to invest money. But, it is essential you have a discipline strategy to managing your money, monitor your portfolio and adapt to the markets to achieve your goals over time. Do this and you will find investing a simple process. From my view it will rid you of unnecessary headaches, not to mention lost money.

Last, the greatest asset is self understanding which lends to being a better investor overall. Learning what you can and cannot tolerate relating to risk is vital to the investment process. In other words, actions that increase our emotions and lead to irrational or reactive decisions create the most harm. Therefore, learning our own investment psychology goes a long way in achieving investment success and our financial goals.

Making it hard is not necessary. In fact, keeping it so simple that you can do it, is imperative to success.

Simplify Your Portfolio

When it comes to investing your money you have to learn to play by the rules. Those rules are ultimately determined by you the investor and no one else. They are built through the experience of putting your money into various investments under different scenarios and learning from what happens. In other words, experience really is the best teacher. In all the conversations I have had with investors over the years I hear similar war stories of how they did something stupid and learned a valuable lesson. Those stupid decisions many times are doing things they didn’t understand or taking risk that didn’t equate to their psychological profile. This is why I try to tell investors everyday – KISS, Keep it So Simple! In fact, Keep It So Simple – You Can Do It! The process of investing can get as complicated as you want, but for the average investor simple is better. Here are some simple rules I follow everyday in my own portfolio and in advising other investors:

• Manage Risk in your portfolio! I cannot say this loud enough or strong enough. When markets get volatile like they have for the last nine months reduce the risk in your portfolio. Raise cash to buffer the volatility. Owning cash is not a sin! I promise you will not read that anywhere other than your mind. Use stops to prevent your emotions from taking over and creating larger losses.
  
• Watching the game sometimes is more interesting than playing. Watching the markets churn is better than playing. Sometimes taking a break is winning. You can learn a lot from sitting back and watching what is going on versus having money in the game. I am a big football fan. I have learned that betting on the game creates too much stress. I have also learned they are not paying me to be the coach. So it is more fun to sit in the stands and watch the game for the entertainment value it is. The market sometimes is better observed than played.
  
• Volatility versus Information. Investors react to news or information and that in turn creates volatility. I have learned to evaluate the news source relative to the investment. Learning that most investors are lemmings and they follow the crowd is important. Sometimes it is better to be a salmon and swim upstream. Know what you want, know why you have it, and make your own decisions how to play it.
  
• Risk and time go hand-in-hand. Know what your goal is! This is vital to investing. The old adage of sell hope and buy despair works more than you think. Link the amount of risk you are willing to take to the timeframe you are willing to hold.
  
• Don’t fall in love. Emotions are the number one enemy to investing. Having a disciplined strategy means having an entry price, stop price, and target price. This allows you to manage your position proactively versus reactively.
  
• Ready, Fire, Aim. Every trade/investment must be accompanied by an exit strategy. This is risk management 101. Don’t rationalize holding your losses. Ban the phrase, “I will sell it when I breakeven.” What about those who held Enron stock. As I stated at the beginning knowing what you want is key, knowing how you are going to go about getting it is equally important. Strategy.
  

You are the solution to your portfolio. Too often we want others to tell us what to buy or sell. The challenge with that is you don’t know what their strategy is. Only you can control the strategy for your money. For example, have you ever read a prospectus for a mutual fund? Inside they describe the objective of the fund. Read one sometime and tell me if you really understand the strategy of how they are going to manage the money invested in the fund. Therefore, you have to have a strategy based on the historical statistics of the fund. Notice I didn’t say the historical performance. I am interested in the historical statistics of alpha, beta, r-squared, standard deviation, etc. Why? It tells me how the fund performs under various market conditions. Then I can make a decision on how to invest in the fund to achieve my goals. Remember the role of financial institutions is to get you to give them your money, for as long as possible, so they can make as much as possible, returning you as little as possible. (Joke) My point here is simple…take control of your chosen investments and build your portfolio based on your goals and objectives. This will lead most of you to building simple portfolios that you can understand and control. You can always learn to make investing more complex if you understand the fundamentals. Learning to walk is imperative to learning to run. Investing is no different.

When you look at your portfolio of investments if you cannot state why you own each one and what the strategy is behind each one, you are not in control. It’s your money - manage it. Learn to keep is so simple – you can do it.

Fear of Investing

Is fear holding you back from making a decision to invest? The challenge is all the news seems to be focused on the negative. The media instills fear as it jumps on these points and beats them to death. CNN’s famous around the world in 30 minutes. That means that 48 times a day they are telling the same stories and 90% of them are negative. Imagine the impact on your psyche. CNBC, FOX Business and Bloomberg are doing the same thing with the financial news. Web pages have headlines, and if the markets move enough the general news channels have headlines. No wonder volatility in the market is a daily occurrence. You, the investor, have to deal with all this noise in order to accomplish your goals for investing.
Step back take a deep breath and ask yourself:
Do I have a goal for this investment? Visualize it.

• How specific is the goal? The more specific the better.
• How clear is it in my mind?
• How do I intend to reach it? What needs to happen?
• What discipline do I need in place? Entry, stop, target, etc.
• What obstacles are in my way? Fear, Greed, etc.

In the case of investing use your emotions to lead you to success versus defeat. Fear is one of the most intense emotions on the planet. It doesn’t have to be in control, it can be used to push you forward. One key element of fear, that is a positive, is the awareness it creates both mentally and physically. It creates focus and leads to action. Good or bad it will lead to action. You need to use it to take positive action versus negative reaction. If you have done your homework (research) and you are confident in your decision, take action. In other words be proactive based on your knowledge and plan. Even if it doesn’t work out, you know that you tried based on your knowledge at the time. If an investment doesn’t pan out according to your plan, use it to learn. The learning from doing is more powerful than learning passively. Emotions of doing are a powerful teacher. Without a plan the mistake can create paralysis next time around. The fear of experiencing the same thing all over again will keep you from putting your money to work.

Now is a difficult time to invest due to all the negative news. Headline in the USA Today newspaper read, “Where’s the bottom? NO end in sight!” The date was October 10, 2002. The Dow closed at 7,286, coincidentally that was the closing low as the market moved into a five year bull rally with the Dow hitting a high of 14,093 on December 12, 2007. There are similar headlines in the newspaper and on the news today. So it would seem history teaches us when everything is doom and gloom it is the best time to start looking for what to buy. On SectorExchange.com we are in the process of building long term positions in various sectors. Why? For the simple reason no one knows where the bottom is and if we look forward five years the question is, “Will it be higher than it is today?” The best answer would be “Yes”. Therefore, after pulling back to a recent low of 11,740 the outlook longer term is for a bottom to be formed. Our goal is to ladder into these positions through dollar cost averaging and not trying to pick the bottom. In other words, we have a strategy on how we are building these positions. We have a disciplined approach and that takes the emotions out of the decision process. For the last 25 years this approach has worked more times than not which gives me confidence versus fear. We also know with the proper stops in place our downside is protected. In other words we have done our homework, set in place a disciplined strategy, and we are following the strategy based on past experience. This takes fear out of the picture, or at least puts in the corner where it can be monitored and dealt with when it tries to come out.

I saw an article on “Post Traumatic Trade Syndrome” recently and at first I thought it was a joke. Then I realized as I read it that there really is such a thing and psychologists have studied the impact on investor’s psyche. The basic cause of this stress is when individuals trade without experience, plans or a strategy, and stops to prevent excessive losses. While I am not a psychologist by trade, I can tell you more times than not that when individuals have an innate fear towards investing one or all of these events have taken place at one point in their lives.

Don’t look back on the current opportunities in the market and say “if only”. Turn those into “I did” by approaching the market with a disciplined strategy to accomplishing your goal. You have everything you need to achieve your desired objectives. If not, take the time to learn, but experience is the best teacher. Get the experience you need by putting yourself out there to learn and develop a disciplined strategy that works for you. You’ll be glad you did.

It's Just Like Riding a Bike

“It’s just like riding a bike!” This common phrase is used frequently to describe situations or tasks we think are easy. Of course my sadistic brain thinks, “what if you never learned to ride a bike?” That would mean you have no frame of reference from which to draw. Too often this describes investors I talk with when teaching disciplined investment workshops. I will make reference to the S&P 500 index as if everyone knows what it is and how it functions. At times I will even go as far as to make the joke that it is not a Nascar Race. While that brings a laugh from some, others are confused and don’t even know what Nascar is or stands for. So with that rambling introduction, being in control of your money is a vital step in the process of investing. The phrase, “It’s Your Money – Manage It!” I use all the time. This is my mantra so to speak. If you don’t take control of your money and manage it, who will? Who cares more about your money than you do? No one – so you owe it to yourself to take control of your money.

The greatest challenge in managing your money is dealing with the unknown – the market. When it comes to understanding the investment markets it can become very complex. Therefore, we need to adopt another of my philosophies, “KISS – Keep It So Simple, You Can Do It!” Why make investing your money harder than it needs to be? You need to define a simple discipline for managing your money. When my daughter wanted to learn how to dive into our swimming pool, she first had to learn the simple task of falling into the water versus jumping into the water. The point is she needed to learn the simplest of tasks first. This gave her the confidence she needed to go to the next step. At each interval she could make it more and more complex if she so desired. You as an investor have to learn the simple steps first and then add complexity. I have been investing money for nearly 30 years and I still like to keep it simple. The simpler the better from my perspective, because it affords me the ability to understand and that understanding in turn gives me confidence when investing my money. Just as my daughter learned that keeping her head down and falling into the water avoided the ever famous – belly flop, you too can learn to invest your money with confidence.

Here is a simple strategy you can try and see how it works for you. Take the S&P 400, 500, 600 indexes, investing in each will give you exposure to the small, mid and large cap stocks in the US stock market. Then add the EAFE index which introduces the international markets and last add the Shearson Lehman Bond Index for fixed income (bonds). For simplicity sake, let’s put 20% of our money into each position. This allows you to diversify your money and track five indexes. This is important from a time management view as well as money management. If one of the indexes moves into a downtrend you will trigger a stop (an exit/sell at a predetermined point) and the money will be put in a money market. We can then wait for the index we exited to return to an uptrend and invest our money again. This is a simple enough strategy to follow. All you have to understand is what the indexes are, how to look at a chart of each to determine if the trend is up, down or sideways, and last determine how much risk you are willing to take in each investment, then setting a stop or exit point accordingly. Most investors could learn this in short order and take complete control of their money. In doing so they would also understand what is happening with their money and gain confidence as time goes by. You can then learn to add complexity if your desire, this is simply a starting point. From there you can learn to dive off the 35 meter platform and do triple flips with backward twists. You can make the dive as complex as you are willing to learn or you can simply dive off the side of the pool and enjoy the swim.

“It’s just like riding a bike!” First you have to learn how to ride a bike and control the balance of two wheels while peddling. Once you learn this you can take it to whatever level you desire. The challenge for some us is we want to go down the ramp like they do on ESPN extreme sports and jump doing wheelies and landing perfectly at the end. If you don’t learn how to ride first you will be on the highlight reel from ABC sports – “the thrill of victory and the agony of defeat.” You will be the later part – the agony of defeat in this instance is losing your hard earned money because you made it more complex than you were ready to deal with or understand. Keep It So Simple, You Can Do It!