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Money Psycho

If what you are doing isn’t working… STOP!

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Over several years at least once a month I would teach a workshop titled, “If what you are doing isn’t working… STOP!” I still get comments and emails from people who attended, watch a video or listened to a recording commenting how true it is that stopping is not easy because we are convinced we are right and the market is wrong. The reality is the market is never wrong now… it may adjust and re-calibrate going forward to realign with the truth as it is revealed, but today the market is right. We have the task of deciding how we want to manage our money in light of our risk, time horizon and belief over time as it relates to the markets swings and trends.

The best analogy for bad investing strategies is that of smoking. Despite the big warning on the side of every tobacco product from the Surgeon General warning about the potential effect on your health, many ignore the warning and keep on using the products to the detriment of their health. Go figure. Throw in the additional data on how hard is to stop smoking and you can see how the process compounds on itself. Investing, trading and managing money in the various markets is much the same way. Every investment comes with a warning tag attached to it from the Securities and Exchange Commission. We ignore it and determine we are smart enough to figure it out. We are determined to be the salmon who swims upstream and wins versus all those lazy trout who float with the stream and enjoy life. Interesting fact about salmon swimming upstream is if they make it, they spawn and then die. While they may have made the trip successfully the end result isn’t quite as glamorous as the salmon believed. Death doesn’t seem to add up to winning in my book. Ignoring the warnings relative to investing and the markets may not end in death, but some feel like it when they lose the money they worked so hard to save.

There are three primary categories for developing strategies for investing money, technical, fundamental and quantitative. You can mix, match or go solo with any of these theories and there are as many combinations as there are dreams. The challenge lies in defining the strategy, implementing it with discipline and managing the risk as it relative to the market’s volatility day to day. What starts out as simple way too often turns complex and we get lost in the analysis and forget it is about managing money. Simple systems/strategies work the best because they are understandable and executable. But, we seem to feel the need to introduce complexity versus simple.

When markets turn lower and the fear factor is introduced into the equation all the logic and strategy tends to get lost in the emotions of the moment. Here is lies the greatest challenge for the investor… emotions, the psychology of investing. I am not talking in the sense of behavioral psychology and teaching ourselves to overcome mistakes with understanding of how emotions create irrational responses when our money is involved. I am talking about not putting yourself in those positions to start with. The psychology of managing risk before you invest. Too much lip service and theory is applied to understanding what people do when the market does ________! If we learn to deal with the market doing ________, what are the odds it will do it exactly like we learned? What are the odds the outcome even resembles what we learned? The real problem with theory is quite simply… REALITY! In science we can perform experiments and obtain definable results over and over again. In the markets the variables are not constant and thus we get a similar result, but never the same result. That is why we have to focus more on the psychology of managing the risk before we invest not after.

I cannot begin to tell you the number of people I speak with that have absolutely no business investing their money in the markets… period. The problem lies in chasing performance or returns versus understanding the risk of the process. I have heard all the statistics, I have heard all the speeches about long term performance of the markets, blah, blah, blah. If you can’t understand, digest, accept and deal with the risk of the investments you will never be there long term to experience the performance of the markets. This boils down to know yourself psychology. If you are not up to the emotional swings that go with investing… buy a CD, Treasury bond or fixed annuity. Why take the risk or brain damage of losing your money.

Investing is a process and unfortunately you are part of the process. The human element of emotions is the challenge for every investor large and small, professional or novice. It take time, effort and knowledge to conquer the process and manage your money in alignment with yourself. If that is not your cup of tea… find another solution.

Stop attempting to tell the future!

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As the world turns around the news the investment markets continue to cause stress for investors. The last two weeks have been up and down literally each day. One day up and one day down. The challenge being a lack of clarity which in turn creates a lack of direction. This is nothing new in reality the markets have been doing this since early March and the trend has been lower over the last six months with the S&P 500 index down 6.5% year-to-date. It isn’t the downside that is disturbing investors as much as the volatility surrounded by the uncertainty going forward. Thus, the need to be patient enough to let all of this unfold and the direction be defined. That is easier said than done at times, but it is still the direction we all need to take for now.

This is not about what happened in the market today or the last two weeks, but more about what is taking place psychologically ‘to’ investors. The uncertainty and volatility of stock prices creates nerves. Those are currently reflected in the VIX index which now stands at 26.6. Remember that for the last six months the index has traded between 12-15 with some bumps higher or lower, but it has been fairly quite. But, when the fear of what may lie ahead… cue the theme to “Jaws”, most investors are afraid of the water. Even though many still have money in stocks or stocks type investments, they are afraid of the water. If they are in, should they get out? If they out, should they get in? It is becoming paralysis of analysis day by day.

I have believed for a long time that investing is eighty percent psychological and ten percent logical and ten percent a flip of the coin. We all know that hindsight is 20/20! We do some incredible analysis looking backwards and filling in the blanks on what, why and how the markets did what they did. The challenge comes in looking at the chart today and determining where it is going looking to the right side.

What happens now

The truth be known… nobody knows. Oh we all can prognosticate what will transpire. We may even be right, but the reality is still we don’t really know. That is the hardest part of investing… no, not that we don’t know, but accepting the fact that we don’t know. Therein lies the psychological damage that many will experience. They guess the direction going forward, invest their money accordingly, they are wrong, and the wheels fall off mentally leaving scars we spend the rest of our investing lives attempting to heal. The bigger the losses the hard the process of healing.

If we would just stop long enough to realize when the market becomes this irrational and directionless… the odds of being right go down significantly. When the markets are trending higher or lower the probability of being right in following the trend go up significantly. Why then do we feel the need to stand on the beach looking at the water and contemplating endlessly do we go in or do we not? The easiest thing is to get a towel, some suntan lotion, a book, a radio and relax. Wait for the opportunity and then wade into the water versus rushing in believing we could never be wrong. STOP IT!!! My email box is full of questions about the market, the right things to buy, the best opportunities to own, etc. etc. etc. STOP… let this all unfold and then look at the opportunities left behind that give the highest probability of success based on the trends in place.

Focused strategy, based on discipline, with sound risk management is the key, not attempting to be a palm reader of the markets for what the future holds. Focus, discipline, risk management, and patience are the winning combination. Enough said!

investing

What’s Wrong With My Investing?

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investingHaving been in and around the investment world as both an investor and an advisor, the most common thing I hear from individuals is how they lost money at some point in their life. They either gave an advisor their money to manage, or attempted to do it themselves, but the results were the same. This generally leads to the questions… “What’s wrong with how I am investing?”,  and “Can you help me fix what is wrong?” I hate to say it, but what is wrong has nothing to do with the investment, or the process of how they are investing. It has everything to do with the fact they are not investing based on themselves: their focus, passions, goals, objectives, or dare I say their psychological profile.
I happened to be watching Dr. Phil a while back and to my surprise an acquaintance of mine was on the show. Of course, I had to watch and see why. Well, he had a gambling problem, and his wife had requested help from Dr. Phil. After interviews with everyone there they brought him out and interviewed him asking the same questions. The obvious result was that he was in denial about his gambling problem. When Dr. Phil felt he wasn’t making any progress he made a comment out of frustration… “It ain’t gambling the way you’re doing it! You should just stand on the corner and give away twenty-dollar bills.” That comment has popped into my head many times as I speak with investors. I want so badly to say, “It ain’t investing the way you’re doing it….” I’m not sure if Dr. Phil ever got through to this person, but he did attempt to help him and his family. Regardless, he helped me understand that sometimes we are too blind to see the bases of our mistakes. In order to cure a problem you first have to admit you have a problem, and then decide if you are willing to do what it takes to rectify the problem. Investing is no different.
If your investing is not about you, your goals, your dreams, your life… you will face plenty of challenges going forward.  Let’s face it, investing is challenging enough without adding to the frustration. Let me state this as clearly as I can… Investing is about you, not money! When you make it about money the anxiety level rises. When the anxiety level rises your fear steps in and with fear comes poor decision- making. It is like an avalanche… it picks up steam as it moves down the hill. Invest on purpose… your purpose. Not the advice of someone else, not the media, a newsletter, CNBC, or your advisor. All of these sources can help guide you once you know what your purpose is. Think about what experience  you want to achieve from your money.
If we make investing about ourselves versus money it takes on a completely different perspective. Now, we can invest on purpose. The purpose is what we want. Make a list. Some call it a bucket list, but I prefer to make a list of what I want to experience in life and from life. Now I am investing for experiences not ROI (return on investment). ROI is a factor of the experiences we create in our lives. Those experiences are different for everyone. That is why investing is based on what you want and what you want to accomplish. The most financially successful people in the world came from doing what they love and following their passions in life… not investing. Investing your money in your passion is where true wealth is created. The examples are everywhere if we stop and look. Bill Gates, Warren Buffet, Ronald Reagan, Micheal Dell, Ghandi, Andrew Carnegie and the list goes on in every walk of life. Do what you love and the money will follow.
I remember one of my advisory clients, who retired at the grand old age of 65, told me what he wanted to do based on his list of travels, charities, grandchildren, hobbies, etc. I told him that based on the list he would spend two-thirds of his money over the next 15 years. His reply changed my view forever… “That’s fine because when I’m 80+ I may not or will not be able to do all of these things, but what I will have is the memory of having done them with the people I love.” As an advisor my focus had always been to preserve the principle and spend the income. What this gentleman was teaching me was that investing in life’s experiences was a better investment than having the principle. The amazing thing to me about this client is that he is now 84 years old, and he really has done all of those things and more. He experienced life by investing in what he wanted and not what books and Wall Street tell us to do. Along the way he made investments in things he loved (stocks, real estate, etc.), and he has only eroded his principle by 15% from when he started nearly 20 years ago. I have seen this unfold time and time again. When people invest in the experiences of life, their ROI is compounded in ways that are not measurable in percentage figures or dollars.
Compare the story above with one about another client who retired at the same age of 65. He had more than he needed with his pension from a major company after 35 years of labor, social security, and his wife’s pension from teaching. They had a large sum of money by the standard of many people. He spent the next 21 years of his life worried that he would run out of money and not have enough for healthcare, etc. He wouldn’t travel, and refused to help his grandchildren with college expenses based on his fear of outliving his money. He worried constantly about the return on his investments. He refused to buy investments that weren’t guaranteed, no matter what. When he passed several years ago he still had his money plus some growth. He did pay for healthcare on both he and his wife, but he never experienced things he wanted to experience. His wife never experienced what she dreamed as they both lived in fear of money loss. No compounding effect from experiences, and no real joy from what he worked so hard for all those years. To me that is not investing. That is money imprisonment.
Both of these clients achieved their respective goals… one lived… and one existed. Remember this one simple fact.  He who dies with the most money… still dies.
Invest in your life experiences not possessions. Don’t violate your inner soul. Focus on investing for experience, not ROI. Make investing about you and the experiences you want in life, not money. Invest on purpose, invest in yourself, do the things you love and you really will have a rich life with the true ROI being measured in life’s experiences.
Another wise saying from one of my clients many years ago, “You will never see a U-haul behind a hearse.” Funny thing… I never have.

Lower Retail Sales & JP Morgan’s Missed Earnings Trip Investors

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The markets continue to test lower and intraday tested the next level of support at 1992 on the S&P 500 index. Like Tuesday buyers stepped in at support, but failed to make it back to positive territory to complete an intraday reversal. The earnings from JP Morgan were a huge disappointment for the financial sector. Throw in the December sales report showing a drop of 0.9% and you had the making of a negative open for stocks. The sales data reflected the price drop in gasoline, but sales still fell 0.3% ex auto and gasoline. Thus far the December economic data has not impressed and if anything, it has been been disappointing. While I would like to yell ‘FIRE’ and evacuate the building, it is still not as bad as it looks and some of the selling starting to look overdone short term. Regardless of what I think… the markets still have to validate on the directional side. For now we remain in the trading range and volatility remains elevated. Patience is the key ingredient at this point in time and we will move forward looking for the trend to confirm… up or down.

Uncertainty remains the key issue facing investors currently. We can label all the issues, but they all add up to uncertainty about the growth of the economy and earnings. It is easy to get caught up in the emotions of the moment and make poor trading and investing decisions in the process. Those emotions can make us money psychos… my affectionate term for making yourself crazy by allowing the market to determine your actions versus the defined strategy or discipline you should use in making decisions to buy or sell a position in your portfolio. In light of the current trading environment I thought it would be a good time for a quick refresher course in establishing your trading plan every day prior to the market opening. The following steps are a good habit to get into daily to keep you out of the emotional trading game or from becoming a money psycho.

First, determine the market environment and establish a defined reason for each buying or selling decision. The ‘WHY’ factor is vital to making good decision daily about your portfolio. All good trading and investing strategies follow a define rationale for owning or selling stocks. Answering the ‘why’ question now will help in making the appropriate adjustments (fifth step below) as you go forward. Simply put, if the ‘why’ no longer is true, you should look for the nearest exit as the strategy or belief looking forward is not confirming and in turn the risk of the position is rising. Know why you are buying or selling the position and you will make better trading decisions devoid of emotions.

Second, WRITE IT DOWN!Define your entry point based on the strategy you are implementing. Are there any restrictions to the entry process? Example: Buy SPY at $204. If it gaps more than $1.50 above the entry or $205.50 I will wait for the test of the move higher. I use this example because if you buy above the defined entry point you will squeeze your profit potential based on the target, and in turn increase the risk of the handwriteittrading position. Thus, don’t chase the entries, define them and respect the increased risk above that point.

Third, WRITE IT DOWN! Define the EXIT point based on the strategy you are implementing. This breaks down into two key points… 1)  The trade is wrong… defined stop or maximum loss based on the strategy implemented and risk management principles. 2)  The trade is right… defined target or profit desired from the position taken. You will also need to determine what you will do if the target is achieved. Sell all, half or none of the position… key is to let the profit run while protecting the gains against the risk of the future market action.

Fourth, don’t make trading decision during moving markets, that is why you have stops in place defined by your strategy and plan. I would go so far as to say don’t make trading decision during market hours that are not part of your daily trading plan. Too often traders and investors hear, see, or stumble on interesting opportunities during the day and trade it without the proper research or due diligence.  Or, worse yet, trade it without a defined plan or strategy. That usually ends poorly as emotions are not good decision markers.

Fifth, Review your plan daily (after hours). When the markets are closed review your positions in accordance with the plan, strategy and objective. Make adjustments to stops and targets based on non-emotional research and prepare your plan for the next trading day and follow it appropriately. Maker revised decisions while the markets are open and volatility is high tends to be poor decision making. Let you plan play out and then make adjustments after-hours.

Remember one key ingredient… It is YOUR money and managing it is process defined by a strategy built on discipline. Implementing that strategy is best achieved through a daily written plan that you can implement without emotions. Respect the risk of the market and find ways to manage your money in light of your goals and objectives. Anything less is likely to turn you into a money psycho!