Are You A FOODIE?

Feature  Show Me the MONEY
By Ben Reynoso

Our economy has fallen on hard times and we are deep into the worst bear market that most of us have ever seen. Everyone has an opinion about how close we are to the beginning of an economic recovery and a market turnaround. Investors are desperately looking for firm footing. They express it in different ways, but most of them are really asking the same question: “What should I do now?”

While this is the right question, it is a difficult one to answer. No solution is right for everyone. We each bring a unique combination of financial resources, life goals and emotional make-up to the table. These all play a role in determining what path to take in today’s difficult environment. However, I believe there are some universal principles that can help any investor sort things out and find an answer to their question about what to do going forward.

Distinguish Between the Past and the Future. A problem that often plagues investors is the inability to clearly separate the past from the future. Behavioral researchers have identified a strong tendency in people to project the immediate past onto the future. They call this tendency “representativeness.” If the stock market has been going down, people are likely to believe that it will continue to go down. If the economy has been bad, they believe it will continue to be bad. The same thing happens when trends are positive.
The implications of this tendency are very clear in the current environment. The tendency is to see the future as dark and gloomy because we have been going through difficult times. In fact, there are good reasons to be concerned about the immediate future, but we must recognize that these troubled times will pass. The current situation will not last indefinitely. We need to look at the future realistically, unburdened by feelings about the past.

Acknowledge the Difference Between Emotion and Rational Thought.
Another problem that often plagues us is a tendency to let emotions cloud the decision-making process. During difficult times like these, everyone experiences negative emotions. The key, however, is to put them aside while making investment decisions. Feelings do not contribute anything positive to the process. Good decisions are made by identifying alternatives, assessing probabilities and proceeding based upon conclusions about likely outcomes.  Investors are usually better off financially if their rational side can prevail over their emotions.

Turn Off the Television. It helps to reduce the amount of “noise” we are exposed to on a daily basis. Modern investors are subject to historically high levels of media bombardment. Television, the Internet, newspapers, magazines and radio all compete with one another to capture our attention. To draw us in, they seek out commentators with extreme or dramatic outlooks. Much of this is pure entertainment, not serious financial or economic analysis. Increasingly, our urge to “do something” is stimulated by those motivated by self-interest rather than any real concern for us or our financial well-being.
Don’t Get Trampled by the Herd. The human tendency to follow the herd is well documented. This instinct may have its origin in our distant past when individuals were rewarded (primarily by survival) for staying near other group members and conforming to group norms. However, following the herd clearly does not bring rewards in the area of investing. Studies show that investors, as a group, tend to buy high and sell low—not a recipe for investment success.  The fact that everyone around you thinks the market is going down (or up) does not make it so. The weight of opinion is not a good indicator of what is going to happen in the market.

Look at the Forest, Not the Trees.  This is when we view investment decisions too narrowly. It is called “narrow framing.” In today’s environment, it shows up when investors focus too closely on daily market movements or on the daily swings in the value of their portfolio. This undermines investment success in two ways.  Most investors have a relatively long-term time horizon. Short-term swings in portfolio value rarely have a lasting effect on the achievement of long-term financial goals. Although they are painful to live through, the eventual recovery usually lifts the portfolio back to previous levels and even beyond. Making investment decisions based on short-term market turmoil can severely limit the effect of the eventual recovery.

Watching the market like a hawk or letting changes in the value of your portfolio drive your mood swings is guaranteed to inflict pain and suffering. The emotional impact is bound to be negative. This will cloud an investor’s judgment just at the time when clear thinking is most needed. Investors should focus on their long-term goals and stop tracking meaningless short-term changes in the market and the value of their portfolios. By cultivating a broader perspective, investors can reduce the stress associated with investing and maintain the clarity of thought necessary for good decision-making.

Have a Little Faith.  As a people, we desire to better ourselves, to provide for our families and to find security in a harsh world. We were born with creative impulses that produce new businesses, new products and new ways of doing things. Our freedom to pursue these desires and indulge these impulses sometimes results in excesses that are counterproductive to the common good. When this happens, the system stalls and lurches for a while, but then corrects itself through our collective effort. Our essential nature has not changed, so there is no reason to believe that we cannot find solutions to the problems that ail us today. Have faith.

Looking forward to living longer in retirement than expected should be a pleasure and not a worry. Longevity risk is something to plan for. You don’t want to outlive your assets so plan on them being there for you and a little to spare! The security of knowing you have an income stream that you cannot outlive, especially for your core expenses are priceless. Attempting to provide a hedge against inflation and mitigate taxes as much as you can and providing an efficient transfer of wealth to heirs can be very comforting.

Finally, now more than ever, navigating complex investment solutions coupled with market dynamics requires professional financial advice, someone who can take emotion out of the equation and help you stay focused on your goals.
Successful wealth creation is about how you manage behavior.  95% of successful wealth creation comes from behavior and 5% from investments.  A trusted advisor will take the time to review the common behavioral finance trends so that you can recognize these behaviors in yourself and guide you to a worry free future!