Which Will Win Your Logical Mind or Your Emotional Mind?

Fidelity Investments just revealed that during the recent downturn 401(k) participants have been making a record number of calls, over 4 million. Many of those calls involved selling out of their equity based funds. This is further evidence that do it yourselfers do not have the discipline necessary to become successful investors.


As I have said many times in the past there are three simple rules of successful investing. Own equities along with the right amount of high quality short term fixed income for you…globally diversify…rebalance.


The problem with this formula is that most people are not emotionally equipped to deal with market turbulence, both up and down.


There is a study that states 70% of 401(k) plan participants that work with a retirement adviser are on track for a successful retirement. While just 28% of participants that do not work with an adviser are on track.


A good adviser will not allow their client(s) to panic and sell during the inevitable downturns of the equity markets.


Below is a great article that helps provide credibility to the statement that discipline wins.


Although many people will nod their heads after reading the tips in the article. Most will allow their emotions to take over and sell during down markets.


Are you one of the people to panic?


Or do you have an investor coach/fiduciary adviser to help you through the turbulent markets?


CNBC article by Fred Imbert

Investors thinking of selling amid the current market turmoil should resist the urge, Vanguard Group founder Jack Bogle said Wednesday.

“Just stay the course. Don’t do something, just stand there. This is speculation that we’re seeing out there, and you can’t respond to it,” the investing legend told CNBC’s “Power Lunch.”

Bogle made his remarks in the midst of yet another sell-off in global equities.

The Japanese Nikkei 225 tumbled nearly 4 percent and closed in bear market territory. In Europe, the pan-European STOXX 600 index fell more than 3 percent.

U.S. equities inched closer toward bear market territory, with the Dow Jones industrial average falling more than 450 points Wednesday, while the S&P 500 and Nasdaq composite fell about 3 percent.

At the center of the sell-off was U.S. oil, which plunged nearly 8 percent Wednesday, hitting a fresh 2003 low.

“Each bubble, for lack of a better word, is different from the previous bubble. The dotcom bubble back in 1999 into the beginning of 2000 was a whole lot of ridiculously overpriced new companies, only probably 15 percent of which made it,” Bogle said. “The mortgage bubble was because a lot of people had mortgages, and weren’t able to pay for them.”

The recent fall in stocks and commodities, particularly oil, has raised questions as to whether or not the economy is at risk of entering a recession. Bogle said the long-term relation between the economy and the stock market is very tight.

in the short term, however, Bogle said: “Nothing has changed.”

“In the short run, listen to the economy; don’t listen to the stock market,” he said. “These moves in the market are like a tale told by an idiot: full of sound and fury, signalling nothing.”

The True Enemy of Every Investor

Many of the investors (potential or not) I talk with have many reasons for an unsuccessful investing experience. It could be the stock market is too risky or their broker/agent is no good or the federal government is using bad policy or the Federal Reserve has pumped in too much money or not enough. The list of excuses goes on and on.


All investors are searching for the right combination to earn stock market returns with Treasury Bill risk. This includes finding the right stock(s), the hot fund manager or the hot asset classes. They believe that someone out there can get them into and out of the market at the right time.


Successful investing to many investors is finding the right portfolio that will experience no losses.


Successful investing is not, per se, a portfolio problem, but rather a people problem. No matter how well designed and engineered a portfolio is, it can easily be destroyed by imprudent investor behavior.


Unfortunately, the true enemy of every investor lies within.


The instincts, emotions, and even biochemical makeup of human beings drives them to gamble and speculate with their money, even when they don’t mean to. This problem is multiplied exponentially by financial institutions that profit from this self-destructive cycle. You will see that this cycle is hard wired into every human being in the world. No one is exempt.


After studying the collective behavior of thousands of real world investors over the past decade, several truths have made themselves clear. It is my belief that many, if not most financial product sponsors are aware of this dilemma,


but either don’t care that the investor is harmed by it,


or are ignorant of the damage that they unknowingly perpetrate on the American investor.


To succeed in investing you must own equities……globally diversify….rebalance.

You need to fire your broker/agent and hire an investor coach/fiduciary adviser.


With help of your investor coach you will build a prudent portfolio at the right amount of risk for you. Your coach will then work with you to remain disciplined during both down markets as well as markets are surging up.


Don’t empower the Wall Street bullies but rather follow an academically researched strategy with the help of an investor coach/ fiduciary adviser.

Is It Logic or Greed?

Every week I discuss the advantages of following the three simple rules of investing:

  • Own equities and high quality short term fixed income.
  • Globally diversify.
  • Rebalance.

Very simple indeed until being globally diversified results in performance less than the U.S. Large cap asset class. Because we see large cap stocks every night on the news we compare our results to the DOW and the S&P 500.

As humans we avoid pain and are drawn to pleasure. It is a natural thing. When we see the U.S. large cap earning a great return while small, international and emerging markets are lagging. We wonder why not invest all my money into U.S. Large Cap.

Keep in mind the financial media focuses on the Dow and S&P 500.

On the flip side when small, international or emerging markets are out performing we think nothing of it because we don’t know. Consider this since 2000 the S&P500 has been the best performing asset class three years. And the worst performing asset class for five years. The rest somewhere in between.

Perhaps another small history lesson will help you realize the value of a globally diversified portfolio.

From 1996-2000 the S&P 500 earned a cumulative 132% while Emerging market small value stocks lost -49%.

Naturally at the end of 2000 investors would want to invest all their money into the S&P500 Large Cap stocks(Pleasure) and avoid emerging market small value(Pain).  The next five years, included the tech bubble bursting. As I mention often no one can consistently predict the future.

Let’s see how that worked out for investors. From 2001-2005 the S&P 500 earned a cumulative 3% while Emerging market small value stocks earned cumulative 162%. That didn’t work out well at all.

Naturally, I cannot predict that this will happen again because past performance is no indication of future results.

The point is no one can predict which asset class will outperform and for how long. When someone does make an accurate prediction it is a matter of luck and not skill. When you consider all the analysts on Wall Street all making their own predictions. In any given year someone will be right. The problem is we never know which one is right in advance.

On another point I find it fascinating that investors see crashes of the past as buying opportunities and current or future crashes as risk. It is interesting how the human mind works. OK now I’m rambling.

It is times like these that investors really need an investor coach the most. A coach will help you control your emotions. Right now the emotion is greed. Even though allocating all your investments to U.S. large cap might sound logical it is not.

Your coach along with your investment policy statement should guide you through all market conditions.

Don’t empower the Wall Street bullies and hire an investor coach/fiduciary adviser.

As always I welcome any questions or comments.

Without 401(k), it Would be Worse

NEW YORK - JULY 31:  Traders take an afternoon...
Image by Getty Images via @daylife
Discipline is the cornerstone of successful investing. This cannot be confused with complacency by plan participants. Participants are more apt to do nothing than make a decision. Therefore we must provide better solutions. Buy and hold are said to be dead, I believe they should have never been in the first place. To succeed we must buy and rebalance.

As the DOW rides waves of volatility, lurching up and down by hundreds of points, there is one island of stability in this stormy sea – – 401(k). Because we constantly remind participants of the benefits of dollar cost averaging; because we provide them with solutions like target date funds and managed accounts; because inertia is easier than taking action; because participants have been rewarded over time for staying the course, few 401(k) participants market time.  To the shock of some and the dismay of others, 401(k) participants do not panic during times of market volatility. Instead, year after year they invest hundreds of billions of dollars in the stock market regardless of whether markets are going up or markets are going down. They were buyers after 9/11, they were buyers in 2009. They are buyers today. They were holders after 9/11, they were holders in 2009, they are holders today. Their buy and hold behavior augmented by dollar cost averaging has not only benefited them through over a decade of wild economic swings, it has cushioned market declines. I shudder to think what kind of market drops we would have experienced had 401(k) participants not been buying and holding when everyone else was selling. Without 401(k) it would be worse.

This article emphasizes the importance of providing a professionally managed solution for 401(k) participants. Like it or not the participants believe their company plan provides all the tools for them to successfully retire.

Please comment or call to discuss how this affects your company plan.

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