Category Archives: Behaviors

Bitcoin’s Bursting Bubble

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“I have to confess that I find it all exhilarating. I’m only concerned somewhat for the relatively new investors who get drawn into these things and then find out the hard way. I sympathize completely with these people out there enjoying this bubble, but they’ve always ended very badly, and I have no doubt this one will too.” Jeremy Grantham

The price of Bitcoin dropped below $40,000 for the first time in months and the cryptocurrency fell more than 40 percent off recent all time highs.

There are reasons for the recent crash in the price of Bitcoin, according to Barron’s Magazine. Recently, China banned the use of cryptocurrencies for financial institutions asserting that “virtual currencies shouldn’t be used in the market as they are not supported by real value”. Instead, China intends to create its own indigenous cryptocurrency that will allow the regime to monitor and track its citizens

Furthermore, other countries might be considering tighter regulation, particularly as cryptos become the currency of choice for ransomware hackers and money laundering. Additionally, Tesla stopped accepting Bitcoin as payment for vehicles and Elon Musk expressed climate-related concerns over Bitcoin’s mining process.

But sometimes things go down because they are going down, according to Barron’s. Investors who bought early are looking to lock in gains, while recent arrivals to the crypto game are panicking. Selling begets selling.

Image Source: Getty Images

Bubble Burst

“We’re a crazy marketplace full of irrational human beings who behave themselves 80% of the time and then 20% of the time totally freak out one way or the other.” Jeremy Grantham

Retail investors piling into Bitcoin have fueled a historic price bubble that has finally burst. When stock bubbles pop, the selling usually stops when shares drop well below intrinsic value and become attractive to a new class of value investors who didn’t partake in the market froth.

Cryptocurrencies are different. They have no intrinsic value, which means there’s no telling when the selling might stop.

Essentially, Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive Bitcoins in exchange. Overall, the mainstream acceptance of Bitcoin is still limited.

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with tech enthusiasts, speculators — and cybercriminals.

“The concerns among investors and traders is that perhaps we are about to see another crypto winter and it may take a long time for Bitcoin price to see any recovery as the bull cycle may be over,” said Naeem Aslam, chief market analyst at AvaTrade.

“The actual answer is that no one really knows about that and the only thing that we do know is that institutions are still buying Bitcoin on every dip,” said Aslam.

Maintain a long-term outlook

Stock market and assets, like cryptocurrencies, bubble bursts can be intimidating, but they’re no cause for panic. Historically, the market has always recovered from every one of its downturns — and it’s extremely likely it will bounce back again.

If you maintain a long-term outlook, it’s easier to avoid panic-selling when asset prices begin to free-fall. Remind yourself that the market will recover eventually, and you’ll be able to ride out the storm.

The key to investing for the long term is to ensure you’re investing in quality assets. And, investing during market downturns can actually be a cost-effective move.

Because asset prices are lower during market downturns, it can be a good opportunity to buy good assets, like stocks (and cryptocurrencies, if you’re so inclined), at bargain prices.

References:

  1. https://www.barrons.com/articles/china-issues-crypto-bitcoin-warning-51621416378
  2. https://www.dallasnews.com/business/technology/2021/05/19/bitcoin-falls-below-38000-whats-going-on/
  3. https://barrons.cmail20.com/t/ViewEmail/j/62CDF96507F967432540EF23F30FEDED/9E2B0856731CA0B32018F019E6F15D33
  4. https://markets.businessinsider.com/currencies/news/jeremy-grantham-gmo-stock-market-bubble-burst-before-may-2021-2-1030118339
  5. https://www.fool.com/investing/2021/04/03/3-ways-im-preparing-for-the-stock-market-bubble-to/

Greater Fool Theory | Motley Fool

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“Greater fool theory states that investors can achieve positive returns by buying an asset without concern for valuation fundamentals and other important factors because someone else will buy it at a higher price.”

Simply stated, investors expect to make a profit on the stocks they purchase because another investor (the “greater fool”) will be willing to pay even more for the stock, regardless if the stock’s price is overvalued based on fundamentals analysis or long-term performance outlooks.

According to The Motley Fool, this philosophy relies on the expectation that someone else will get caught up in market momentum (frenzy) or have their own reasons for why the asset is worth more than the price you paid. 

In the short term, popular sentiment plays the biggest role in shaping stock market pricing action, but fundamental factors including revenue, earnings, cash flow, and debt determine how a company’s stock performs over longer periods.

In short, it is possible to achieve strong returns by using the greater fool theory, but it’s risky and far from the best path to achieving strong long-term performance. 

Specifically with regard to the stock market, the Greater Fool Theory becomes relevant when the price of a stock goes up so much that it is being driven by the expectation that buyers for the stock can always be found, not by the intrinsic value (cash flows) of the company.

The Greater Fool Theory is a very risky, speculative strategy that is not recommended especially for long-term investors.

References:

  1. https://www.fool.com/investing/how-to-invest/greater-fool-theory/
  2. https://www.hartfordfunds.com/investor-insight/the-greater-fool-theory-what-is-it.html

Volatility and Market of Stocks

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If you pay any attention to the stock market, you probably know that volatility is actually a normal part of investing.

Stock market volatility is a measure of how much the stock market’s overall value fluctuates up and down. A stock with a price that fluctuates wildly—hits new highs and lows or moves erratically—is considered highly volatile. A stock that maintains a relatively stable price has low volatility. according to Investopedia.

Stock market volatility is most commonly measured by standard deviation, which is a measure of the amount of variability around an average. The larger the standard deviation, the higher the volatility will be.

Volatility is often associated with fear, which tends to rise during bear markets, stock market crashes, and other big downward moves. However, volatility doesn’t measure direction. It’s simply a measure of how big the price swings are. You can think of volatility as a measure of short-term uncertainty.

“Keep it simple and avoid complications in the markets.”

  • Sooner or later, most investors realize that the stock market is actually a ‘market of stocks’ that is chaotic, dictated by investors’ emotions of fear and greed, and influenced by interest rates and macro economic conditions. Good stocks don’t always advance. Bad stocks don’t always fall. Reality is rarely ever as bullish, or as bearish, as forecasted by financial analysts and strategists.

What is certain is that a quasi-invisible force known as volatility is always always present, threatening to disrupt the market’s delicate equilibrium and sanity.

“One of the hardest parts about being a long-term investor is the fact that sometimes your money is going to get incinerated and there’s nothing you can do about it.” Barry Ritholtz

Investors have a few primary ways to respond.

  • They can sit tight and act like long-term investors. Time tends to reward such behavior, though research has shown that it is as difficult to practice as it is uncommon.
  • Most investors never hold stocks long enough to benefit from the fact that the market rises over time. Investors typically buy too late and sell too early. They routinely “greed in” and “panic out” of stocks. They hold stocks for just a few years — or worse, a few months — rather than carefully curating a portfolio over decades, which means most investors behave like salmon swimming upstream. They struggle against the stock market’s natural rhythms.
  • Rotations is when smart and retail money runs after gains in certain sectors until a rally there becomes exhausted, and then their money runs to other sectors.
  • Investors can use options to more effectively navigate the stock market. A well-placed put or call can make all the difference in an uncertain market. A well-placed options contract can turn the unpredictably of investing into a defined outcome.
  • There are two types of options. A call option gives investors the right to buy a stock at a certain price and time. A put option gives investors the right to sell a stock at a certain price and time. An easy way to remember the difference between puts and calls is that a call gives you the right to “call in” a winning stock, while a put gives you the right to “put off” a bad stock on someone else.
  • Investors buy puts when they want to protect stock that they own from losing value.
  • Investors buy calls when they want to own a stock they believe will increase in value.
  • Many investors sell puts and calls to generate income.
  • Many people pick options that expire in three months or less. When you buy an options contract that expires in a year or more, you spend more money because time equals risk.
  • Simplicity is everything. It’s important to keep your trading strategy simple and avoid complications in the markets. Since everything could change tomorrow, or not, and thus we fall back on something we learned during the dark days of the 2008-09 financial crisis: Focus on the facts that have held up over time

Consider keeping a list of stocks or exchange-traded funds you would like to buy during market sell offs or crashes.

When in doubt, always remember: “Bad investors think of ways to make money. Good investors think of ways to not lose money.”

To keep from panicking when stock market volatility ticks up, it’s important to realize that volatility comes with the territory when you decide to invest. The stock market will always have its ups and downs, and there’s no use trying to predict what’s going to happen. So if you’re investing for the long term, consider basing your decisions on your goals. timeline and tolerance for risk, rather than on what’s happening in the markets from one day to the next.

Also, remember that being diversified is one way to help manage your exposure to volatility. By spreading your money out over various asset classes you’re also spreading out your market risk, and ensuring your portfolio’s results aren’t based on the performance of one type of investment.

References:

  1. https://www.fool.com/investing/how-to-invest/stocks/stock-market-volatility/
  2. https://www.barrons.com/articles/how-to-buy-and-sell-options-without-making-a-fool-of-yourself-51600336811
  3. http://www.barrons.com/articles/how-to-use-options-to-beat-the-market-1477415121
  4. https://awealthofcommonsense.com/2021/05/sometimes-you-just-have-to-eat-your-losses-in-the-markets/

Financial Mindset

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“It’s difficult to master the psychology and emotions behind earning, spending, debt, saving, investing, and building wealth.”

Personal finance is simple. Fundamentally, you only need to know one thing: To build wealth and achieve financial freedom, you must spend less than you earn. Yet, it seems challenging for most people to get ahead financially.

Financial success is more about mindset and behavior than it is about math, according to J.D. Roth, author of Get Rich Slowly. Financial success isn’t determined by how smart you are with numbers, but how well you’re able to control your emotions and behaviors regarding savings and spending.

Financial Mindset

“Change your mindset and attitude, and you can change your life.”

You sometimes have to make sacrifices in order to improve your financial situation. For instance, if you are in debt, you need to sacrifice some expenses so you can pay more towards managing and eliminating your debt. It is these financial sacrifices that will require you to have the right financial mindsets so you can overcome the obstacles that derail people from managing and eliminating their debt.

According to an article published in USAToday.com, Americans do not have a financial literacy problem. Instead, Americans simply make the wrong financial decisions and have bad final habits which does not necessarily translate that they are unaware of the best practices of financial management. We know how to make the right choices about our personal finances. The problem, according to the article’s author Peter Dunn, is that Americans have a financial behavioral problem. It is bad financial behavior, decisions and habits that usually get them into money trouble. It is what put them in a financially untenable position.

A perfect example is that you should never spend more than what you are earning. It is logical after all. But does that mean you follow it. Some people still end up in debt because they spend more than what they are earning.

Other examples of beliefs about money and personal finance include:

  • Taking personal responsibility regarding your finances is everything.
  • You shouldn’t buy things you can’t afford.
  • You don’t have to make a ton of money to be financially successful.
  • You can give yourself and your family an amazing life, if you’re able to remain disciplined and think long term.
  • Borrowing money from or lending money to your family isn’t recommended.
  • Education can get you a better job, if you get the right education.
  • You should buy life insurance.
  • You have much more to do with being a financial success than you think.

Financial literacy gems such as “spend less than you make,” “you need to budget” and “save for the future” are impotent attempts to help. However, lacking the correct financial mindset can make following the simple financial gems quite challenging.

There are 5 destructive financial mindsets that are the norm in our society today but you should actually get rid of starting today, according to NationalDebtRelief.com.

1. Using debt to reach your dreams.

This can actually be quite confusing. A lot of people say that it is okay to be in debt as long as it will help you reach your dreams. There is some truth to that but you should probably put everything into the right perspective. Buying your own home and getting a higher education are some of the supposedly “good debts.” It is okay to borrow for these if you can reach your dreams because of that debt. Not so fast. It may be logical to use debt to reach these but here’s the key to really make it work – you should not abuse it. If you get a home loan, buy a house that will help pay for itself. That way, the debt will not be a burden for you. When it comes to student loans, make sure that you work while studying to help pay for your loans while in school. Do what you can to keep debt from being a burden so it will not hinder you from reaching your dreams.

2. Thinking you do not need an emergency fund.

The phrase, “you only live once (YOLO)”, should no longer be your mindset – especially when it comes to your finances. You always have to think about the immediate future. If you really want to enjoy this life, you need to be smart about it. Do not splurge everything on present things that you think will make you happy. It is okay to postpone your enjoyment so you can build up your emergency fund. You are not as invincible as you think even if you are still young.

3. Settling for a stressful job to pay off debt.

“The most important thing when paying off your debts is to pay off your debts.”

Among the financial mindsets that you need to erase is forcing yourself to stay in a stressful job just so you can pay off your debt. You are justifying the miserable experience that you are going through in your job because you need it to meet your financial obligations. This is the wrong mindset. You need to put yourself in a financial position where you will never be forced to stay in a job that you do not like. Live a more frugal life that does not require you to spend a lot so you can pursue a low paying job and still afford to pay your debts.

4. Delaying your retirement savings.

Some young adults think that their retirement savings can wait. Some of them think that they need to pay off their debts first before they can start thinking about the future. This is not the right mindset if you want to improve your finances. You have to save for retirement even when you are drowning in debt.

5. Failing to have a backup plan.

The last of the financial mindsets that you need to forget is not having a backup plan. Do not leave things to chance if it involves your finances. You have to make a plan and not just that, you need to have a backup plan. If you have an emergency savings fund, do not rely on that alone. What if one emergency happens after another? Where will you get the funds to pay for everything? Think about that before you act.

Takeaway

Remember, personal finance is simple…it’s your emotion, behavior and habits that are challenging. Bottom-line, it comes down to your financial mindset.  Smart money management is more about your mindset than it is about personal financial math of net worth, cash flow, saving and investing. The math of personal finance is simple and easy. It’s the psychology that’s tough and challenging. Essentially, the concepts to improving your finances and achieving financial freedom are simple but it is not easy to follow through with them.

References:

  1. https://business.time.com/2013/03/11/why-financial-literacy-fails/
  2. https://www.usatoday.com/story/money/personalfinance/2015/09/27/americans-financial-literacy-behavior/72260844/
  3. https://business.time.com/2011/09/22/debt-tsunamis-debt-snowballs-and-why-the-conventional-wisdom-about-defeating-debt-is-wrong/
  4. https://www.nationaldebtrelief.com/5-financial-mindsets-you-need-to-get-rid-of/
  5. https://www.getrichslowly.org
  6. https://obliviousinvestor.com
  7. https://petetheplanner.com/yes-you-are-an-investor-think-like-one/

The Man in the Arena — Daring Greatly

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On April 23, 1910, Theodore Roosevelt gave what would become one of the most widely quoted speeches of his career. In Paris at the Sorbonne, Roosevelt delivered a speech called “Citizenship in a Republic,” which would come to be known as “The Man in the Arena.”


“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

Theodore Roosevelt, Twenty-Sixth POTUS

 

 

References:

  1. https://www.mentalfloss.com/article/63389/roosevelts-man-arena

Road to Wealth | American Association of Individual Investors (AAII)

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You can build wealth by saving for the future and investing over a long term. The earlier you start, the easier it is for your money to work for you through compounding. 

Building wealth is essential to accomplish a variety of goals, from sending your kids to college to retiring in style. Wealth is what you accumulate; not what you spend. Most Americans are not wealthy. and few have accumulated significant assets and wealth.

How long could the average household survive without a steady income.

Every successful saving and investing journey starts with a set of clear and concise goals, whether they’re as big as retirement or as small as wanting to save for new tires for your vehicle. It’s important to determine and write down what are your savings, investing and wealth building goals.

Rather than trying to guess what’s going to happen, focus on what you can control. Each financial goal calls for a positive step you can take no matter what the market or the economy is doing.

The Wealth-Building Process can help you keep many of these financial goals and investing process on track. It is designed to give you clarity on what you are investing for and what steps you need to take to reach and fulfill those goals.

The key is to stick to your financial plan and recalibrate the investing process throughout the year. One way to do so is to set up reminders that prompt you to go back and review your goals. Positive change often requires a willingness to put yourself back on track whenever you drift away from the plan.

With that in mind, here are financial and investing tactics for investors:

1. Only follow strategies you can stick with no matter how good or bad market conditions are.  All too often, investors misperceive the optimal strategy as being the one with the highest return (and often the one with the highest recent returns). This is a big mistake; if you can’t stick to the strategy, then it’s not optimal for you. Better long-term results come to those investors who can stick with a good long-term strategy in all market environments rather than chasing the hot strategy only to abandon it when market conditions change.

One way to tell if your strategy is optimal is to look at the portfolio actions you took this past year. Make sure that you are not taking on more risk than you can actually tolerate. Alternatively, you may need to develop more clearly defined rules about when you will make changes to your portfolio.

2. Focus on your process, not on your goals. Mr. Market couldn’t care less about how much you need to fund retirement, pay for a child’s college education or fulfill a different financial goal you may have. He does as he pleases. The only thing you can control is your process for allocating your portfolio, choosing investments to buy and determining when it’s time to sell. Focus on getting the process right for these three things and you will get the best possible return relative to the returns of the financial markets and your personal tolerance for risk.

3. Write down the reasons you are buying an investment. One of the most fundamental rules of investing is to sell a security when the reasons you bought it no longer apply. Review your current holdings and ask yourself the exact reasons you bought them. Recommend you maintain notes, so you don’t have to rely on your memory to cite the exact characteristics of a stock or a fund that attracted you to the investment.

4. Write down the reasons you would sell the investments you own. Just as you should write down the reasons you bought an investment, jot down the reasons you would sell an investment, ideally before you buy it. Economic conditions and business attributes change over time, so even long-term holdings may overstay their welcome. A preset list of criteria for selling a stock, bond or fund can be particularly helpful in identifying when a negative trend has emerged.

5. Have a set schedule for reviewing your portfolio holdings.  If you own individual securities, consider reviewing the headlines and other relevant criteria weekly. (Daily can work, if doing so won’t cause you to trade too frequently.) If you own mutual funds, exchange-traded funds (ETFs) or bonds, monitor them quarterly or monthly.

6. Rebalance your portfolio back to your allocation targets. Check your portfolio allocations and adjust them if they are off target. For example, if your strategy calls for holding 40% large-cap stocks, 30% small-cap stocks and 30% bonds, but your portfolio is now composed of 45% large-cap stocks, 35% small-cap stocks and 20% bonds, adjust it. Move 5% of your portfolio out of large-cap stocks, move 5% out of small-cap stocks and put the money into bonds to bring your allocation back to 40%/30%/30%. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by five percentage points or more.

7. Review your investment expenses. Every dollar you spend on fees is an extra dollar you need to earn in investment performance just to break even. Higher expenses can be justified if you receive enough value for them. An example would be a financial adviser who keeps you on track to reach your financial goals. Review your expenses annually.

8. Automate when possible. A good way to avoid unintentional and behavioral errors is to automate certain investment actions. Contributions to savings, retirement and brokerage accounts can be directly taken from your paycheck or from your checking account. (If the latter, have the money pulled on the same day you get paid or the following business day.) Most mutual funds will automatically invest the contributions for you. Required minimum distributions (RMDs) can be automated to avoid missing deadlines and provide a monthly stream of income. You can also have bills set up to be paid automatically to avoid incurring late fees.

9. Create and use a checklist. An easy way to ensure you are following all of your investing rules is to have a checklist. It will both take the emotions out of your decisions and ensure you’re not overlooking something important.

10. Write and maintain emergency instructions on how to manage your portfolio. Typically, one person in a household pays the bills and manages the portfolio. If that person is you and something suddenly happened to you, how easy would it be for your spouse or one of your children to step in and take care of your financial affairs? For many families, the answer is ‘not easily’ given the probable level of stress in addition to their lack of familiarity with your accounts. A written plan better equips them to manage your finances in the manner you would like them to. It’s also a good idea to contact all of your financial institutions and give them a trusted contact they can reach out to, if needed.

Even Warren Buffett sees the value of this resolution. In his 2013 Berkshire Hathaway shareholder letter, he wrote, “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Considering the probability of Mrs. Buffett having learned a thing or two about investing over the years, it speaks volumes that Warren Buffett still sees the importance of including simple and easy-to-follow instructions in his estate documents.

11. Share your insights about investing with your family.  If you’re reading this, you likely have some passion for, or at least interest in, investing. Share it with your family members by having a conversation with them. Talk about how you invest, what you’ve learned and even the mistakes you’ve made. It’s a great way to pass along a legacy to those younger than you and to maintain a strong bond with those older than you. You might even learn something new by doing so. Our Wealth-Building Process can provide a great framework for facilitating these types of conversations.

If a family member isn’t ready to talk, don’t push them. Rather, write down what you want to say, give the letter to them and tell them you’ll be ready to talk when they are. For those of you who are older and are seeking topics that your younger relatives (e.g., millennials) might be interested in, consider our discount broker guide, which includes a comparison of the traditional online brokers versus the newer micro-investing apps.

12. Check your beneficiary designations. It is critical that all of your beneficiary designations are current and correctly listed. Even if nothing has changed over the past year, ensure that the designations on all of your accounts are correct. Also, make sure your beneficiaries know the accounts and policies they are listed on. Finally, be certain that those you would depend on to take over your financial affairs have access to the documents they need in the event of an emergency. We think this step is so important that we included a checklist for it in our Wealth-Building Process toolkit.

While you are in the process of checking your beneficiaries, contact all of the financial institutions you have an account or policy with to ensure your contact information is correct.

13. Be disciplined, not dogmatic. When you come across information that contradicts your views, do not automatically assume it is wrong. The information may highlight risks you have not previously considered or that you have downplayed in the past. At the same time, don’t be quick to change your investing style just because you hear of a strategy or an approach that is different than yours. Part of investing success comes from being open to new ideas while maintaining the ability to stick with a rational strategy based on historical facts. When in doubt, remember resolution #1, only follow strategies you can stick with no matter how good or bad market conditions are.

14. Never panic. Whenever stocks incur a correction (a decline of 10%–20%) or fall into bear market territory (a drop of 20% or more), the temptation to sell becomes more intense. Our brains are programmed to disdain losses as well as to react first and think later.

This focus on the short term causes us to ignore the lessons of history. Market history shows a pattern of rewards for those who endure the bouts of short-term volatility. We saw this last year. The coronavirus bear market was sharp, and the drop was quick. Those who were steadfast—or used it as an opportunity to add to their equity positions—were rewarded with new record highs being set late in the year and so far this year.

Drops happen regularly and so do recoveries. If you sell in the midst of a correction or a bear market, you will lock in your losses. If you don’t immediately buy when the market rebounds—and people who panic during bad market conditions wait too long to get back in—you will also miss out on big gains, compounding the damage to your portfolio. Bluntly put, panicking results in a large and lasting forfeiture of wealth.

15. Don’t make a big mistake.  Things are going to go haywire. A stock you bought will suddenly plunge in value. A mutual fund strategy will hit the skids. A bond issuer will receive a big credit downgrade. The market will drop at the most inopportune time.

If you are properly diversified, don’t make big bets on uncertain outcomes (including how President-elect Biden’s administration and the Democrats’ control of Congress will impact the financial markets), avoid constantly chasing the hot investment or hot strategy and set up obstacles to prevent your emotions from driving your investment decisions, you will have better long-term results than a large number of investors.

16. Take advantage of being an individual investor. Perhaps the greatest benefit of being an individual investor is the flexibility you are afforded. As AAII founder James Cloonan wrote: “The individual investor has a distinct advantage over the institution in terms of flexibility. They can move more quickly, have a wider range of opportunities and can tailor their program more effectively. They have only themselves to answer to.”

Not only are we as individual investors not restricted by market capitalization or investment style, but we also never have to report quarterly or annual performance. This means we can invest in a completely different manner than institutional investors can. Take advantage of this flexibility, because doing so gives you more opportunity to achieve your financial goals.

17. Treat investing as a business. The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

18. Alter your passwords and use anti-virus software. There continues to be news stories about hacks. The best way you can protect yourself is to vary your passwords and use security software. A password manager is helpful for this. Anti-virus software and firewalls can keep viruses off of your computer and help thwart hackers.

19. Protect your identity. Identity theft can cause significant problems. Freezing your credit, monitoring your credit reports (Consumer Reports recommends AnnualCreditReport) and paying your taxes as early as possible can help prevent you from becoming a victim. Promptly challenge any suspicious charges on your credit card or telephone bills. If you get an unsolicited call asking for personal information, such as your Social Security number, or from someone claiming to be an IRS agent, hang up. (Better yet, don’t answer the phone unless you are certain you know who is calling.) It’s also a good idea to cover the keypad when typing your passcode into an ATM. Never click on a link in an email purporting to be from a financial institution (a bank, a brokerage firm, an insurance company, etc.). Instead, type the company’s website address directly into your browser.

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 required credit bureaus to allow consumers to freeze their credit reports at no cost. The following links will go directly to the relevant pages on each credit bureau’s website:

  • Equifax: www.equifax.com/personal/credit-report-services
  • Experian: www.experian.com/freeze/center.html
  • TransUnion: www.transunion.com/credit-freeze

20. To help others, invest in yourself first. Investing based on your values, donating to charity, devoting your time to causes you are passionate about and giving to family and friends are all noble actions and goals. To do so now and in the future requires taking care of yourself. Keep yourself on a path to being financially sound through regular saving and controlled spending. Good sleep habits, exercise and following a healthy diet (eat your vegetables!) are also important—as are continuing to wear a face mask and practicing social distancing. The better shape you keep yourself in from a physical, mental and financial standpoint, the more you’ll be able to give back to society.

For those of you seeking to follow an ESG strategy, be it due to environmental, social or governance issues, make sure you stay on a path to achieve financial freedom. The same applies to other values-based investing, such as following religious beliefs. While it is possible to do well by doing good, every restriction you place on what you’ll invest in reduces the universe of potential investments you will have to choose from.

21. Be a mindful investor. Slow down and carefully consider each investment choice before making a decision. Ensure that the transaction you are about to enter makes sense given your investing time horizon, which may be 30 years or longer, and that it makes sense given your buy and sell rules. A common trap that investors fall into is to let short-term events impact decisions that should be long-term in nature. If you think through your decision process, you may well find yourself making fewer, but smarter, investment decisions.

22. Take a deep breath. Often, the best investing action is to simply take a deep breath and gather your composure. Short-term volatility can fray anyone’s nerves, but successful investors don’t let emotions drive their trading decisions. It’s okay to be scared; it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves. If you find yourself becoming nervous, tune out the investment media until you get back into a calm state of mind and then focus on resolutions #1, #2, #3 and #4 (found in last week’s Investor Update). Success comes from being disciplined enough to focus on your strategy and goals and not on what others think you should do.

“I found the road to wealth when I decided that part of all I earned was mine to keep. And so will you.”  The Richest Man in Babylon

Finally, remember that you have a life outside of the financial markets. Investing is merely a means to an end. Put the majority of your energy into activities you truly enjoy, including spending time with family and friends.

References:

  1. https://www.aaii.com/learnandplan/aboutiiwbp
  2. https://www.forbes.com/sites/jrose/2019/09/26/ways-to-build-wealth-fast-that-your-financial-advisor-wont-tell-you

Understanding the Emotions of Investing | Edward Jones

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“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch

No one can control the economy, the stock market or exactly know how an investment will perform in the short term. And that lack of control and certainly can lead to making poor (and many times, emotional) investing decisions – like chasing performance, not diversifying, or trying to time the market by moving into and out of the market (often at the wrong time).

While these reactions can be triggered by a desire to avoid risks (defined for our purposes as loss of capital), the results of these behaviors can pose the greatest risk of all — not reaching your long-term goals. In fact, the biggest risk may not be market fluctuations themselves; it’s our emotional reaction to these fluctuations and market volatility. That’s why it’s so important to have a financial advisor in your corner, helping you stay committed to your long term investment strategy.

Here are some common emotional investing behaviors that may derail your journey to reaching your long-term financial goals. By understanding the pitfalls of these behaviors, you can prevent making these investing mistakes in the future.

1. Heading to (or staying on) the sidelines

We’ve all seen the headlines: the economy’s slow recovery, the government’s budget deficit, market volatility. Prompted by what they perceive as bad news, some investors may try to “time the market” or sell investments just because of what they hear in the news – to move to the sidelines (and perceived safety) and wait until things get better. But it’s nearly impossible to correctly ‘time’ the market (predict when to get out and even more difficult to decide when to get back in), which often results in missing the best days – thereby severely affecting your performance And often, waiting until things get better means selling when prices are down and then buying back in when prices are higher – not a recipe for long-term success.

Other investors hold in too much cash because they want to avoid market risk. But not investing could actually increase your risk because you may not have enough growth in your portfolio to meet your short and long term financial goals or offset inflation (and loss of purchasing power).

2. Stay in the game and stay invested

Keep your focus on your long-term financial goals rather than on the ever-changing headlines, which could focus too much on the negative for dramatic effect.

If you begin to feel overwhelmed, talk with your financial advisor about your attitude toward risk and observe how you react to specific events. That way, you can work together to refine your goals and investment strategy, if needed.

3. Chasing performance

When the media raves about the latest “hot” investment or highlights “dramatic” declines in the market, some investors are tempted to chase the winners and sell the losers. This type of emotional response could be a recipe for underperformance because it results in buying high and selling low – not the recipe for a successful investment strategy.

4. Stay diversified

Having a diversified set of investments is more important than trying to find the next “hot” investment. When you have a portfolio made up of a variety of quality asset classes and investment types, success isn’t tied to one company or one type of investment. While diversification cannot guarantee a profit or protect against loss, it can help smooth out the ups and downs of the markets, providing the potential for a better long-term experience.

Financial experts recommend reviewing your portfolio with your financial advisor at least once a year to ensure it’s adequately diversified. Your financial advisor can also help you decide if a recent major lifestyle or goal change warrants a change to your strategy.

5. Focusing on the short term

Day-to-day fluctuations in an investment’s value may tempt some investors away from their long-term strategy. For example, some investors sold out in 2008 because their portfolio had fallen from an all-time high, even though their performance may still have been on track to meet their goals and well above where they initially started.

Decisions can also be influenced by how a situation is presented.

Take this example: “The Dow plummets 150 points” OR “the Dow declines 1%.” Both could describe the same situation, but the first sounds much worse. It’s these short-term movements, and how they’re presented by the financial entertainment media, that could lead you to make emotional short-term decisions.

6. Setting realistic expectations

Realizing that market declines, while unpleasant, are normal will help you set your own realistic expectations for investment performance. After all, the stock market averages one 10% correction every year, and over a 25-year retirement, you could experience an average of six to seven bear markets.

It’s important to measure performance as progress toward your long-term goals, not in day-to-day fluctuations. Your financial advisor can help you answer the question, “How am I doing?” and help provide the discipline you’ll need to stick with your long-term strategy and ignore short-term distractions.

Source: https://www.edwardjones.com/preparing-for-your-future/financial-education-resources/investing-emotions.html

Mindset: Two Wolves – A Cherokee Parable

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“Feed your faith and your fears will starve. Feed your fears and your faith will starve.” Pastor Max Lucado

An old Cherokee chief was teaching his grandson about life…

“A fight is going on inside me,” he said to the boy.

“It is a terrible fight and it is between two wolves.

“One is evil – he is anger, envy, sorrow, regret, greed, arrogance, self-pity, guilt, resentment, inferiority, lies, false pride, superiority, self-doubt, and ego.

“The other is good – he is joy, peace, love, hope, serenity, humility, kindness, benevolence, empathy, generosity, truth, compassion, and faith.

“This same fight is going on inside you – and inside every other person, too.”

The grandson thought about it for a minute and then asked his grandfather,

“Which wolf will win?”

The old chief simply replied,

“The one you feed.”

Takeaway

Your thoughts can be your best friend or worst enemy. That is, if you let them.

Think about how you may be “feeding” your positive or negative thoughts, and allowing them to control your prevailing mood, attitude and behavior.

You have the ability to change anything in your life that no longer serves a purpose. Start today by believing that there is nothing in life that you can’t achieve. It is vital that you maintain a positive mindset and focus on what’s positive in your life. Dreams and goals cannot come to pass with a negative mindset.

References:

  1. https://www.virtuesforlife.com/two-wolves/
  2. https://m.huffpost.com/us/entry/us_580fda27e4b06e45c5c6ffd6

Sir Christopher Wren and The Story of Three Bricklayers

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Mindset affects just about everything–including your attitude. Your attitude is based upon your beliefs. Beliefs affect your decisions. Decisions affect your behavior, behavior affect your actions, actions affect your results.

After the Great Fire of London destroyed much of the medieval city of London in 1666, Sir Christopher Wren designed new churches and supervised the reconstruction of some of London’s most important buildings. His name is synonymous with London architecture.

He produced ambitious plans for rebuilding the whole area but they were rejected, partly because property owners insisted on keeping the sites of their destroyed buildings.

Wren did design fifty-one (51) new city churches, as well as the new St Paul’s Cathedral. In 1669, he was appointed surveyor of the royal works which effectively gave him control of all government building in the country. He was knighted in 1673.

Story of Three Bricklayers

We see things as we are; not as they are

The story of three bricklayers is a true story. After the great fire of 1666 that leveled London, the world’s most famous architect, Sir Christopher Wren, was commissioned to rebuild St Paul’s Cathedral.

One day in 1671, Sir Wren observed three bricklayers on a scaffold, one crouched, one half-standing and one standing tall, working very hard and fast.

  • To the first bricklayer, Christopher Wren asked the question, “What are you doing?” to which the bricklayer replied, “I’m a bricklayer. I am cutting this stone to a certain size and shape.” He was just doing a task
  • The second bricklayer, responded, “I’m a builder. I’m building a wall. I’m working hard laying bricks to feed my family.” He was just earning a living
  • But the third brick layer, the most productive of the three, when asked the question, “What are you doing?” replied with a gleam in his eye, “I’m a cathedral builder. I am helping Sir Christopher Wren build St. Paul’s Cathedral for The Almighty.” He was doing his small part of building a great cathedral.

The lessons from the story of three bricklayers:

  • Big Picture Thinking – Being able to see the end result and how your work contributes to that end.
  • Attitude – A positive attitude and pride in what you are doing will show up in your work and your motivation.
  • Connection to the Organization’s Mission – Employees who are rightly connected to the organization’s mission, vision, values, and goals are happier, more engaged, and more productive employees.

The Power of Purpose and Calling

The story of the three bricklayers is also a metaphor on the power of purpose, where the “cathedral builder,” demonstrates a personal expression of purpose that transforms his attitude and gives a higher meaning to his work. Another term for purpose is “calling.” For the first bricklayer, building the wall was a job. For the second bricklayer it was an occupation. For the third bricklayer, it was a calling.

A calling reflects our universal need to matter, to influence, and make a difference in the world around us.  Victor Frankel made this clear in his book, The Meaning of Life.  He wrote about how some people survived the holocaust, but so many didn’t.  One of the things he identified was those who had a purpose or reason to continue to live that was beyond themselves tended to survive, while those who were focused primarily on themselves did not.  Those who survived found some meaning in their painful circumstances.  The meaning they found was in caring for and helping others in this horrible experience.

References:

  1. https://www.thoughtco.com/sir-christopher-wren-rebuilder-of-london-177429
  2. http://www.bbc.co.uk/history/historic_figures/wren_christopher.shtml
  3. https://sacredstructures.org/mission/the-story-of-three-bricklayers-a-parable-about-the-power-of-purpose

April is Financial Literacy Month

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“The goal behind teaching financial literacy is to help people develop a stronger understanding of basic financial concepts—that way, they can handle their money better…Financial literacy is the possession of skills that allows people to make smart decisions with their money.” Dave Ramsey

April 2021 is Financial Literacy Month – In 2004 Congress passed a resolution officially recognizing April as Financial Literacy Month to “raise public awareness about the importance of financial education in the United States and the serious consequences that may be associated with a lack of understanding about personal finances.”

Financial Literacy. The goal of financial literacy is to help people develop a stronger understanding of basic financial concepts—that way, they can handle their money better.  Especially when you consider a few realities about our country’s lack of financial literacy and about how the typical American handles money:

  • U.S. college students continue to struggle with massive debt. There’s also the uptick in adults living paycheck to paycheck.
  • Money management appears like it should be simple and easy…just spend less money each month than you make and save for the future.
  • It’s never too late (or too early) to learn good money management habits, or to start saving for the future, and investing for the long-term and to grow your money.
  • Money management and financial planning are not only for the wealthy; it’s available to every American.
  • Learning about money management and personal finance should be a lifelong endeavor that you’ve now begun!

  • A large number of Americans lack financial literacy. They believe financial success is doing things the same way that they have always done or planned to do is the recipe to success; for example, not preparing and planning for the future and only living in the moment.
  • Often times, your spending can take on a life of its own before you can take time to think about it. This is where many people get into trouble. It is not unusual to find someone who is working in an industry or job they may not like, simply because they need a paycheck and do not have a choice financially.

Lacking financial literacy is a significant enemy of financial progress and success. Since living paycheck to paycheck has become a significant way of life for most Americans, according to 2017 CareerBuilder Survey, which highlights:

  • An estimated 44% of Americans can’t cover a $400 emergency without going into debt.
  • 56% of Americans have less than $10,000 in savings for their retirement.
  • 78 percent of U.S. workers live paycheck to paycheck to make ends meet
  • Nearly one in 10 workers making $100,000+ live paycheck to paycheck
  • More than 1 in 4 workers do not set aside any savings each month
  • Nearly 3 in 4 workers say they are in debt today – more than half think they will always be
  • Financial literacy and knowledge has never been more relevant. The only person who will truly always be looking out for your best financial interest is you. Learning about money management and personal finance should be a lifelong endeavor.

It’s never too late (or too early) to learn good money management habits, or to start saving. Since, personal finance is not only for the rich! Read books and financial publications, watch the videos and follow closely emerging and trending issues and practices in finances. Also, work with a financial advisor.

Our schools don’t do the best job preparing us for handling all of the challenges of personal finance, so it’s up to you to figure it all out. As a nation, we must embed basic financial literacy into our education system.

Financial Literacy and understanding money are vital to planning for financial well-being and a life well lived. Financial literacy, when dealing with bills, tracking long and short term payments and how to develop a system for saving, paying for the dailies, etc. is incredibly important.

No. 1: Successful money management is about making sure your money is doing for you what you want it to. This means that before you can be successful with your money, you have to know what you want. To get control of your finances, you must understand your own personal expectations, goals, and values. According to a study by the University of Tennessee, less than 1 out of 20 Americans have clearly defined goals; the key to developing a practical spending plan. That means 19 out of 20 find it difficult to avoid debt and save for the things that really matter.

No. 2: Managing finances is an important part of living a balanced life. It helps you pay your bills, build strong credit, establish realistic goals, and plan for the future. Simply put, it’s the process of making sure you spend less than you earn and save for the future. Income and expenses often vary from month to month, so keep track of your spending and following a budget and financial plan are critical and not hard once you get the hang of it. Don’t focus on the numbers — focus on the outcome! And, at some time or another, everyone will confront a financial emergency. The decisions we take regarding your budget and financial plan can have lasting impact on you, now and far into the future. And, a critical part of that planning is emergency savings to help navigate turbulent times.

No. 3: As every personal finance course emphasizes, retirement savings in tax-advantaged retirement accounts are important but not enough. It is critical that we think about the future, but every household also needs emergency savings to help navigate turbulent times. We must identify ways to make these savings strategies simple, even automatic.

No. 4: Don’t make dramatic changes during periods of high market volatility and economic uncertainty. Instead, embrace a strategy of goal based money management, financial planning and investing. When your tempted to react dramatically to market volatility and economic uncertainty, ask yourself which one of your long-term goals is no longer a priority. Which goal or goals do you want to abandon in order to move assets from stocks to safer asset classes such as bonds or cash. The older you will thank the younger you for not panicking and sticking with your long-term goals.

Let’s each of us make sure that financial literacy becomes part of the curriculum in our education system. We should push for mandatory personal finance education in schools starting next year.

Visa and the NFL Launch New Financial Football Game

Visa and the National Football League (NFL) have teamed up to create Financial Football, a fast-paced, interactive game that engages students while teaching them personal finance skills.

Students of all ages can learn key concepts about saving and spending, budgeting and the wise use of credit in preparation for game play.

References:

  1. https://www.daveramsey.com/blog/what-is-financial-literacy
  2. http://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey
  3. https://www.forbes.com/sites/forbescommunicationscouncil/2019/12/16/why-financial-literacy-in-schools-matters-today-for-the-workforce-of-tomorrow
  4. http://video.cnbc.com/gallery/?video=7000121923
  5. https://cdn.zephyrcms.com/c90050c9-f059-4e40-a9d7-381cf48d84bd/-/inline/yes/personal-finance-course.pdf
  6. https://www.practicalmoneyskills.com/play/financial_football
  7. https://www.financialfootball.com