Are You A Victim Of Your Financial Fears?


It’s ridiculously easy to find “success literature” stories of people who are stuck living out old scripts – so-called limiting beliefs that no longer serve them (or never served them), but they are still living according to those beliefs or rules.

And usually, those beliefs center around fear of some kind, though people are not conscious of that.

Sadly, these fear-based beliefs can have huge effects on the financial decisions people make.

Here’s an example: A couple years ago, as I was sitting on a plane, two guys behind me struck up a conversation. The obviously hadn’t known each other previously, but somehow their conversation drifted to the stock market, and how they didn’t trust it.

“I got out a couple years ago and I’m not going back in yet,” said Guy No. 1. By a quick account, I figured that he exited near the bottom of the market in late 2008 or early 2009, and then missed the subsequent rally that began in March of 2009.

“Oh yeah, me, too,” said Guy No. 2.

They were clearly impressing each other with what they believed to be extraordinary market savvy, but they were stuck in a place of financial fear and distrust. In the short run, they missed out on some big stock-market gains, but the long-run implications are far worse.

We live in an era of media-stoked fear. Competing political TV networks exhort viewers to completely distrust and dismiss anything the “other side” says, resulting in a nation of paranoids who express the conspiracy theory du jour on Facebook.

 

Are financial fears making you scream?

The financial media aren’t much better, breathlessly encouraging viewers to trade every day’s events. I can only imagine the mental condition of the poor soul who takes all this contradictory advice literally, and trades China’s PMI one day and pending home sales the next. This is a perfect example of stoking financial fears.

And it’s not just the financial media, which is aimed mostly at men. The financial media tends to cloak the fear-mongering in as left-brained “analysis,” but it’s fear, all the same. (“How to play today’s jobs report?” The implication being that if you are not “playing” it, you are missing out on big, big, life-changing portfolio gains. Nonsense.)

But the women’s media is perhaps even more expert at this, unabashedly using the embarrassment of social stigma (“My closet doesn’t look awesome enough!”), health concerns, and worries about the children to stoke fear, which, in turn, eventually stokes ad dollars. If you want first-hand documentation of how the women’s media makes money by scaring its audience, read Myrna Blyth’s excellent book on this topic.

Remember benzene in your bottled water? Alar on your kids’ apples? Not so scared about those anymore, are you? That’s because the media have moved on. They have to. They have products to sell.

You can’t follow all the fear-based advice, because it will only send your account into fresh havoc on a regular basis. I know traders who make panicked buys and sells. Sure, they have some big wins now and then, but over the long term, they generally operate in the red.

Try to keep in mind: Much of your world view, including that of the stock market, is likely manipulated by the media. Everybody says they are immune to it, but almost nobody is.

Fear-mongering is often disguised as being smart or sophisticated. Fiscal cliff, anyone? Remember all the terror spread by the chattering classes on that one? Sequestration? Don’t worry (pun intended), there’s another scare tactic coming soon, and it will be packaged as something only the most sophisticated among you need to worry about.

Of course, that’s you, right? What you just read about government spending and your portfolio. Better start worrying about that!

The two guys on the plane who sold out at the bottom of the market and hadn’t gotten back in? They were acting sophisticated, but they were making rookie mistakes.

So if you have the belief that your financial survival depends on reacting to news, price movements in individual stocks, or whatever economic development the TV anchors say you are supposed to “play” today, you are operating from a fear-based belief system, and it is not serving you well. It is serving them well. Their interests are not aligned with yours, and it’s important to remember that.

Image by  University of Salford

 

 

 

 

Does an Equity Overlay Portfolio Fit Into Your Investment Strategy?


Today Rigged Money features a guest post from my colleague at Portfolio, Jared Hopkins, CFP. Jared manages our Equity Overlay portfolio of individual stocks. He explains some background about the portfolio, and tells us how it performed in the first quarter. 

When asking clients to state their investment goals, the most common response is “to make money.”  The real question then becomes how.  At Portfolio, LLC, we employ a risk budgeting process using exchange-traded funds to create our pension models.

The Portfolio Pension Model is an extremely efficient investing strategy by itself.  However, some clients like having individual stocks in their portfolio to track and watch.  For these clients, Portfolio, LLC developed the Equity Overlay strategy where individual stocks are combined with the pension model.

The overall goal for the equity overlay portfolio is to have a combination of stocks that give us market exposure with less overall correlation to the S&P 500 and a better dividend yield.

To accomplish this investment objective, the Equity Overlay Portfolio is segmented into three investment criteria:  core, income, and growth.

Core investments provide exposure to areas of the U.S. economy that will be vital to long-term growth.  Income stocks deliver consistent dividends, which offer cash flow and help to increase the overall return of the portfolio.  Growth stocks are those companies with higher growth targets than the overall market.

With all stocks in the Equity Overlay portfolio, we maintain a quality bias seeking companies with strong balance sheets, attractive valuations, and a proven management team.  The strategy will keep some cash on the sideline for opportunities that may arise in the market.  Likewise, if market conditions become too volatile, cash will be raised as a tool to control risk.

 Q1 2013 Equity Overlay Portfolio Update

The first quarter of 2013 saw the S&P 500 zoom up 10.61%.  The S&P 500 returned in one quarter what most investors hope to achieve in one year.

But this market run-up was different than the past.  Most of the growth names in the S&P 500 did not participate in the first quarter rally.  Defensive areas, such as consumer staples, health care and utility sectors, lead the way.

This was no different in the equity overlay, as ten of our 19 stocks reached 52-week highs.

Some standouts include Allstate (ALL). This has a strong chart, and is up almost 50% since we purchased it. Costco’s (COST) chart also shows solid gains; we’ve seen a 33% gain since initiating this position.

Another notable holding is Health Care REIT (HCN), which has advanced nearly 30% since we purchased it. We also like the 4.30% dividend rate at the current price.  For EO investors, the yield is a healthy 5.61%.

Finally, I want to point out MasterCard (MA), one of the best performers in the EO. Since opening our position in October, 2011, the transaction processor is up  has gained 82%.

MasterCard (MA) gains since October 2011

MasterCard (MA) gains since October 2011

 

Even when looking at these impressive gains, it’s important to remember that not losing money is really making money.  Investors who consistently invest in only the “growthy” areas of the market will be very disappointed when they open their March statement.  Not the case for clients at Portfolio, LLC.

Click here to contact a Portfolio advisor for a review of your investment strategy and retirement plan.

 

Your Financial Plan Is Not Written In Stone


The topic of perfectionism is one that I’m fascinated by, because I see plenty of people using it as a reason to avoid financial planning.

“I’m waiting for my inheritance.” (I hear this a lot, though it always has the ring of a pipe dream.)

“I need to wait until I make some more money.” (When will they think they have enough?)

“I’m going out of town. And my ferret is sick.” (I love the double excuse. When one avoidance justification is not enough, use two, or even three! And they never have any connection to each other.)

People commonly make excuses as a buffer. Their excuses protect them from having to take action with the situation is less than ideal.

Christine Kane, a blogger who regularly gets my attention with her to-the-point posts about personal development and business success, offered a colorful example of making a bad decision because of perfectionism.

Think about how many people you know (maybe you’re one of them!) who started on a path. Maybe it was a new business.  Maybe it was a long-held dream. Maybe it was a project, or a production or a plan.

Then, they got a “flat.”

the financial equivalent of a flat tire

Maybe it was a bad performance.  Or a negative review.  Or overwhelm from too many clients.

Rather than fix the flat or put on a spare for a while, they sabotaged the entire dream. They slashed the other three tires.

Are you doing the financial equivalent of slashing the tires because things aren’t perfect right now? Maybe you aren’t making as much money as you hope to be someday – but why in the world would that stop you from planning?

A financial plan is not chiseled in stone, never to be changed. It’s kind of like the U.S Constitution, at least in the sense of its “living, breathing document” interpretation. You don’t have much money now, but three years from now, once your income is up significantly, work with your advisor to fundamentally revamp your financial plan. It’s not a tough concept, but I’m getting a little tired of the all-or-nothing excuses, which I’m not buying anymore.

 

 

 

 

 

 

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It’s Not About Being Perfect. It’s About Getting Started.


My first post on this site touched on the topic of perfection: It’s often hard to get started because we expect perfection from ourselves. If we can’t do it perfectly – whatever it is – then we don’t do it at all.

I was reminded of that a couple of times in the past week.

In particular, I was thinking of how the quest for perfection prevents many people from taking baby steps that would be financially beneficial over the long term.

PerfectionA few days ago, I tweeted a New York Times article about a woman whose 43-year-old husband suddenly died.

She realized she did not have basic financial measures in place, and she started a Web site (with a very colorful title) to aggregate useful forms.

However, what really grabbed me was an observation from the Times Writer:

“[T] world of personal finance suffers from an odd sort of organizational failure. We tend to organize our thinking around products: retirement accounts, mortgages, long-term care insurance.”

That paragraph touched a nerve with me. The financial services world is often intimidating and bureaucratic. The various products are confusing, and the terminology can make people feel stupid.

They’re not stupid, of course. But people believe they should know this stuff cold, and have their accounts perfectly organized and up-to-date.  Anything less would not be perfect.

The other article that brought to mind this perfection pursuit came from Kevin Mercadante’s blog, Out of Your Rut. His topic: Start and grow your nest egg, even if you’re broke.

In other words, just get started. Begin paying off your debt. Sell some stuff to raise cash. If you receive some unexpected cash, such as a gift or a bonus, stash it away or put it toward debt payments. Cut your spending. Take on extra jobs.

In other words, it’s not about understanding all the nuances of financial products or services.

It’s about just getting started. You don’t have to be doing it perfectly, but you have to be moving.

Image by pheezy

Why Stock Picking Is A Hobby, Not A Retirement Plan


A few weeks ago, I came across a story with a headline that caught my attention: “Is stock picking just another hobby for men?”

Even before reading the article, my first, very well-articulated reaction went something like, “Well, yeah, duh.”

As insightful as that was, I still felt that I wanted to learn what the author, Felix Salmon, had discovered. Here’s his opening paragraph, which hooked me.

“I had a fascinating lunch, a couple of weeks ago, which lodged in my mind the idea that stock picking, at least when practiced by individuals, is best analyzed as an upper-middle-class hobby rather than as purely profit-focused investing activity. Once you start looking at it that way, suddenly a lot of behavior, which looks irrational under most lights, starts making a lot of sense.”

Salmon goes on to analyze the phenomenon of investors and traders using do-it-yourself subscription products, and likens it to the money spent on golf. I would also add to the cost of trading: Money spent on a ridiculous number of monitors, in an attempt to feel like a pro.

 

stock picking computer monitors

Full disclosure: For more than a decade, I have been a contributor to subscription-based stock-picking services, and I currently write a column for Jim Cramer’s RealMoney.com. Obviously, I have no grudge against such services (well, legitimate services, anyway – not the “get rich quick” day-trading schemes designed to lure the gullible). But I have long believed that stock picking should be an adjunct to a cohesive plan of investing for retirement. That philosophy, however, flies in the face of a common belief, which seems to be concentrated among men over 50, that actively trading single stocks is the way to quickly amass retirement funds.

I’m currently working on an article for Financial Advisor magazine, focusing on late starters – people who find themselves at 45, 50, 55 years old (or older) with little or nothing in retirement. Of course, that describes a large swath of America, which is why it’s a compelling story.

One of the people I interviewed was my friend Jerry Slusiewicz, radio host and principal at Pacific Financial Planners. Jerry made the point that many men in their late 40s and early 50s realize they have little or nothing saved for retirement, and they become very aggressive in their trading. Suddenly, all the sophisticated-sounding programs for day trading and shorting sound like viable ways to quickly make up for lost time.

Of course, we know how that story usually ends (that would be: Not well). But hope springs eternal, and these trading systems appeal to the buyer’s hope that he will be the one to beat the odds! Never mind that most active mutual fund managers can’t beat the indexes for a sustained period of time – but a guy sitting at home, in front of the seven monitors he’s got set up (to feel like a professional trader) – he has what it takes to get those excess returns!

Not really.

For traders who want to carve out a small portion of their assets – and by small, I mean absolutely no more than 10%, and usually less – it’s OK to dabble with some of these systems. I know some stock gurus recommend to treat the trading as a business – but for most people, it’s not a business. It’s a hobby. There are some at-home trading pros who understand the rules of portfolio management, and can create a nice income stream from swing trading. But those folks are few and far between. Unfortunately, there are too many who don’t have a thorough grasp of trading rules, but who try, unsuccessfully, to play a game of beat-the-market.

Photo by drewgstephens

Does That Ferrari Make You Extra Successful?


If a person buys himself a holiday Ferrari, are you impressed because he is extra successful?

For a long time, plenty of guys who promote stock-trading systems used an old trick to convey great riches: They would take pictures of themselves working on a laptop in front of a pool, or maybe standing in front of a Ferrari or Porsche.

The idea was to sell customers on their success. So if this guy’s stock-trading methods landed him a poolside gig or a Ferrari – well, who wouldn’t want to sign up for a newsletter that uses a double-secret Fibonacci retracement method, combined with a proprietary volume analysis.

4978639642_1042a03bb5_b

But it seems that particular sales technique is falling by the wayside.

Maybe it’s just tired and nobody believes it anymore. After all, who even knows if it’s the guy’s Porsche, or one that he borrowed for the photo shoot? Who knows how “successful” he really is?

Maybe it’s that people are less concerned these days with the traditional trappings of success. I don’t know many people who would turn down a Ferrari, but we’re hardly in an era that celebrates conspicuous consumption.

But the other day, I spotted a photo of a well-known stock trader, one of those guys with plenty of followers and plenty of bluster to match. He was standing in front of a new Ferrari that he bragged was a holiday gift to himself. I can’t say it bothered or offended me – I don’t care that much – but it seemed oddly out of place.

Mainly because it misses the point of the financial guidance that people need and want these days. There will always be stock trading systems, and hobbyists who are looking to trade the best micro-cap junior gold miner.

But learning how to get out of debt, spend less, stick to a regular investment plan, and make wise decisions with money is more helpful to most (really, everybody) than one of these get-rich-quick trading schemes.

But that’s a whole lot less sexy than standing next to a new Ferrari, isn’t it?

Image by FotoSleuth

That Stock Trading Program Probably Won’t Make You A Millionaire


It sounds straightforward enough: Find the right stocks (or currencies, or options), and buy and sell them at the right times. And once you’re done with your stock trading for the day (that should take about 30 minutes, max), you can go golfing, play with the grandkids, or book that round-the-world trip.

Voila. The formula for a perfect life.

stock trading programs don't deliver what is promised

But why doesn’t it work out that way? I have plenty of experience with people touting trading methodologies billed as the ticket to financial security. But think about it: If buying the right stock trading software, or learning how to discern particular chart patterns, or trading only at certain times of day were the path to riches, wouldn’t it be as popular as Modern Family?  Or Orville Redenbacher kettle’s corn?

Of course, the promoters of these trading programs will tell you, if their product is not working for you, then you are using it wrong. In other words, it’s your fault that you are not raking in the bucks by trading forex harmonic butterfly patterns every other Tuesday at 9 a.m. Singapore time.

I understand how marketers have boosted the appeal of DIY trading and investing. They sell you chart programs with 176 oscillators, pattern recognition, and 34 proprietary indicators. It feels sophisticated to fiddle with these programs – and after all, those guys (and a few token gals) on the commercials really do seem sharp, together, and confident! Dang! I could do that if I had just half of those oscillators!

Problem is – and I’ve seen this many times – people get caught up in the mechanics of the trade, and lose sight of their objective. And for some, there really is no objective. It’s trading for trading’s sake.

Alarmingly, some marketers push these trading programs as antidotes to underfunded retirement accounts. Sadly, this is a risky and expensive way of compensating for a lack of prior planning.

I’ve talked to folks who claim it’s too late for them, that trading is their only hope for making up the difference. In most cases, that’s not true. But they panic, and believe that instead of cutting spending, managing money somewhat more conservatively, raising their income – or some combination of the above – trading risky, high-beta stocks is the way out.

Unfortunately, that particular strategy usually does not work out well.

Photo by Porto Bay Trade

When A Stock Trader Has That “Light Bulb” Moment


Remember how Bugs Bunny would get that light bulb over his head when he had an idea, or a moment of recognition?

I saw that happen to a client recently. OK, not that a light bulb literally appeared over her head (though that would have been really cool).

But I saw the look of realization on her face when it hit home that the stockbroker she had been work had no incentive to grow her account; instead, he had incentive to trade stocks.

See, these brokers, they’re crafty. They are recognizable, internationally known names. They have slick, high-production-value TV commercials, showing healthy, attractive, gray-haired couples walking on a beach, or sailing, or snuggling by the fire. Smiling the whole time.  A dulcet-toned narrator makes smooth promises about the broker’s deep care and concern for its clients.

Of course, these commercials don’t tell you, “These couples paid us a lot of money to make stock trades. But we never sat down and did a comprehensive plan for their retirement. We just traded a bunch of stocks and made it sound like we knew what we were doing. Oh – and that sailboat? It’s not theirs. They’re about to blow through all their money, and will have to move in with their daughter, who they don’t really get along with, but that’s life!”

The bitter truth is: Because of their business model – being paid per trade – brokers are simply not good stewards of a client’s money. They are stock traders. Not investors.

But any time a client realizes that fee-only asset management is not the same as paying a broker per trade, she sees that she has likely forgone some opportunity to grow her account in the past.

The good news, though, is that once someone understands the difference between a broker and a fee-only financial planner – or even between a broker and a fee-only asset manager – she sees the potential for better stewardship of her money.

Image by faith goble

Are You Smarter Than A Squirrel?


There’s a TV game show called “Are You Smarter Than a 5th Grader?” But I think there’s an even more relevant question, one that  pertains to personal finance.

Are you smarter than a squirrel?

Sure, they’re just bushy-tailed, tree-climbing rodents.

But there’s an important, life-saving action they instinctively take, that people can’t seem to get the hang of. Ever heard that term “squirreling away?” It’s an old-school phrase, and it means to stash away food for the winter.

 

For people, it means stashing away funds for a rainy day.

I thought of that phrase the other day, when I heard a story about an acquaintance who, with her husband, owned a huge house with pool and guest quarters. They bought the house when the economy was stronger; they were in an industry that benefits from boom times.

They outfitted the house with all the latest and greatest designer décor.  My friend quit her job, so they were financing it on one income.

You already know where this is headed, don’t you?

The gravy train came to a halt. The house is gone, the goodies, too. In fact, the couple broke up, due in part to financial stress.

The money was rolling in, and they spent it all. They didn’t grasp the concept so familiar to Rocky and all his squirrel brethren: Stash away some of your treasure. There could well be a day when you need it. That’s a basic personal finance tenet.

But most of us have seen this sad story play out dozens of times.  We like our stuff. I understand that. I’m an American; I like my stuff, too.

But the accumulation of stuff can hurt us, if we don’t also set some aside for that inevitable cold or rainy weather. The squirrels are smart enough to know this intuitively. We can learn something from them.

 Photo by likeaduck