Why We Don't Rebalance

For investors, the $1 million question is, "Why don't all of us rebalance?" according to Jason Hsu, chief investment officer at Newport each, California-based Research Affiliates.
In Research Affiliates' July newsletter Hsu says research shows the long-term benefit of rebalancing, yet anecdotal evidence suggests that most investors don't rebalance their portfolios-that is, buy assets that have become cheap and sell assets that have become expensive.  In fact, many investors do the exact opposite.

The reason it's so hard for investors to rebalance, says Hsu, is less about "behavioral mistakes" and more about "the fact that 'rational' individuals care more about other things than simply maximizing investment returns.  Perfectly rational individuals exhibit changing risk aversion that makes it hard for them to rebalance into high-return assets that have had steep price declines,"he says.  "An unwillingness to buy low and sell high is not characteristic of just retail investors unaware of the finance literature and market history, but also sophisticated institutional investors advised by investment consultants and academics who are also prone to the same behavior."

Hsu says financial research shows that asset classes exhibit long-horizon price mean-reversion.  So when an asset class falls in price, resulting in a more attractive valuation level relative to history, it's more likely to experience high subsequent returns.  For example, when the S&P Index falls in price, its dividend yield increases; empirically the subsequent five-year return on the S&P tends to be significantly above average.

Similarly, when corporate bond prices fall as credit spreads blow out, the forward return on corporate bonds increases, says Hsu.  Price mean reversion in asset returns suggests that a disciplined rebalancing approach in asset allocation that responds to changing valuation levels would improve portfolio returns in the long run.So, if "buy low and sell high" works so well, why don't we investors rebalance?  Hsu says research suggests that investors become more risk averse and unwilling to add risk to their portfolios despite lower prices when their portfolio wealth declines.  Investors tend to become more risk seeking and, therefore, more willing to speculated even when their portfolio wealth increases.

In bear markets when personal income and wealth is declining, any further loss in portfolio value could reduce the household's quality of life and retirement planning, he says.  Investors become more risk averse and unlikely to want to take on more investment risk, even when assets are attractively priced, he adds.

If the $1 million question is "Why don't investors rebalance?" Hsu adds, then the $5 million question is "Should you rebalance?'  Statistically, he says you're likely to outperform in the long run if you rebalance in response to major price movements.  However, when you buy risky assets during economic distress, Hsu says, there's a strong chance your portfolio may post a greater decline than if you didn't rebalance, so things won't look so rosy in the short run.  That's why rebalancing takes such discipline.  In spite of the benefits of rebalancing, our changing risk aversion make us poor stewards for managing long-term returns.



 

5 bad investment ideas-and how to avoid them

Do your best to side step these financial pitfalls:

1. Driving while looking in the rear view mirror.

What's one of the top methods of choosing your 401k investments?  It's simple.  You look at the different funds and you select the ones that have increased the most in the last year.  That small cap fund looked great when it was up 27% in 2010.  The problem is that once you piled your retirement savings into it, it was down 8% in 2011 when the broader market was flat.

In fact, your tendency should be to purchase asset classes that have gone down and sell those that have increased in value.  Rebalancing every year can give you superior returns.

2. Ignoring investment costs.

Most investors don't have a clue about investment costs, yet it is the best predictor for future investment performance.  Think of expenses as a moving walkway in the airport, except in this case you're the little kid running down the walkway going against you.  The higher your investment fees, the faster that walkway races against you in your journey to financial independence.

Investment cost for mutual funds can be easily found on morningstar.com or from the fund company itself.  More insidious are the expenses and tax impact of the fund buying and selling a big portion of its portfolio each year.  Look at the fund turnover ratio to keep these costs down.

3. Letting investment inertia take over.

Inertia can keep you overly static or kinetic in your investment approach.  Sure signs of an ossified portfolio are having three 401k plans in place from current and former employers.  Letting your investments ride for two years or more without a thought means that you are giving up one of the most valuable investment strategies:  regular rebalancing.

On the other hand, hyper focus on your portfolio performance can transform you into a twitchy smart phone trader.  Twitchy rarely wins the investment race.

4. Letting the tax tail wag the investment dog.

Income taxes are on the mind of most of us in April, but there are times when too much focus on taxes can drive poor investment decision.  An example of this is when to exercise stock options. 

From a tax perspective, it makes a lot of sense to exercise options and hold stock long enough to qualify for long-term capital gains.  Paying 15 % tax on your profit instead of 25% or worse sounds like a no brainer.

But, if your stock loses share value, you could end up owing taxes on profits you never even receive.  The primary issue to consider should be the wisdom of a concentrated investment in one company, rather than the tax impacts.

Many investors purchase variable annuities and cash value life insurance policies for their purported tax benefits.  Unfortunately, these investments often have annual expenses that exceed 2 %.  That can wipe out any tax benefits, which could have been oversold in the first place.

5. Equating complexity to a desirable investment.

As we build up our net worth, there's a natural movement toward more "sophisticated" investments.  This could take the form of a hedge fund, private Real Estate Investment Trusts, limited partnerships, and private equity funds.  As a whole, these investments have a better track record of making money for the managers than the investors.

Many of these funds have fees of 2% annually plus 20% of investor profit.  You need to hire an outstanding fund manager to overcome those fees.  The odds are not in your favor.

Happy investing!
Randy Moore, CFP(r), CRC(r)

Writing an investment policy statement

Once we have a financial goal identified and a time frame for meeting that financial goal, then it is time to put down in plain English the specific plan we will undertake to go about meeting that goal.  This will involve writing an investment policy statement.  All big financial institutions, such as bank investment departments and mutual funds do this and their investment policy statements are usually several pages in length.  They use their investment policy statements to set down the "rules of engagement" whereby they will invest their customers' money. Of course, our investment policy statements will be much simpler because we are investing only for ourselves. We just want to get down in writing a plan that will guide our actions in meeting a financial goal.  This statement will also be a reminder to us as time goes by just how we should be investing so that we don't get off track.  In a word, it provides us with the discipline that we need so that we will not let our emotions dictate our actions when the going gets rough. 

And believe you me, the going can get very rough!  The market meltdown of 2008 is a very recent example of just how rough the going can get.  Losses in investment portfolios of 30% to 50% were not uncommon and a lot of the selling of stocks were by folks who were flat out scared to death that their investments would be worthless.  So a lot of people did just the opposite of what we know we should do.  They bought high and sold low, which is always a guaranteed loss.  Had those who panicked held on to their stocks they would have largely regained their losses the very next year as the stock market made a stunning comeback from the previous record lows.  Even today, some people are so fearful that they have permanently vowed never to invest in stocks again.  And that is o.k. if your aversion to risk is so great that you can't sleep at night worrying about your stock investments.  Just realize that if you are one of those who have given up on stocks, that your investment options to achieve your financial goals will be significantly reduced.  Stocks will continue to provide the best choice to keep pace with inflation and provide a sufficient return to help us achieve our financial goals, in my opinion.

Your odds of achieving your financials goals will be greatly enhanced if you have a well-thought out written plan to follow.  So with that in mind, let's look at how we can get our investment policy statement down on paper.  Let's use a fictitious married couple in our example of developing an investment policy statement.  Meet Joe and Liz Simpson (no kin to Homer and Marge).  Joe is 35, Liz is 33.  They want to begin an  investment program to provide funds sufficient for retirement income when Joe turns 65. They both work and have 401(k)s at their workplace, but they want to have a separate investment portfolio apart from work to supplement their 401(k)s. 

• Step 1-  State your financial goal.  In the case of the Simpsons, this could be stated as:  Save to provide sufficient funds for retirement in 30 years.  So we have the goal and the time frame stated simply.  We have a long term time horizon in which to invest, so stocks could definitely be an option for investing.
• Step 2- The first step provides the "why" we are investing part, so the next steps will determine the "how" part of the equation.  In step two, we determine that since this is a long term retirement goal, we can take advantage of one to the tax advantaged retirement programs.  In the case of the Simpsons, they decide that they would like to contribute to a Roth IRA.  This would complement their participation in their 401(k)s at their workplaces.  The contributions to the 401(k)s provide them with tax deferral and they get a tax deduction right off the top because they don't pay taxes on the money that they contribute.  On the other hand, the Roth IRA doesn't provide the upfront tax deduction but the earnings in the account are not taxed as in the traditional IRA or a 401(k).  In addition, distributions from the Roth IRA are not taxed, whereas the distributions that are eventually taken from the 401(k) are taxed at the participant's income tax rate at the time of the distributions.  So, to get to the point, the Simpsons decide that each will contribute $5,000 to their respective Roth IRA accounts each year, which is the maximum for the year 2010.  So far, our investment statement reads:  We will undertake an investment program to supplement our 401(k) savings so that we will have sufficient funds to provide income in retirement starting in 30 years by each contributing $5,000 annually into a Roth IRA.  Please note that we haven't gone into specifics as to what dollar figure that we are talking about.  That is, just how much money are the Simpsons going to need at retirement.  For purposes of illustrating the concept of an investment policy statement, we are not going to get into specific figures.  For one thing, the computation of a specific figure requires us to make a lot of assumptions about such things as inflation rates and rates of returns on different asset classes.  It also requires a lot of number crunching that is best left to a trusted adviser to help you out with.  He or she will have the necessary knowledge and the necessary tools, such as sophisticated computer software programs, to help you arrive at a specific figure.  To keep our illustration simple, we will simply state that the Simpsons
• Step 3- Decide on which types of investments to have inside the Roth IRA.  Government regulations allow all sort of investments inside an IRA.  For our purposes, we are only going to consider the 3 most common types:  stocks, bonds, and cash.  This is to keep our example simple and also because stocks and bonds will most likely be the major part of any long term investment.  The Simpsons decide that they are going to invest their IRAs in mutual funds.  This is, in my opinion, a wise decision on their part because with mutual funds you can get instant diversification.  The proper mutual funds will provide you with diversification by allowing you to own the stocks and/or bonds of a hundred or more companies with your initial investment.  Buying individual stocks and bonds is out of the reach of most investors just starting out and it takes an awful lot of expertise not to mention time and energy to make the specific selections.  
• Step 4- Determine the percentages of  stocks and bonds inside the Roth IRA.  In general, the more stocks inside an investment, the riskier the investment is going to be.  But their is a trade off between risk and return, because if you invest too conservatively, that is stick mostly to bonds,  the rate of return we can expect will likely be reduced.  What we want is what is known in investment parlance as "the optimal portfolio", that is, one in which we can get sufficient return to meet our investment objectives but will still allow us to sleep at night.  This involves determining your "risk tolerance" which is just a fancy term for assessing your ability to cope with failing to achieve your target rate of return, and yes, most of all to tolerate losses in your portfolio.  There are currently a number of risk tolerance questionnaires to help you determine your risk tolerance and you can take them to see how you score, but the best advice I can give you here is to always take as little risk as you can to achieve your investment objectives.  In our example, the Simpsons have 30 years over which they can invest, but I would recommend to them to still have only about  60% to 70% allocated to stocks.  This percentage should decrease as time goes on and this points out the fact that any investment statement policy that you come up with should be reviewed at least annually to make needed adjustments in your portfolio.  So far, the Simpsons investment policy statement reads:  We will undertake an investment program to supplement our 401(k) savings so that we will have sufficient funds to provide income in retirement in 30 years by each contributing $5,000 annually into a Roth IRA.  Our IRA investments will be in diversified mutual funds with a 70% stock allocation and a 30% bond allocation. 
• Step 5- Select the specific mutual funds.  In the case of the Simpsons, since I am going to pretend to be their investment advisor, I am setting them up in two mutual funds.  The stock fund will be the Vanguard Total Stock Market Index Fund and the bond fund will be the Vanguard Total Bond Market Index.  These two funds will give them a broadly diversified portfolio across the two major asset classes and will keep their investment expenses very low.  They will not be trying to pick out a particular actively managed fund that may or may not outperform the index fund (most under perform).  At the same time each year, they will rebalance the percentages inside the IRAs so that they maintain their desired percentage.  For example, if stocks have a good year so that the money inside the IRA is now invested in 65% stocks and 35% bonds, then at rebalancing time, they would sell 5% of your stock mutual fund shares and buy shares of the bond mutual fund to bring the balance back to 60/40.  It's that simple.

We now have the Simpson's investment statement policy:  We will undertake an investment program to supplement our 401(k) savings so that we will have sufficient funds to provide income in retirement in 30 years by each contributing $5,000 annually to a Roth IRA.  The money contributed to our IRAs will be invested such that 60% will be invested  in the Vanguard Total Stock Market Index Fund and 40% will be invested in the Vanguard Total Bond Market Index Fund.  This stock/bond percentage will be maintained by rebalancing annually.  (Note: If the Simpsons decide to reduce their stock percentage as they get closer to retirement, then they can take the opportunity at rebalancing time to adjust this percentage. This stock allocation reduction could be done each year or every other year, every 5 years, and so on. If they decide to do this, then this should also be stated in the investment policy statement.)

Just for information purposes, if the Simpsons follow through with their investment plan of contributing $10,000 $5,000 each) annually to their Roth IRAs, and they can get an average annual return of 8%, after 30 years they will have accumulated $1,132,832.  And they will not have to pay any taxes on this money at any time.  What a sweet deal!  Having a written plan will increase the odds that you can do just as well.

Wishing you the best,
Randy
randy@mooreadivser.com

Keep It Simple, Sweetheart- Setting Investment Goals

In my last newsletter, I promised that I would take you through the orderly steps required to establish and maintain an investment portfolio. This newsletter will consider the first step in the process : Determine your investment goals.  How are you going to get somewhere if you don't know the somewhere you're trying to get to?  I mean, would you just hop in a taxi and tell the driver, "Here's 20 bucks, just take me wherever you're going and step on it!."  That wouldn't make any sense.  The cab driver would be glad to take your money, I'm sure, but you would only get nowhere fast.  The point is, if we're going to be saving our hard-earned money and forgoing the pleasure of spending it now, we should have a well-defined goal for those savings. But setting our financial goals also does something else for us.  It determines the time frame we are looking at to accumulate the necessary funds for our goal.  This in turn help us to determine how we are going to put the money that we save to work for us, that is, how we are going to invest it.

For example, if your goal is to save $30,000 for the down payment on a new home in 5 years, you wouldn't want to invest the money in an aggressive growth stock mutual fund.  Your potential rate of return will be greater than putting your money in a bank savings account, but the risk is all out of proportion for this particular goal and time frame.  Let's say the mutual fund into which you are making your monthly deposits of $500 has the following rates of return for the 5 years:
                                                    Amount Accumulated
Year 1:  10%                               $6,600
Year 2:   25%                              15,750
Year 3:     7%                              23,272
Year 4:  -10%                             26,945 
Year 5: -15%                             $28,004

Although the fund had great returns in the first 2 years of your savings plan, the 2 lousy returns in the final 2 years has left you a little short of your goal.  That's the problem with using riskier investments for short term gaols.  If we would have instead deposited our monthly savings in a savings account or money market mutual fund earning a 1% return, we would have accumulated $30,809 with very little risk.  I will concede that a 1% return that is reflective of our current economic environment provides a pretty lousy return compared to rates on savings accounts and money market funds in the not too distant past, but we have to work with the tools currently at our disposal. 

If we have a longer time period in which we can save for a goal, for example, retirement, then a mutual fund such as an aggressive growth fund could be appropriate for a portion of our investment portfolio.  I emphasize the word portion because, no matter how young you are when you begin accumulating a retirement fund, financial planners generally recommend that you also have some less risky and non- correlated asset classes in your portfolio, such as bonds.  The point is, with a longer time frame you have time to recover from a few bad years of returns before you will need to withdraw the funds, so you can afford to take on riskier investments that potentially provide a greater return.  Since stocks have in the past 50 years or so provided a greater return than bonds, then you will want to include some stocks in your portfolio for long term investment time frames, or as they like to call it in financial planning circles, longer time horizons.

Similar goals will present different time horizons depending on our individual circumstances.  For example, if you have two children and one of them is 5 and the other is 12, you will of course have two different time horizons and therefore will need to select investments appropriate for each time horizon.  In either case, as the time for starting college approaches then you will want to increase your bond portion to decrease your risk exposure so that the funds will be available for college costs.  Another example would be retirement saving.  A 30-year old and a 50-year old person obviously have different time horizons and so the types of investments and percentages in the respective portfolios appropriate for each person would be different.

Most of us have several financial goals that we need or want to work toward so it stands to reason that we will have more than one investment portfolio. For example, one portfolio for retirement, one for college savings, one for a major purchase, and so on.  We could think of all of our investments as one portfolio and each specific goal could have its own sub-portfolio.  I know some of you are thinking that that sounds complicated and I'm preaching simplicity, but if you think of your finances in terms of goals, as you should, then it follows that different goals will require different types of investments.  Just think in terms of something that is easy to relate to....pie.  We have all seen pie charts and they are pretty easy to understand. A simple pie chart could be just 2 slices, or a pie cut in half if you, for example, have 50% of your money in bonds and 50% in stocks.  More than likely in your portfolio you'll also have other types of investments, so, for example, if you have 15% invested in a money market account, 10% in cash, 25% in bonds, and 50% in stocks, you would have a 4-slice pie with each slice proportionate in size to the percentage of each investment type.  So with multiple goals you will have several "pies", all sliced up differently and with a different set of ingredients. And hopefully, with time and the great American economy on your side, your investments will have grown to meet your goals so that by the time your pies are ready to be served up, they will be very, very filling. 

The bottom line:  Setting specific investment goals is the first step in developing a successful investment strategy. You can do it!  It's as easy as pie!

Next newsletter:  Step two in developing an investment portfolio-Writing out your investment policy statement.

Wishing you the best,
Randy
randy@mooreadviser.com

Keep it simple, sweetheart.

Our lives can get very complicated these days.  With all the high-tech gadgets and all the consumer choices we have at our command, we can get away from the simple things in life that really make life worthwhile.  Like.....spending more time with our families or getting outside and doing some low-tech activities such as walking, gardening, swimming, or playing volleyball and the like.  Most of us have well over a hundred cable channels to choose from, but, let's be honest, how many do you actually enjoy?  I know I routinely watch less than a dozen or so channels, and the choice of programs are not all that great on the ones that I do watch.  I probably watched more TV and enjoyed the programs more when I was a kid and we only had 2 channels to choose from.  (I know, I getting old.)  I guess my point is that more choices don't necessarily make for better choices.  And I think the same holds true for choices in the investment world.  Take mutual funds, for example.  The total number of mutual funds has risen from 361 in 1970 to over 8,000 today.  Are we, the investing public, any better off with the massive increase in the number of funds?  We certainly have more choices, but how to we glean from this multitude of  funds the few that will be useful in helping us reach our investment goals?  How do we separate the wheat from the chaff?  How do I go about setting up an investment portfolio of mutual funds that will allow me to accomplish my financial objectives given the current state of the economy and the high level of volatility exhibited by the stock market lately? 

I have four words of comforting advice for you:  Keep it simple, sweetheart.  (Or if you're a guy, keep it simple, stud.  How's that?  I know the standard phrase is "keep it simple, stupid" but I don't like to use the word stupid here because anyone smart enough to be reading this newsletter is definitely not stupid, in my humble opinion!) I think you will find that investing can be successful if you follow a few simple steps in the implementation of your investment plan and you stick to that plan.  Investing does not have to be complicated but it does need to be orderly and rational.  So, with that in mind, next week my newsletter will contain the first step in the orderly process of establishing an investment program.  Each week, my newsletter will take you over a different step of the process until we have covered the basics of setting up your investment portfolio. Stayed tuned. 

Sealed with a K.I.S.S.,
Randy
randy@mooreadviser.com

If I only had a brain!

If you've never seen the classic movie, "The Wizard of Oz", then please quit reading this newsletter, because you're from another planet and nothing I say here will do you any good.  You need help of a different kind.  But for you inhabitants of good old planet Earth, let me give you the last verses from the song the Scarecrow sings to Dorothy:

I would not be just a nuffin'

My head all full of stuffin'

My heart all full of pain

I would dance and be merry

Life would be a ding-a-derry

If I only had a brain

Well, I'm not sure what a ding-a-derry is but I do know we humans have a brain.  Now, just how much we use our brains is another question altogether.  Now, don't get me wrong, I'm as lazy as the next guy when it comes to thinking.  Thinking takes a lot of work.  But, think about this....since we don't all have the brains of an Einstein, doesn't it stand to reason that we should use as much of our brain power as God has blessed us with?  

For example, those of you out in the workplace, do you know exactly what your job's total employee benefits are?  Now you probably know what your hourly rate of pay is or, if you're not paid by the hour, what your weekly or monthly salary is.  But if you have a job that has any benefits at all, and most do provide some benefits, do you know what those benefits are, really?  If you don't then it's time you found out because those benefits can be very, very useful to you and your family.  The following is a list of some of the possible benefits that companies provide and a brief description of how they can be useful.  You should find out as soon as possible if your employer provides any of these benefits and take advantage of those that are available as early as you can
. 

• Health insurance- protects you and your family from catastrophic medical costs

• Life insurance- provides your beneficiaries with a lump sum or periodic payments if you die unexpectedly

• Disability insurance- provides a percentage of your pay to you if you are injured or become ill and cannot work

• Flexible Spending Plan, also known as pre-tax spending plan- allows you to set aside money tax-free to pay for certain expenses such as medical, dental, and child care

• Thrift plan- let's you set aside money into a tax-deferred account 

• Employee stock ownership plan (ESOP)- a profit sharing plan that offers you shares of company stock

• SIMPLE IRA- allows you to set aside money tax-free into a tax-deferred account for retirement; may provide an employer match up to 3% of your pay

• Qualified retirement plans- 401(k) plan or 403(b) tax sheltered annuity plan  - these plans allow you to set aside money tax-free into a tax deferred account; may also provide an employer match

The above list by no means includes all of the possible employee benefits that your employer may provide, but these are the biggies.  Some of these benefits may be provided to you without any sign-up necessary on your part and some you must fill out paperwork to get enrolled.  But by all means, find out what you are eligible for and sign up today for the plans that will benefit you.  Some may be of limited use, such as life insurance for a single person, but some are, well, a no brainer. For example, if you are eligible to contribute to a 401(k) with a 6% company match and you are not enrolled and are not contributing 6% of your pay, then you ought to have your head examined.  You might be like the Scarecrow in the "Wizard of Oz"!  Now that's a no brainer of a different color.

Hope this helps....somebody,

Randy

randy@mooreadviser.com        

We have met the enemy and he is us!

Walt Kelly penned the syndicated comic strip "Pogo" from 1948 to 1975.  In 1970 he created a poster for Earth Day showing the lovable main character, a possum named Pogo, standing in a heavily littered forest with the caption, "We have met the enemy and he is us".  Yes, we humans are sometimes our own worst enemies.  We eat too much junk food, we don't get enough exercise, we watch too much TV, we do destructive things not only to the environment, but to our relationships as well. Since I'm not Dr. Phil, I won't get into relationship issues, but as a financial planner I will go over some bad behaviors in the realm of personal finance.  So, all you bad boys and girls out there, listen up!  I'm going to give you my list of the top seven reasons why we are our own worst enemy when it comes to saving and investing to meet our financial goals.  ( I was going to make it a top ten list because that sounds better, but since I could only come up with seven, they are all going to start with the letter "P".  Hey, I had to try to impress you somehow.)

• Bad Behavior #1-  Putting off, or procrastination if you want to get all fancy.  Yes, we all do it, but this is the number one reason we don't meet our financial goals.  The sooner we get started, the easier it is to accumulate the funds we need.  But you don't need me to tell you this, you already know that.  But in case you didn't already know this, see my August 1 blog, "Start early, stay the course!"  Do it now! No putting off!
• Bad Behavior #2- Poor planning.  Even when we decide to finally start a savings and investment program, we may sabotage our good intentions if we fail to come up with a written plan of execution.  Why is this so important?  Well, we humans have a bad habit of straying from the path.  But when you write down a goal, complete with specific steps with deadlines for completion of the steps, then the goal passes from being a daydream to an actual plan.  That's right, a goal without guidelines and deadlines is just a daydream.
• Bad Behavior #3- Pessimism.  O.K., I admit it, there are a lot of reasons to be pessimistic.  About the economy, the budget deficit, the state of politics in Washington.  Heck, there are good reasons to be pessimistic about life in general.  But don't give in to the feeling. Pessimism can become so ingrained into our thoughts that it becomes a bad habit that will blind us to all the reasons to be optimistic.  And there are many more reasons to be optimistic than pessimistic when it comes to achieving your financial goals. For all its faults, we still live in the greatest country in the history of mankind, with the most innovative and robust economy in the whole world.  We can achieve our financial goals by investing our hard-earned money in the greatest companies in the world, good ole USA companies who still pay stock dividends and whose stock share prices will appreciate in value as good times return, as they most assuredly will.  Bank on it! 
• Bad Behavior #4- Panicking.  If we know anything about the stock market, we know it will go down.  This tendency for stock prices in general to go down in certain economic times is known as systematic risk.  It is why stock investing is risky.  There will be times when the economic outlook will be not so rosy.  Investors become fearful and so many of them will sell their stock shares, even at a loss. But now is not the time to panic.  If we have a well diversified portfolio with the right proportion of stocks and bonds according to our level of risk tolerance, then we should not sell simply out of fear. If fact, this is the very time that many savvy investors will buy.  We should always strive to buy low and sell high.  But when we get panicky, we will do just the opposite.  We will sell at a  lower price than it cost to get into the stock and that is a guaranteed loss. 
• Bad Behavior #5- Pain avoidance.  Hey, wait a minute. Everybody wants to avoid pain. What could possibly be wrong with pain avoidance?   Well, here I am talking about the kind of pain that's good for you.  As in weight lifting, for example.  You know the old saying, "no pain, no gain".  When it comes to saving for our financial goals, most of us are going to have to give up some things in order to be able to set aside the money to fund those goals.  In other words, we are going to have to make some sacrifices.  This doesn't mean we'll have to live like a monk, but for most of us the sacrifice would probably be good for us.  Instead of keeping up with the Joneses, we will be living within our means and we'll be keeping up our investment account balances.  To paraphrase a popular running T-shirt message, "Save hard, live easy".
• Bad Behavior #6- Performance chasing. Once we have established a written investment plan, we should stick to that plan.  If we have a properly diversified portfolio, we should be in good shape to capture the stock market gains necessary to fund our goals.  So let's be disciplined.  For example, let's say we are invested in a large cap stock mutual fund where the manager has been successful the past several years in beating the S&P 500 index.  Now let's say he has two years in a row of bad returns that don't beat the index.  Let's not sell out of the fund to invest in another fund that has had a better year just because of the short term sub-par performance of our fund .  If our current fund's manager is still operating the fund according to the guidelines in the prospectus, it should still be a solid fund based on its past performance.  Getting in and out of funds trying to capture the returns of last year's best performing fund is what's known as performance chasing.  It is a behavior guaranteed to lose money, so let's not do it.
• Bad Behavior #7- Pridefulness.  O.K., I going to use this word even though spell check doesn't like it. After all, I had to have my final "P" word. So what do I mean by "pridefulness".  We all know that there is nothing wrong with taking pride in our accomplishments.  We are rightfully proud of ourselves if we, for example, have lost weight, or learned a new skill, or have been recognized by recieving an award, and so on.  But the pridefulness I am talking about is a false pride and so we don't always recognize it in ourselves.  When it comes to investing for our financial goals, we can attribute too much of any success we have had to our own skills when the success may have just been good luck on our part.  This may give us a good case of over confidence that leads us to take unnecessary chances in our portfolio.  So, my point is, don't be too prideful to get a second opinion from someone you trust.  Don't be afraid to consult someone when you are beginning an investment plan.  It may make the difference between getting off to a good start and getting off on the wrong foot.

The bottom line is, with so much out of our control when we invest, we should try to control what is possible for us to control.  We can make up our minds to save and invest for our important goals.  We can try to control our emotions: fear, greed, feelings of pessimism, over confidence.  The fact is, the most important component in a formula for success in meeting our financial goals is self control.  If we can control our harmful saving and investing behaviors, our chance of success will increase tremendously.  Then we can amend the words of our little furry friend, Pogo, to say, "We have met the cause of our success and he is us"!

Signing off,
Randy
randy@mooreadviser.com