If you invest your money, you have to deal with stress. You ask yourself, “Is this the best place to invest?” and you ask yourself this question often.
Besides family and health, there aren’t many things more important to you than your money. I know it. You know it. We might as well admit it. This creates financial stress and makes it harder to make smart financial decisions.
But if you want to invest wisely, you have to cure your investment management stress and anxiety. The way to do that is to know and accept yourself completely and live with the consequences of your decisions – good and bad.
Let me clarify this by way of a few examples.
Dean is a risk-taker. He created a financial plan and decided to put all of his money into real estate. He really cleaned up (for awhile). But Dean always knew he was taking a risk. He knew that he’d either make or lose quite a bit of money, and he was comfortable with those risks.
He wasn’t the kind of investor who believed that “real estate always goes up in value.” Not surprisingly, over the last 3 years, a lot of Dean’s fortune has turned to dreck – which is a sophisticated financial term for… Uh… Turned sour.
You’d expect Dean to be upset. Well, he’s certainly not happy about what has happened, but this turn of events hasn’t turned Dean catatonic. He’s a risk taker, and he’s willing to accept the consequences. Dean is in the minority of investors who are really willing to take the good with the bad. How many people do you know who would be OK with this turn of events? Not many I’m sure.
Marge is very risk averse. She has never been willing to take risks. She’s kept her money in the bank. She never complained when her friends were making big bucks in the market. She knows herself and invested accordingly. Again, Marge is a rare person.
In other cases, some folks follow a systematic approach to investing and understand that at times they’ll do well, and at other times they won’t. They accept who they are, the choices they make, and the reasonable results of their actions.
I have no problem with any of these approaches.
But people run into trouble when they become “risk averse” when the market is weak and “aggressive” when the market is strong. This can be an acute problem if you are currently retired.
As I write this post, the markets seem to be turning. My experience tells me that this can be a very dangerous posture to take. Don’t get me wrong, I completely understand why people want to do this. Its just that the results are rarely good.
Why do folks fall into this trap?
I believe it relates to powerlessness. No, I’m not talking about being powerless over the market. I’m talking about being powerless over our own emotions.
It’s easy to say “I’ll ride it out, ” but it’s tough to actually do it when you are looking at big red numbers on a daily basis. It can also be hard if you have a strategy that directs you to ease up on your equity investments (and you do so) while everyone around you is making big bucks.
I’ve studied many investors who were wildly successful. I found that quite often, the method they use to invest under-performs for years. Sometimes they under-perform for three years straight. Do you know how difficult it is to stick to something that keeps doing poorly for 36 straight months? Not easy.
Your emotions will color and skew your investment decisions – especially if you are saving money for retirement. The best way to make sure you don’t follow your emotions is to acknowledge them first and then reinforce the need to stick to your plan. Go over the results of what happened to you in the past when you left the path. Hopefully, that will be enough to get you back on the straight and narrow.
So here’s my question…
If you are a person who made big changes to your portfolio over the last several months, are you OK with sticking to a more aggressive approach from here on out? Or do you expect to become more conservative if the markets turn south? If that’s the case, how will you know when to do it? Will you stick to your investment strategy no matter what? If not, how do you know it’s the right time to make a shift?
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Not really digging the stock market game. I’m using a special tax advantaged dividend paying product. I don’t get stressed out anymore.
I think the only way to really know is to try. I started investing right before the financial crisis, just early enough to have some skin in the game. At my lowest point the whole portfolio was down around 50 percent. What surprised me was that I didn’t care! I kept on investing, a little more each month, watching the red pile up. Now I’m looking at almost 100 percent return after the bounce back. I think that shows the power of sticking to your strategy and not switching with the market turns. It also taught me that I’m pretty comfortable with paper losses. But many people are not at all comfortable there and I totally understand. I’m just saying that the only way to really know is to try. If you start losing sleep at 10 percent swings, then the stock market probably isn’t for you.
Carol) You are debt free (including no mortgage) at 33. You have absolutely nothing to be stressed about, financially anyway.
If ‘investments’ aren’t your thing, then forget about them. You have been ‘investing’ in yourself by paying off that debt and stashing 2-years of income away.
You can continue to ‘invest’ in yourself by starting a business or some other venture that will give you income for life: that is where real wealth comes from. If you don’t have ideas for your own business(es) THEN invest in the stock market (which is just investing in someone else’s business/ideas).
Congratulations on a very major accomplishment!
Thanks, BG!
I told my husband the other day that the reason I was procrastinating on the extra investing was b/c I still wanted to “bask” in the excitement that we were 100% debt free with about 2 years worth of living expenses saved (our expenses are very low without a mortgage, and the savings account, while meager, earns 3.3%).
But it’s been 6 months since we paid off the house. I know I can’t sit around, “basking,” much longer. But this blog post hit the nail on the head…investing is stressful, for me anyway.
#3 Carol and #6 Courtney: It is the people who are planning on 10+% returns to justify their low levels of saving that I’m worried about.
I think Carol will do just fine (by planning for low returns as a pessimist would) and be very comfortably safe if the real returns turn out to be greater that what was expected.
@ Courtney (#6)
hahah…no, I’m not your mom. I’m not the mom of anyone (unless you count my dogs). I’m 33 and so is my husband. I know it should be easier to take on a bit of risk. It’s just a mental thing. Thanks for the advice. 🙂
I recently sold all of my individual stock holdings this month and picked three ETF’s for my 2011 investments.
I have made money on every stock I had held onto since 2007 and felt that with the market continuing to go up I needed to realize my gains and set my goals for the next 5 years as opposed to the next few months.
I know that I have probably left some money on the table, but I am not going to allow myself to lose more than 7% again on an individual stock, let alone 49% the biggest lose I realized.
I don’t believe in the latest rally, to many people are focusing on the DOW hitting 12,000 and not focusing on fundamentals. I believe an ETF can provide me more security than a few individual shares which can flux with the whims of people reacting to earning reports.
I changed my portfolio in December, 2010 to be more aggressive. I expect to stick with it for at least a year or less, if the market changes. Over the next 5-6 years, I plan on increasing my dividend paying portion of m portfolio.
The most significant change that I made in the last several months was to get out of bonds entirely. I simply felt rates had bottomed out when the Fed kept taking actions with respect to the economy and yet rates moved very little. And I am very relieved this is the case because bonds are going to get hammered if inflation spikes (a very real risk in my opinion). So where do I turn for a safe haven as far as interest bearing investments are concerned? Money market accounts. Safe, liquid, and the interest floats.
#3 – Mom??
Sorry, my mom’s name is Carol and she’s also extremely risk adverse 🙂 I don’t have a lot of advice but I wish someone did, because I’m worried the burden will fall on me to take care of her if/when she can’t afford to take care of herself.
My only suggestion for you would be inflation protected securities (TIPS) which would cover your fears about currency devaluation, since they are pegged with inflation. You don’t say how old you are, but the longer your time horizon, the easier it is to take on risk because you have more time to save, and to recover from market drops.
My first entry into investing was May, 2008. I opened an E-trade account and bought 8k$ worth of CAT. then, the next day, the economy collapsed. The stock price was shedding 5% a day almost. Instead of pulling my money out, I scoured all cash accounts I had to invest more money into CAT. I brought the cost basis down to about 60% before I ran out of money to invest, since then I’ve left it alone. CAT continued to pay a dividend every quarter and that return was way more then I could get at a bank or anywhere.
2 years later I’m up 68%. (still holding it)
Is that very risky? It’s construction and mining machinery, the price drop had very little to do with CAT itself.
I will stick with my strategy no matter what. I’m currently in mostly low P/E, high dividend stocks – but no REIT’s.
I like Buffet’s view on risk, which is that if you understand the company and the investment, and it’s a great deal with very limited downside – there is no risk. So, in that sense, I’m very risk-averse. I don’t invest in anything I don’t understand and feel very good about.
I’m VERY risk averse. It’s debilitating to my investing. I’m excellent at paying down debt and saving. Basically, I’m very good at hoarding my money. (We had no other debt but our mortgage, but we paid that off 6 months ago.) I never buy what I can’t afford and often don’t buy what I really want b/c I can’t justify the expense. But I’m terrified of investing and losing (losing is key). I’m a doomsday pessimist. I’m sure I’ll lose money. Currently, our only form of investing/retirement is our 401k. We contribute up to the company match, but we could contribute to the maximum allowed by the IRS. But I’m scared. If I weren’t convinced the FED were purposely devaluing the dollar and/or that I’d get robbed, I’d stuff all my money under my mattress. *sigh* I just don’t know what to do so I do nothing. But I know I should do something. And it stresses me out.
If I could summarize this piece, it would be to learn “to be comfortable in your own skin.” Dean & Marge don’t swayed by what the herd is doing.
My investment stress came because I didn’t have much to invest, then all of a sudden I did, through bereavement. What astonished me was how many people had opinions they would freely share, even after expressing a bit of anger about the lack of consideration the sensitivity of context. Now a few years on, what has helped my investment stress is to come up with my own plan, using general resources out there, understand why I made my decisions and when I should review them. Then keep most of it quiet, outside the herd’s earshot, less someone tries to share how I should improve it.
I changed my portfolio recently, and it is now less risky. I also increased my contributions.
The more you save, the less risk you need to take.