Viewing entries tagged
risk

The Ostrich Problem

"After all, it feels good to keep moving, and who wants the frustration of discovering that they've actually been driving in the wrong direction...?

The snippet above is from an article at 99u.com by Christian Jarrett on "The Ostrich Problem" and The Danger of Not Tracking Your Progress.  If you read the article you'll find a certain reference in there to yourself somewhere and it not to yourself most certainly to someone you love, or know well. (the fact that you don't recognize yourself is another ostrich problem.)

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Now, I know that finance is my job and I tend to focus on it in most of the blogs I write so It shouldn't come as a surprise that I'm going to do it again. 

So, let's think for a moment about all the problems that the Ostrich Problem creates in the realm of personal finance and to help us all out, I'll list the ones that quickly come to mind; 

  • Bad investments
  • Bad insurance programs
  • Bad estate plans
  • Not having enough money for a goal
  • Not having enough money to retire
  • Not having enough money to stay retired
  • Leaving your heirs worse off than you'd ever imagined
  • Bad portfolio design

Ok, there's a few. 

Most of these maladies are caused by the simple fact that as humans; we avoid feedback loops that confirm the negative fears that we have. Like a plague we avoid them. And, this is what really compounds the bad decision.  I mean really, it isn't that we're somehow going to stop making bad choices but it's when we ignore them after we've made them that the damage starts to spread in an almost unworldly way. 

"The temporary pain of negative feedback is nothing compared with the crushing experience of project failure......."

Another snippet from Christian that rings so absolutely true. 

Risk in investing is and likely always won't be defined by market volatility. 

Risk in investing is the probability of not having the money you need when you need it. Think, daughter's wedding, kids college and worst of all, retirement. The problem with getting off course and not knowing it is that we have then no ability to initiate interim course corrections. 

I think that Christian might have it just right at the close of his article....

It's ok that you haven't been checking, now forgive yourself and start checking. 

One of the true benefits of planning lies not so much in it's ability to anticipate the future as it does in it's innate ability to quantify the present. 

The New York City Marathon and Your Investment Portfolio

Without one, there's no other. 

Without one, there's no other. 

You can tell when there's a lot of misinformation when it could be a monthly blog topic and you'd never have to devise another one to write about again. 

As the markets start to improve, the flood of "the next bad news" has been surplanted by "the next best thing you can do." And, that's what the financial periodicals and websites are starting to spew out. There's all sorts of recommendations, buy high-dividend paying stocks (isn't it odd that right when tax rates are poised to increase that there'd be a recommendation to buy stocks who generate taxable distributions?) or go for "yield" to keep your income up (better known as the "straight-jacekt approach, it never works) or get entirely out of bonds and cash and put everything you own into stocks because "now is the time."

Every year, thousands of people run the New York City Marathon. Probably less than 1% of them are running it to win it. Everyone else, God bless them, is out there for some other much more personal reason, and that's exactly my point. 

The financial media (and way too many investors for that matter) come to a common worldview that what every investor is doing or must do, is to attempt to make as much money as they can at every turn of the market, irrespective of goals, timing to reach those goals or perhaps more importantly, the risk involved. Just like the marathon, most investors should be basing their investment decisions on more personal matters such as their lives, their financial security and their willingness to accept risk. Not on maximizing the return on their money at any cost. 

And, thankfully, most of the people that run the marathon with no hope to win it, still plan on winning. But they want to win something less newsworthy, but equally as valuable, their own progress in their heads and hearts. 

Winning takes on many forms. Losing money takes on one. When it's gone, it's gone no matter what the race may have felt like at the beginning. So why not focus on your goals not someone elses. 

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How To Keep Your Emotions From Costing You Money

Success is often the result of a culmination of all the decisions that you make. Improving your decision making will your results. There's an almost endless search to improve our decision making, especially when it comes to money, most notably, our decisions about our investments. 

Almost every emotion can cause us financial trouble. Control the emotions, and you can get a better hold on your finances. 

Almost every emotion can cause us financial trouble. Control the emotions, and you can get a better hold on your finances. 

Can you learn to make better investment decisions? There are some keys to making better investment decisions that you can learn. They require awareness, discipline and practice. Here are 5 concepts you should be aware of that you can focus on to improve your overall decision making: 

1. Tomorrow will not be the same as today- in the world of behavioral economics this is known as recency bias. We tend to make our decisions based on the latest available set of information we have at our disposal. The world is a constantly evolving place, and then by default, today's information won't be tomorrow's information. 

How might this affect you as an investor? Don't base any of your long-term decisions on "good" or bad" news about a company or an industry based on today's headlines. That makes it an emotional decision. Stay focused on your long-term thinking and strategies. The ability to stay-the-course will keep you from the perils of both over exuberance and overt pessimism. 

2. Use short-term goals to achieve long-term results- we'd all benefit if we could focus more on the things that we need to do to improve our situation and less on how our investment returns are doing. Being consistent, or even better, making small improvement in the things that we can control, such as savings and spending, will be at least equally as important as how your investments are performing. 

3. This time is just like last time- in a rush to find answers we often link events that have no real reationship to each other and then we draw the wrong conclusions, leading to poor decisions. The 2008-2009 market and the 1987 market downturn is an example. While certainly there were things about each of these times (like they went down a lot and you were scared) that were similar, there was really almost nothing similar beyond that as it related to the overall market conditions. Many investors decided to "get out" of the market, thereby selling low; and then jumping back in after the market had recovered which meant that they were buying high. 

4. Believing that you can pick winners- over-confidence in our own abilities often leads us to believe that we can pick winning investments, be it stocks or funds. History shows that we can't pick enough winners enough of the time to craft a winning long-term strategy. Building an investment portfolio is like building a business team, a sports team or any other high performance group; go for consistency across the board and let your heroes/winners rise to the top from amongst a group of high quality, well informed choices. 

5. Unlinking Risk and Return- we almost always lose sight of the inexorable link between risk and return. On average, we want our investments to earn more money than the risk we're taking to own them. Wouldn't it be great if we could find investments that had the potential to earn 10% but would never go down in value? Well the reality is that risk and return go hand-in-hand so expect that there'll be volatile times and don't over react to the inevitable down turns that come when you're building a portfolio for long-term growth.

Sound decision making in investing comes down to a host of things that only partly have to do with your investments themselves. Success is based on the decisions you make as much as anything else. Make sure that your decisions aren't clouded by the emotional issues related to the five concepts I covered today. Base your investment decisions instead on long-term strategic objectives and a prudent financial plan.