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Top Five Investing Articles for Individual Investors Read in 2019

09 Monday Dec 2019

Posted by in asset allocation, Average Returns, behavioral finance, beta, bond yields, confirmation bias, correlation, correlation coefficient, economics, finance theory, financial advice, Financial Advisor, financial advisor fees, financial advisory fees, financial goals, financial markets, Financial Media, Financial News, financial planning, financial services industry, gross returns, historical returns, Individual Investing, individual investors, investing, investing advice, investing information, investing tips, investment advice, investment advisory fees, investments, market timing, personal finance, portfolio, reasonable fees, reasonable fees for financial advisor, reasonable fees for investment advice, reasonable financial advisor fees, risk, risk tolerance, risks of stocks, S&P 500, S&P 500 historical returns, S&P 500 Index, speculation, standard deviation, statistics, stock market, Stock Market Returns, stock prices, stocks, time series, time series data, volatility, Warren Buffett, yield, yield curve, yield curve inversion

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As the end of 2019 looms, I wanted to share a recap of the five most viewed articles I have written over the past year.  The list is in descending order of overall views.  Additionally, I have included the top viewed article of all time on my investing blog.  Individual investors have consistently been coming back to that one article.

1. Before You Take Any Investment, Advice Consider the Source – Version 2.0

Here is a link to the article:

https://latticeworkwealth.com/2019/09/18/investment-advice-cognitive-bias/

This article discusses the fact that even financial professionals have cognitive biases, not just individual investors.  I include myself in the discussion, talk about Warren Buffett, and also give some context around financial market history to understand how and why financial professionals fall victim to these cognitive biases.

2.  How to Become a Successful Long-Term Investor – Understanding Stock Market Returns – 1 of 3

Here is a link to the article:

https://latticeworkwealth.com/2019/09/23/successful-long-term-investing/

It is paramount to remember that you need to understand at least some of the history of stock market returns prior to investing one dollar in stocks.  Without that understanding, you unknowingly set yourself up for constant failure throughout your investing career.

3.  How to Become a Successful Long-Term Investor – Understanding Risk – 2 of 3

Here is a link to the article:

https://latticeworkwealth.com/2019/09/25/successful-long-term-investor-risk/

This second article in the series talks about how to assess your risk for stocks by incorporating what the past history of stock market returns has been.  If you know about the past, you can better prepare yourself for the future and develop a more accurate risk tolerance that will guide you to investing in the proper portfolios of stocks, bonds, cash, and other assets.

4.  Breakthrough Drugs, Anecdotes, and Statistics – Statistics and Time Series Data – 2 of 3

Here is a link to the article:

https://latticeworkwealth.com/2019/11/20/breakthrough-drugs-statistics-and-anecdotes-time-series-statistics/

I go into detail, without getting too granular and focusing on math, about why statistics and time series data can be misused by even financial market professionals.  Additionally, you need to be aware of some of the presentations, articles, and comments that financial professionals use.  If they make these errors, you will be able to take their comments “with a grain of salt”.

5.  Breakthrough Drugs, Anecdotes, and Statistics – Introduction – 1 of 3

Here is a link to the article:

https://latticeworkwealth.com/2019/11/11/breakthrough-drugs-statistics-and-anecdotes-investing/

I kick off this important discussion about the misleading and/or misuse of statistics by the financial media sometimes with an example of the testing done on new drugs.  Once you understand why the FDA includes so many people in its drug trials, you can utilize that thought process when you are bombarded with information from the print and television financial media.  Oftentimes, the statistics cited are truly just anecdotal and offer you absolutely no guidance on how to invest.

                                       Top of All Time

Are Your Financial Advisor’s Fees Reasonable?  Here is a Unique Way to Look at What Clients Pay For

Here is a link to the article:

https://latticeworkwealth.com/2013/08/07/are-your-financial-advisors-fees-reasonable-here-is-a-unique-way-to-look-at-what-clients-pay-for/

This article gets the most views and is quite possibly the most controversial.  Individual investors compliment me on its contents while Financial Advisors have lots of complaints.  Keep in mind that my overall goal with this investing blog is to provide individual investors with information that can be used.  Many times though, the information is something that some in the financial industry would rather not talk about.

The basic premise is to remember that, when it comes to investing fees, you need to start with the realization that you have the money going into your investment portfolio to begin with.  Your first option would be to simply keep it in a checking or savings account.  It is very common to be charged a financial advisory fee based upon the total amount in your brokerage account and the most common is 1%.  For example, if you have $250,000 in all, your annual fee would be $2,500 ($250,000 * 1%).

But at the end of the day, the value provided by your investment advisory is how much your brokerage account will grow in the absence of what you can already do yourself.  Essentially you divide your fee by the increase in your brokerage account that year.  Going back to the same example, if your account increases by $20,000 during the year, your actual annual fee based upon the value of the advice you receive is 12.5% ($2,500 divided by $20,000).  And yes, this way of looking at investing fees is unique and doesn’t always sit well with some financial professionals.

In summary and in reference to the entire list, I hope you enjoy this list of articles from the past year.  If you have any investing topics that would be beneficial to cover in 2020, please feel free to leave the suggestions in the comments.

Breakthrough Drugs, Statistics, and Anecdotes: Three Things Every Individual Investor Needs to Know – Part 1 of 3

11 Monday Nov 2019

Posted by in asset allocation, Education, financial advice, financial goals, financial markets, Financial Media, Financial News, financial planning, financial services industry, investing, investing advice, investing information, investing tips, investment advice, investments, math, personal finance, portfolio, S&P 500, S&P 500 Index, statistics, time series, time series data

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Although the title might appear to be random at first glance, I promise that there is an underlying theme.  This article is the first in a three-part series that will discuss how individual investors are bombarded with information about what happens in the financial market.  Most of the time you might hear that, 5 out of the last 7 times “x” happened, the S&P 500 index went up by 10% or more.  I will argue that most of these types of comments might be useful trivia for the television show, Jeopardy; however, they should not impact your long-term investment plan.

So, why did I use breakthrough drugs?  Prior to any drug coming to the marketplace, the FDA does a very thorough review of the test results to ensure that the drug is safe and also its efficacy is not overstated.  What if I told you that a pharmaceutical firm came up with a possible cure for lung cancer, and there were successful trials of 10 individuals.  Does that sound like a group too small to draw any conclusions?  Would you take a drug that the testing was only done on a handful of people?  Now the FDA would never allow such a thing, and there are tons of protocols and blind or double-blind randomized testing of many individuals.  It just sounds weird if only 10 people were tested, and there was also no control group (i.e. a separate group given a placebo).

While the drug example seems a bit outrageous and contrived, I bet you can think of similar examples in the daily financial press (e.g. financial television or print media).  Whenever you hear a small number of events happening that “tend to” lead to certain financial market outcomes, you should be extremely wary.  For instance, I just heard today that, after the Singles Day huge ecommerce sale by Alibaba, the stock (Ticker Symbol:  BABA) is up 80% of the time over the course of the next two weeks.  Well, when did Alibaba start Singles Day?  The first Singles Day sale was in 2009.  Therefore, we have 10 data points to work with (2009 to 2018).  Given the information I referred to above, the comment made today simply says that the stock has been up after two weeks 8 out of the last 10 years.  Now I will try to hold in my red flags and bit of ludicrous thoughts, this type of information is not informative at all.  There are just too few observations to draw any sort of valid conclusion.

Here is the plan of attack for the next two articles.  The second part of this discussion will focus on statistics.  Yes, I know this topic is not too much fun and can get complicated very quickly.  However, individual investors need to know a bit about statistics to recognize when a quantitative quote is totally useless.  We will not get too granular though, I promise.  Essentially most financial market data is time series data.  Different rules apply in that case, and these rules are broken all the time by even the most sophisticated professional investors and commentators.  The third part of this discussion will be an in-depth examination of an actual event that grounds my argument in recent events.  I will examine what is called the inversion of the yield curve and how it normally portends a recession for the U.S. economy.  Don’t worry; I am going to explain those terms when the third part of this series rolls around.

Please join me in a critical review of all the financial market and economic data you get bombarded with.  So much of it is just “noise” or simply interesting trivia at best.  Note that the interesting trivia cannot guide or inform your particular asset allocation of investments.  As always, if you have questions along the way, please feel free to comment on this or any other article.

What is Confirmation Bias? Why is it Dangerous for Individual Investors?

26 Wednesday Apr 2017

Posted by in active versus passive debate, behavioral finance, confirmation bias, Emotional Intelligence, EQ, finance, finance theory, financial advice, financial markets, Financial Media, Financial News, financial planning, Individual Investing, individual investors, investing, investing advice, investing information, investing tips, investment advice, investments, passive investing, personal finance, stock market, stocks

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There are many dangers for individual investors to be aware of when investing.  More and more of these dangers and/or complications are being recognized in the field of behavioral finance.  Behavioral finance looks at the psychological and emotional factors that influence the decision-making process of investors.  Oftentimes researchers in this field try to figure out what causes normally rational people to act irrationally.  Unfortunately, it has proven over and over again that, when money is involved, the vast majority of people let their emotions/feelings interfere with their investment decision either slightly or in profound ways.  We do these things without even knowing it which makes it even harder to address and correct.  Keep in mind that Warren Buffett says that having control of one’s emotions is just as important (or even more so) than having a superior intellect that can select excellent, long-term investments.

Confirmation bias belongs in the realm of behavioral finance, but, as many of these issues, it really first has been examined in terms of psychology.  So, what is confirmation bias exactly?  The definition of confirmation bias is “the tendency to search for, interpret, favor, and recall information in a way that confirms one’s preexisting beliefs or hypotheses” (Plous, Scott (1993). The Psychology of Judgment and Decision Making. p. 233).  Keeping in mind that confirmation bias applies to many other areas, the primary focus in the remainder of this article will be how it manifests itself in relation to investing.  Now that we have the formal definition, let’s take a look deeper into this very real danger for individual investors.

Individual investors have the natural inclination to make a decision first and then look for information that supports that initial decision.  It also applies at an even higher level than that.  The way that individual investors think they should invest in general is almost predetermined.  The easiest thing to do is to talk to people with the same thought process about investing, search through the same supporting financial media news publications and websites, and listen to the same experts.  Over time, it gets very easy to just keep doing the same thing over and over again.  Plus, it takes an incredible amount of effort to step outside of one’s comfort zone and try to prove that he/she might in fact be incorrect.  Individual investors (and even professional investors, money managers and investment advisors) are not wired to attempt to confirm why they might be wrong.  At first glance, it seems like a totally foreign and nonsensical concept.

So, what are the types of problems that can occur when individual investor does not acknowledge confirmation bias?  There is a long list here are a few to ponder.  First, a big mistake can be thinking that what has happened in the recent past will continue into the future indefinitely.  This danger is especially evident during a bull market.  It can be easy to get carried away and see how much money one made and then keep pouring money in (more than you can really risk).  The converse is true when it comes to a bear market.  After stocks have gone down for a number of months or longer, it is very easy to just give up on investing in the stock market because it seems like things will never turn around.  Second, the danger creeps in when investing by not challenging one’s assumptions.  Even if an individual investor knows at a subconscious level that an incorrect decision was made, there can be a desperate search for any shred of evidence that one can justify nonaction.  Third, there are times when listening to the investment advice of a particular expert can be “addictive”.  By this I mean that it is natural to continue to listen only to the views of that person, especially when he/she made a bold prediction about the stock market that came true.  It can be simple to forget that market timing is extremely difficult and that person could be totally wrong in terms of his/her next prediction.  Lastly, it can feel good to be part of the crowd and not think differently (or at least examine other issues).  There is safety in numbers essentially and, if your investment decision does turn out to be wrong, you can at a minimum take solace in the fact that “everyone else was doing it”.

There are a number of steps that individual investors can take to counteract the dangers of confirmation bias.  First and foremost, the fact that you are aware of the potential trap of confirmation bias is half the battle.  Periodically ask yourself if you have looked for alternative viewpoints and evidence.  Second, you can make a list of why you made a particular investment decision in the first place.  But, more importantly, you should write down what types of events could occur to make you change your mind because your investment thesis was not correct.  It is very powerful to have a written record to start with.  This recommendation actually comes from a reporter at The Wall Street Journal named Jason Zweig.  Mr. Zweig has been writing about the financial markets for decades now and still has a weekly article in the paper (usually in the weekend edition) called The Intelligent Investor.  I really urge you to take a look at this interview with him back in 2009 about confirmation bias.  Here is the link:

http://www.wsj.com/video/when-investing-consider-your-confirmation-bias/B768E62A-AA01-4B37-905F-F3EDA5C72B78.html

Third, you should make it a habit on a regular basis, maybe monthly, to go to various financial market and investing websites that do not mesh with your general investment philosophy.  You can peruse through a few articles that you might find totally different than you interpret a situation.  I urge you to read them with an open mind though and try to be objective.  Lastly, you can bounce an idea off a close friend or advisor and see what they think about your rationale.  It is far easier for them to be objective.  If you do not have anyone to consult with, I would urge you to pose the question in an investing forum.  However, you need to phrase the question in the manner that will address your possible confirmation bias.  It is very common to ask question in a positive manner like “Why should you invest in technology companies?”.  The better way to phrase it at the outset is to use language like “What are some of the reasons why you should not buy gold?”.

Now keep in mind that the advice on confirmation bias also applies to the articles I have posted on my website.  You will note that two of the main themes are using a passive investing approach to invest and striving to keep investment fees as low as possible.  I urge you to go and seek out information about why you may want to choose an active investing strategy as an individual investor.  Look for the reasons why and situations where you might have to pay additional investment fees depending on your particular circumstances.  It is very healthy and beneficial to seek out other information, and I always encourage individual investors to do so.  The one thing that I firmly hold onto is that I would avoid financial websites or sources that say I am right and the other guys are all wrong.  Things are rarely ever so “black and white”, especially in the world of financial markets and investing.

How to Rebalance Your Investment Portfolio – Part 3 of 3

21 Saturday Nov 2015

Posted by in asset allocation, finance, financial advice, financial goals, financial markets, financial planning, Individual Investing, individual investors, investing, investing advice, investing information, investing tips, investment advice, investments, passive investing, personal finance, portfolio, rebalancing, rebalancing investment portfolio, risk, risk tolerance, stock market

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This rebalancing discussion is the last installment of a three-part series.  The first discussion defined what is commonly referred to as rebalancing one’s investment portfolio.  Rebalancing is in simplest form is realigning an investment portfolio to a desired asset allocation after time inevitably changes its composition due to the normal fluctuations in the financial markets.  Rebalancing is normally done at set intervals of time of which once a year is the most common.  The link to the full discussion of part one can be found here:

https://latticeworkwealth.com/2015/07/16/how-to-rebalance-your-investment-portfolio-part-1-of-3/

The second discussion outlined a relatively easy way to come up with an allocation for an investment portfolio and how it is rebalanced.  This particular method is to rely on what are commonly referred to as target date or life cycle mutual funds.  These mutual funds offered by some of the largest asset managers in the financial services industry recommend a given asset allocation for an investment portfolio based upon the year one is retiring.  The mutual funds are carefully crafted to take into account risk levels in addition to reaching financial goals.  Additionally, these mutual funds are periodically adjusted over time to keep the investment portfolio aligned with a desired asset allocation.  Bottom line, the asset manager does all the work for you and can be a nice way for novice investors to get their “feet wet” when it comes to investing.  Note that the discussion also outlines how to increase or decrease one’s risk profile (meaning take on more risk to capture possibly higher investment returns or take on less risk to possibly lower the amount one’s investment portfolio might go down by) while still using this approach.  The link to the full discussion of part one can be found here:

https://latticeworkwealth.com/2015/07/29/how-to-rebalance-your-investment-portfolio-part-2-of-3/

The third and final part of the rebalancing discussion will focus on what I define as dynamic rebalancing.  Dynamic rebalancing may be called by different names depending on the investment professional, but the concept is generally the same.  Dynamic rebalancing is reserved for more advanced individual investors.  An individual investor needs to be comfortable with understanding the different investment options available and follow the financial markets more closely.  Dynamic rebalancing still has the basic definition of rebalancing at its core.  However, there is a bit more flexibility involved when realigning one’s investment portfolio.

Let’s dig a bit deeper into dynamic rebalancing and why it is an option for a subset of more advanced individual investors.  In order to start we need to go back to the original definition of rebalancing.  Rebalancing is looking at one’s investment portfolio at set intervals (usually coincides with the end of the year) and moving monies between asset classes.  For instance, stocks may perform better than bonds in a certain year so the investment portfolio has a higher exposure to stocks at the end of the period.  In order to realign the investment portfolio back to its original composition, the investor would need to sell stocks and buy bonds.  The amounts to sell and buy are calculated such that the end result is that the percentages invested in stocks and bonds are at their original levels of the beginning of the period.  As long as one’s financial goals and risk tolerance have not changed, the original percentages are used.  It is a hard rule meaning that there are no exceptions for the final asset allocation to stocks, bonds, and cash.  The percentages are set in stone such that the individual investor does not get emotional by any short-term financial market volatility and drift away from his/her desired financial plan.

Dynamic rebalancing still has percentages for the investment in certain asset classes, investment styles, or industry sectors but a band of acceptable percentages is utilized.  For example, an individual investor would rebalance the investment portfolio at the end of the year, but he/she might decide whether to have anywhere between 65% – 70% invested in stocks.  Why would any individual investor want to use such an approach?  Well, if one looks back on financial market history, the ebbs and flows of asset classes rarely line up with calendar years.  For instance, small cap stocks might outperform other domestic stocks for two years instead of just one.  What usually ends up happening in the financial markets is that financial assets become overvalued or undervalued relative to each other as time passes.  Other investors will bid up certain stocks or bonds and sell other stocks and bonds because of the perceived likelihood of investment performance returns.  However, at a certain point in time, the scales of value tip and it becomes better to invest in the “unloved” stocks and bonds that were being sold so much in the past.  This phenomenon will hardly ever occur exactly in one-year increments.

The most important thing to remember about dynamic rebalancing is that the individual investor has financial flexibility in the asset allocation percentages, but he/she is not allowed to engage in “market timing”.  “Market timing” is when any investor believes he/she knows exactly the right time to buy or sell financial assets.  In fact, the financial media will always have financial pundits being interviewed or write investment articles predicting when the stock market will peak or when the market is at the lowest level it can go so investors just have to buy.  Professional investors might predict one or two tops or bottoms of the financial markets, but there are only a handful of them that can make a living at this approach.  If it is too hard for the professional, institutional investors to do so, individual investors should not have the hubris to think that they can.

Here is an illustration of dynamic rebalancing to make things much clearer.  An individual investor will have defined percentages to invest in certain asset classes for the investment portfolio, but he/she will also have a band of acceptable percentages.  The following is a hypothetical investment portfolio of $1,000,000 using dynamic rebalancing:

1)  Investment Portfolio at the Beginning of the Year
Type of Asset Dollar Amount % in Port Overall
Large Cap Stocks              $300,000 30.0%
Mid Cap Stocks                  125,000 12.5%
Small Cap Stocks                  100,000 10.0%
International Stocks                  200,000 20.0%
Emerging Market Stocks                    25,000 2.5% 75.0%
Domestic Bonds                  150,000 15.0%
International Bonds                    50,000 5.0% 20.0%
Cash                    50,000 5.0% 5.0%
Total           $1,000,000 100.0% 100.0%
Type of Asset Low – Band High – Band
Large Cap Stocks 30.0% 40.0%
Mid Cap Stocks 10.0% 20.0%
Small Cap Stocks 10.0% 15.0%
International Stocks 15.0% 25.0%
Emerging Market Stocks 0.0% 5.0%
Domestic Bonds 15.0% 30.0%
International Bonds 5.0% 15.0%
Cash 5.0% 25.0%
2)  Investment Portfolio at the End of the Year after Assumed Market Fluctuations
Type of Asset Dollar Amount % in Port Overall
Large Cap Stocks               $275,000 26.6%
Mid Cap Stocks                  150,000 14.5%
Small Cap Stocks                  160,000 15.5%
International Stocks                  175,000 16.9%
Emerging Market Stocks                    10,000 1.0% 74.4%
Domestic Bonds                  175,000 16.9%
International Bonds                    40,000 3.9% 20.8%
Cash                    50,000 4.8% 4.8%
Total            $1,035,000 100.0% 100.0%
Type of Asset Low – Band High – Band
Large Cap Stocks 30.0% 40.0%
Mid Cap Stocks 10.0% 20.0%
Small Cap Stocks 10.0% 15.0%
International Stocks 15.0% 25.0%
Emerging Market Stocks 0.0% 5.0%
Domestic Bonds 15.0% 30.0%
International Bonds 5.0% 15.0%
Cash 5.0% 25.0%
3)  Steps Taken to Dynamically Rebalance the Investment Portfolio
Type of Asset Dollar Amount Buy or Sell
Large Cap Stocks               $35,000 Buy
Mid Cap Stocks                            0 No Action
Small Cap Stocks              (40,000) Sell
International Stocks                   5,000 Buy
Emerging Market Stocks              (10,000) Sell
Domestic Bonds              (20,000) Sell
International Bonds                 25,000 Buy
Cash                   5,000 Buy
Total                         $0
4)  Investment Portfolio After Dynamic Rebalancing
 Type of Asset  Dollar Amount % in Port Overall
Large Cap Stocks               $310,000 30.0%
Mid Cap Stocks                  150,000 14.5%
Small Cap Stocks                  120,000 11.6%
International Stocks                  180,000 17.4%
Emerging Market Stocks                                – 0.0% 73.4%
Domestic Bonds                  155,000 15.0%
International Bonds                    65,000 6.3% 21.3%
Cash                    55,000 5.3% 5.3%
Total            $1,035,000 100.0% 100.0%
 Type of Asset  Low – Band High – Band
Large Cap Stocks 30.0% 40.0%
Mid Cap Stocks 10.0% 20.0%
Small Cap Stocks 10.0% 15.0%
International Stocks 15.0% 25.0%
Emerging Market Stocks 0.0% 5.0%
Domestic Bonds 15.0% 30.0%
International Bonds 5.0% 15.0%
Cash 5.0% 25.0%

Here are the salient pieces of information to note when reviewing the hypothetical scenario above.  At the beginning of the year, the individual investor allocates the investment portfolio amongst a number of options.  The options are large cap stocks, mid cap stocks, small cap stocks, international stocks, emerging markets stocks, domestic bonds, international bonds, and cash.  Note that the individual investor has opted to define bands for acceptable percentage exposures to these investment options.  The investment amount of the asset allocation in each category is within the band.  Additionally, assume the individual investor has established acceptable and desired percentage exposures to the overall asset class.  The percentage allocation to stocks is between 70.0% – 80.0%, to bonds is between 20.0% – 30.0%, and to cash is between 0.0% – 15.0%.  Note that the sum of the bands will not equal 100.0%; however, the investment portfolio at any given time will always add up to 100.0%.  In the third part of the hypothetical scenario, there are changes to the investment portfolio in terms of buying, selling, or doing nothing because of the dynamic rebalancing process (in part because some of the bands are violated).  When reviewing the fourth part, the balances and percentage allocations reflect those changes and the percentages do not match the percentage allocations from the first part.  They do not need to as long as the rules for the bands are followed at an overall level and specific-component level.

The hypothetical scenario can be adapted to any investment portfolio size and number of components in the investment portfolio.  Furthermore, the bands of acceptable exposure to asset classes overall or more specific investments can be lower or wider.  The main point of the bands is that the individual investor has more control over the asset allocation of the investment portfolio.  With that being said, the individual investor is not allowed to become too greedy or too fearful.  There are times when a certain type of investment performs extraordinarily well and becomes an ever larger portion of the investment portfolio.  If the percentage allocation exceeds the band though, the amount invested must be reduced to limit risk.  On the other hand, there are times when a certain type of investment performs quite poorly and becomes a rather low portion of the investment portfolio.  It might be tempting to sell the entire portion of the investment portfolio.  Generally speaking though, an individual investor should have exposure to a number of investment components and not try to determine when it is right to avoid one altogether to remain diversified.

In summary, one will note that dynamic rebalancing is much more complicated than using hard and fast rules for the absolute value of percentages allocated to each investment component.  It should really only be used by more advanced individual investors.  Thus, I would urge caution before deciding to implement the dynamic rebalancing approach to your investment process.  I would mention that it is very important to shy away from any investing strategy in general that is too complex to understand.  It is easy to be confused even more as time passes and make critical investing errors in the future.  As it relates to rebalancing, an individual investor may want to start with the standard usage of rebalancing discussed in parts one and/or two of this three-part series.  Dynamic rebalancing might be an option for the future, or you may even start your own hypothetical paper portfolio with this method to learn more.  Lastly, dynamic rebalancing does not need to be used.  I only offer it as a tool that is appropriate for a subset of individual investors.  Therefore, you should not view dynamic rebalancing as an investment strategy that must be utilized in the future once rebalancing is fully understood.  It is perfectly acceptable to stick with normal rebalancing and never even begin using dynamic rebalance as an investment strategy.  Moreover, some individual investors using dynamic rebalancing get carried away and start trying to “time the market” which would be a far worse result.

Two Steps to Help Individual Investors Become More Successful at Investing

11 Thursday Jun 2015

Posted by in Consumer Finance, Emotional Intelligence, EQ, finance, financial advice, financial markets, financial planning, Individual Investing, individual investors, investing, investing advice, investing information, investment advice, investments, personal finance

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Navigating the complicated world of investing can seem very intimidating and so frustrating.  There are so many pieces of information coming from the financial media that seem to conflict with each other.  At times it seems as though the markets move up or down for no apparent reason.  What is an investor to do?  Well, one of the most important things to do is to work on your emotional intelligence (EQ).  Most people assume that you need to have an extremely high IQ to navigate the financial markets.  Now it doesn’t hurt to have a lot of intelligence, but it arguably more imperative to have a high EQ.  EQ, in its simplest terms as it relates to investing, is the ability to control one’s emotions during market volatility.  Extreme market moves either up or down tend to make investors act irrationally or in a panicked way.  Instead of the old saying of “buy low and sell high”, they do the exact opposite and “sell low and buy high”.  Therefore, I wanted to share two steps to help you utilize and develop your EQ to allow you to be a more successful investor.  You will note that the two steps are more akin to practices and definitely interrelated.

Step 1 – Learn how to ignore the “noise” about the financial markets on a daily, weekly, and even monthly basis at times.

What does “noise” mean in this context?  “Noise” relates to all the reporting by the financial media and market prognosticators about the short-term direction of the financial markets.  Every day you will hear market “experts” (money managers, economists, traders, CEOs, etc.) predict with a good deal of confidence that the markets will start to rise, start to fall, or stay unchanged.  How do these discussions with plenty of evidence and thought help you?  Well, every investor (even a novice) should notice something right away.  You know that these are the only three outcomes for the market to begin with.  It really does not help to hear the conflicting opinions on a daily basis.  Note that each day at least someone is saying one of the three outcomes for the financial markets.

Who should you believe?  What should you believe?  Now here is an important note about guest appearances that have had recent accurate predictions about the direction of the stock market.  The financial news networks will rarely bring on a guest that has been totally wrong and advised clients quite poorly in the recent past.  It is not advisable for either party to make the guest look bad.  What is the point here?  There is a bias when listening to a guest appearing on a news network because only the ones whose predictions came to fruition are brought back and asked for more ideas.  The moderator never points out the times when that same guest has been wrong in the past.  Thus, it can seem like every returning guest has the best possible advice to follow as it relates to investing.  Moreover, you should adjust your portfolio as he/she suggests.  Do not get caught in that trap!

The main point and reason for step one is that the sources for investing tend to be conflicting and seeming as though the individual investor must act right now.  There are actually very few times when the financial markets reach a point of inflection that truly warrants your attention.  For example, the October 1987 stock market crash, the 1994 bond crisis, the Asian contagion in 1997-1998, the Dot Com Bubble in the 1990’s that started to burst in April 2000, and the financial crisis of 2008-2009 most recently are events that individual investors should read about and learn what is happening.  Although I will though that the difficult part is knowing in real-time what these events are.  Hindsight is always 20/20 as they say.

For additional information, I strongly recommend that you read a blog post I posted a while back.  The discussion goes into far greater detail on this subject and will help you understand the nuances far better.  The link to this blog post is as follows:

https://latticeworkwealth.com/2013/08/04/todays-news-should-prompt-you-to-adjust-your-entire-investment-portfolio/

After all the discussion above, what is the practice investors should develop?  Well, as difficult as it might be and foreign, I encourage/implore you to stop listening to financial news networks and reading financial newspapers (or Internet columns) on a daily or weekly basis.  Why?  Just as a simple truism, it is the easiest way not to succumb to the financial “noise”.  If you are not exposed to it, you will not act (or feel as though you have to act) on a regular basis.  I promise that as you use this technique you will become much more comfortable.  Your EQ will really start to develop and become more mature.  Now I am not recommending that you give up all together on the financial media and sources of information.  Individual investors should simply consult them less often.  Looking at summaries of monthly activity will give you a much more complete picture of what is going on in the financial markets.

Step 2 – Commit to Examining Your Brokerage Account Statements on a Quarterly Basis Only.

I will admit that this practice, and change in behavior, is the hardest for individual investors.  However, effective adherence to step one is only possible by following this recommendation.  Many individual investors look at their account balances on a weekly or even daily basis.  The financial markets can move up and down quite frequently in the short term.  If you constantly look at your portfolio, your EQ will be hard to control or even melt away.

The vast majority of individual investors have a long-term financial plan.  You should have determined your risk tolerance (how much market volatility you are comfortable with), set up an investment portfolio with exposure to different asset classes like stocks and bonds, and determined what financial goals you have for the future already.  By definition the plan is long term and should not be altered all the time.   Note that you will utilize your IQ to establish your investment portfolio and then harness your EQ to stick with it through the inevitable “bumps” in the road.  If you are only exposed to your account balance four times per year, you will be far more likely to make more rational decisions.  Investing is very emotional due to the fact that money is involved.  That is true and will never change.  With that being said, individual investors will have less chances to be affected by emotions using this practice; only four times per year.

What should an individual investor do each quarter?  The quarterly brokerage account statements should be examined every March, June, September, and December.  Take a look at the account balance as a whole and then how the different components of your investment portfolio performed.  Then open up the other two brokerage account statements in the quarter to simply see what the account balances were.  For example, if it was the first quarter, you would be opening January and February after you looked at March.  Now the important thing to remember is that only your terminal balance matters.  What does that mean?  It is merely a fancy way of saying that only the amount of money you have at the end of the quarter is important.  The manner in which your brokerage account balance got to be at the end of the quarter might be interesting to look at, but, at the end of the day, it does not mean much at all.  It is in the past.

These two steps will definitely assist you in becoming a more successful investor.  Note that I did not say a trader or speculator.  Investors by definition have a long-term orientation.  Traders and speculators deal in hours, days, weeks, or even minutes.  Individual investors should be focused on quarters, years, and even longer increments if a solid and well thought out financial plan is in place.

The decision and ways to reallocate one’s investment portfolio is a separate issue.  Over the course of time, it will become necessary to alter the exposure of an investor’s investment portfolio to different asset classes, sectors, or regions.  Those decisions involve the IQ again but having a well formed EQ will assist greatly in that exercise.  I will take a detailed look at account rebalancing in the next series of blog posts.