Archive for the ‘Investor Psychology’ Category

The Fears That Cause Investiphobia – Book Excerpt

July 30, 2009

The following is an excerpt from the book, Investiphobia – You Can Invest Without Fear. There are eighteen fears that cause investiphobia. To successfully treat investiphobia, you must know the cause. The following fear is common and directly relates to the previous post about Equity Index Annuities. Almost all annuities have surrender charges and some have lengthy surrender periods. You should know the access you will have to any investment, prior to purchasing, and you should make sure that you are comfortable with any limitations to your access. It is perfectly fine to use products that have surrender fees for a small portion of your portfolio. But, no matter how good a product sounds, you should make sure that you have access to the majority of your funds. We do not know the future, plan accordingly.

To purchase the book, visit,

Fear of Losing Access to Money

Every day, senior citizens across the United States buy investment products that have lengthy surrender periods. You have probably heard on the news, or read in the paper, about someone who cannot get access to their money because of the product that they purchased. This happens fairly regularly, and it is scary to anyone who is retired.

I read an article in a professional journal recently about a woman in her seventies who bought a product with a limitation on access that lasted for over twenty years. She would not have full access until the age of 105! Someone convinced her to put most of her money into this product. Thankfully, the company canceled her purchase and returned her money with interest. How did this happen?

The article did not cover the specific product that she bought. It may be an appropriate product for someone, somewhere, but it clearly did not fit her needs. In my opinion and experience, the cause of this type of sale is either greed or inexperience on the part of the salesperson. They probably attended a seminar and heard great things about the product and the commission that they would earn if they sold it, and they thought she might benefit from it. I’ll bet it had a tax-deferral feature and some guarantees.

Some of the products that have these lengthy surrender charges are good products, and some, unfortunately, are not. In either case, we know that there are products that limit our access to our own money. Some people are fearful that this may happen to them. Some people are paralyzed by these fears, and their paralysis prevents them from using many types of investments. They become singularly focused on access to their money and suspicious of anyone in my profession. Speaking as an insider, they are right to be concerned, but they are hurting themselves more than anyone else if this fear prevents them from investing.

It is not a matter of knowing the answers; it is a matter of knowing the right questions.

The advisor you select is critical to your success. If you select an advisor who is knowledgeable and compatible with you, you can expect them to be willing to help you understand what you need to know before you invest in any product. But not all financial services professionals are advisors, as a matter of fact, most are not. Many are salespeople, hiding behind titles such as financial advisor, investment consultant, vice president–investments, and other equally innocuous, but misleading and legitimate-sounding names. Sometimes salespeople also have the Certified Financial Planner, CFP, which is a very legitimate designation. Always remember that a salesperson with a CFP is a salesperson first!

It is not a matter of knowing the answers; it is a matter of knowing the right questions. I have included several questionnaires in the appendix that will help you. These questionnaires do not require any investment knowledge. You should know exactly how much access you will have to your money. Whenever you are asked to purchase a new investment, use these questions to make sure that you understand what the product will do for you.


New Investiphobia Introductory Video

July 14, 2009

I’ve now joined the YouTube crowd and have uploaded my first video introducing Investiphobia. To view the new video, just click Investiphobia which will take you to the Media page of the Investiphobia website. Click play and let me know what you think by emailing me at or commenting here.

The End of Common Sense

July 13, 2009

Almost every financial publication, tv and radio show, has now declared the process of asset allocation dead. Amazing what happens when academics, investment guru’s, and investment sales people try to explain why they didn’t see 2008 in advance. And today, no less than the Wall Street Journal, has added to the mix with the following article entitled, “Failure of a Fail Safe Strategy Sends Investors Scrambling“, which I dugg (a net term meaning “uploaded to Digg”). Anyway, I do think that the Journal does produce some of the best titles and news reporting in journalism and the article is very well written. The reporter is not editorializing and doesn’t really indicate his opinion of the facts gathered. What is striking is the wide acceptance of the “death” of asset allocation.

Now is evidently the time for stock traders, short sellers, sector rotation, market timers, pick a strategy, because this time their previously debunked strategies will work. Now, understand I’m not against active management. But you can actively manage within a predetermined asset allocation, and based on the experts this active method of asset allocation is also dead. So, let’s apply a little commonsense.

A phrase that all of us have heard, and which is already in a previous post of this blog, describes in easy to understand terms the process of asset allocation.

Don’t put all of your eggs in one basket!

Everyone thinks that advice is no longer valid, it’s dead. Investment management is not a short-term venture. Ignore the noise and the naysayers, it is times like these when the snake oil salesmen make a very good living.

Speaking of “ignoring the noise”, try Mike Piper’s excellent blog and book, The Oblivious Investor. He advocates indexing more aggressively than I do, but his blog and book are both well-written and you might enjoy them.

As always, remember that:

Money is not your life. It is simply the means to the life that you want!

What is the price of worrying?

July 5, 2009

I found this article interesting. It was written by Caryn Colgan, the Denver Karma Examiner for Worrying can lead to investiphobia and Caryn does an excellent job of presenting the costs of worrying.

For some of you, this article may be a bit beyond your comfort zone, but her points are very valid. Besides, when was the last time you read something from a Karma Examiner? Enjoy, Paul

What is the price of worrying?

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Fear still here?

June 16, 2009

Radio Show Coming Soon!
Investiphobia Radio

A few days ago, Investment News had the following headline,

Headline on June 15, 2009

Headline on June 15, 2009

Click here for full article.

Barclay Wealth, a division of Barclays Capital based in London recently completed a survey of 2,100 wealthy investors and found that although 88% believe that there are good investment opportunities available, 68% are not investing because “they believe the risks of further price declines is too high”.

This is worth repeating, 68% of “wealthy investors” are too fearful to invest in the markets. This group of investors has more experience investing than the average retail investor and many are very knowledgeable. But, they also have more to lose and most haven’t lived through a market like 2008 and 2009. In some ways, this confirms an April article also in Investment News that had the following headline,

A Lost Generation of Investors

A Lost Generation of Investors

Click here for the full article, A Lost Generation of Investors.

Over the course of my career, I have encountered many people who were not alive during the Great Depression but were still emotionally impacted by it. Having heard about it from their parents, they learned wealth destroying principles like, “Never buy Stock” or “If it’s not guaranteed, don’t buy it”. These investors zealously protected their principal, but unfortunately missed out on the tremendous growth of the stock market. They fell behind those that approached investing rationally.

Stock market investors understand that measuring returns over one year is far too short. Jim Cramer, of Mad Money, said last fall that you should pull your money out of the stock market if you need it within the next five years. He was criticized for saying this because he supposedly caused a panic. In reality, you shouldn’t invest in the market if you need the money within at least five years, preferably more like 10. There have been very few ten year periods in the US Stock Market’s history where the return was negative. There have been no fifteen year periods with a negative return. The shorter the time period, the more likely it is that you could experience a loss. Savvy investors remain invested regardless of market conditions, but they do not invest money that they may need in the short term.

Based on what we see happening today, investors may leave the market permanently and another generation may suffer as a result. The purpose of my book, Investiphobia, is to help prevent this from happening. It was written specifically to address the fears that become Investiphobia, a condition that paralyzes and prevents sound investment decisions. It really isn’t hard to invest successfully, but it is impossible if your fears prevent you from investing.

What squirrels can teach us about investing

May 19, 2009

Here’s a little exercise that might be beneficial to your stress level and might even help you with your investments.

Harvesting Dividends?  

No matter where you live in America, there is probably a squirrel in your yard every day.   Just for fun, take an opportunity to watch the squirrels today.  Maybe take that morning cup of tea or coffee into the yard and sit quietly watching the squirrels at work and play.  Watch them as they stand in line at the little squirrel coffee shop discussing the acorn futures market.  As they read the Squirrel Daily’s Business section looking for an update on the upcoming acorn tax legislation.  Panicking as they hear that there may be an oversupply of acorns driving the price down or a shortage due to climate change.  Many squirrels distrust the reporting of other squirrels, so you may notice some watching Fox News, sorry, couldn’t resist.  If you actually see squirrels doing this in your backyard today, film it and your money worries will be over.  But you won’t see squirrels doing anything like this.

So go back to the coffee, take a deep breath, let it out nice and slowly, and watch what squirrels really do all day. You may see them stop and enjoy an acorn or you may see them collecting acorns and running off to hide them.  They may have a little fun chasing each other or running off a few birds from your bird feeder.  If you think about it, squirrels are the ideal long-term investors.  Every day they work on their portfolio, harvesting dividends(acorns) that have fallen from their investment portfolio (trees).  Some of the dividends are used immediately.  They sit back, like the squirrel above, and enjoy a little of their tree’s income for immediate consumption.  You may see them reinvesting the dividends by putting them in a little hole where, if not found during the winter, they will ultimately become another income producing investment in the form of another tree.  Squirrels never develop investiphobia.  Following their instincts, they invest wisely and enjoy the fruits of their labor and their investments.  We should be more like squirrels.

So, hop up and chase your neighbor up a tree.  Or, get to work and focus on work.  When you play, enjoy yourself immensely.  Life should be fun.  Do this daily and you may find that your portfolio does fine, even when you don’t watch it every day, hour, minute!  I’m back to work, but tonight I’m watching squirrels.

Money is not your life.  It is simply the means to the life that you want.


Investiphobia – Advisors get it too!

May 18, 2009

According to an article in today’s issue of Investment News, it’s not just the investor who suffers from investment fear.  It is often their advisor.  In an article entitled, Financial Advisors Face a Crisis of Confidence, Investment News writer Dan Jamieson addresses the “compassion fatique” that many brokers and advisors are currently experiencing.  Here’s a link to the full article,  The term “compassion fatique” was originally intended to describe medical personnel, including nurses, doctors, and anyone who deals with the terminally ill.  Evidently the trauma of the current market conditions are causing casualties across the world of professional investing.  And, maybe that is to be expected.

But would you have expected 80% of affluent investors to be “disgusted with their adviser because their adviser is spooked”?  The  Investment News article quotes consultant Matt Oechsli, president of the Oechsli Institute Inc. in Greensboro, N.C., who stands by that figure.  For those of you that prefer fractions, that means that four out of five wealthy investors are disgusted with their advisor.  If you wondered what a wake up call looked like, look no further.

It is natural for anyone to be concerned in the current market, but it is an indictment of my profession that so many brokers and advisors are being affected.  Let’s look at other fields.  How about transportation?  If you are on a plane and there’s turbulence or a ship in heavy weather, don’t you expect the captain and crew to be confident and reassuring?  Not just for show, but because they have experience, knowledge, and everything they need to know to make it to their destination.  

And, maybe that is the issue.  Many brokers and advisors may have the academic training but lack the experience to handle the first decade of the 21st century.  Half of the past ten years will probably end up negative.  Tough environment if you started with your first client in 1999 or even more recently.

The second issue is the amount of new products and complicated money management methods that have been introduced over the past 10-20 years.  There are books on the bestseller list that talk about the end of Modern Portfolio Theory, Asset Allocation, etc.  When tried and true portfolio methods, like these, are discarded in favor of hedge funds, derivatives, and other really neat sounding products, it shouldn’t surprise anyone that the professionals who foisted this change on their clients are feeling “fatigue”.  Particularly after the tech bubble bust, the housing crisis, the sub-prime mortgage fiasco, auction rate securities…  Ouch!

As an industry, professionals need to return to basics.  There are many good things to consider, even in the current market, but not when you have lost confidence.  Clients will gradually force the industry back to solid investment management methods.  Until then, for many advisors, the path is going to be rocky!  If you are a do-it-yourselfer, you might want to consider that advice as well.

If you work with an “advisor”, make sure that they really are advisors.  The second half of Investiphobia contains a comprehensive, but easy to read, review of the differences between brokers, advisors, and other professionals in the industry.  In this environment, I highly recommend that you avoid the commission “financial advisor” in favor of a professional that works with you on an ongoing basis with no incentive to “sell” anything.  This isn’t the time for creative new products.  Solid advice, careful and diversified asset allocation, and long-term commitment will see us through this storm.

Focus on living, not investing.  My bet is that you and your portfolio will both benefit!  And, as I say in the book, remember:

Money is not your life.  It is simply the means to the life that you want.


A Fresh View of the Madoff Scandal

April 2, 2009

The news of the crimes by Bernie Madoff has dominated the headlines since his arrest in December. As the lynch mob mentality has now run it’s course, it is appropriate to re-examine the method that he used to commit his crimes and the regulatory environment that allowed him to get away with it for so long.

We know that Madoff chose to utilize a “secret” firm located on a separate floor to run his Ponzi scheme. We know that he registered this firm, on advice of counsel, in 2006. The firm was not new and had been managing, or in Madoff’s case stealing, money for years. However, prior to 2006, there was no requirement to register this particular type of advisor as it was considered exempt from the Investors Act of 1940. This act required the registration of firms that provided investment management as defined by the Act and the Madoff firm fell under the exemption because it was an advisor to hedge funds. Neither hedge funds, or their advisors, were required to register with any self-regulatory or governmental agency.

The Act exempts these funds and advisors because of the limited number of clients that invest in them and because their investors had to be “accredited”. Accredited investors must have a minimum net worth of $1,500,000 or an annual income for the previous two years of at least $200,000. Basically, congress decided many years ago that wealthy investors would be willing to give up some regulatory protection in exchange for the ability to invest in products that were limited in distribution. Consider it a privilege of wealth! In 2005, the SEC adopted new rules requiring “advisers to certain private investment pools (“hedge funds”)” to register their firms with the SEC by February 1, 2006. They decided to require the registration because they redefined the definition of investor. In most of these funds, the investors are institutional hedge funds with numerous clients. Prior to the new rule, each one of these funds was considered to be one investor and the SEC did not “look through” the fund to find the actual number of investors that the fund represented. With the new rule in place, Madoff was advised to register his fund and he registered prior to the deadline of February 1, 2006.

In justifying the new rule, the SEC stated that they ”are concerned that individuals have targeted hedge fund investors and chosen hedge funds as a vehicle for fraud because these individuals could operate their funds without regulatory scrutiny of their activities”. Hedge funds offered, and continue to offer, an unregulated environment that provided generous compensation and the ability to manage money without oversight!

Phillip Goldstein, co-founder of Bulldog Investors, hedge fund advisor, director, and a well-known hedge fund activist filed suit to block the SEC rule. Mr. Goldstein has worked vigorously to prevent regulation of hedge funds and has portrayed the ability of hedge funds to operate in secret as a “first amendment issue”. In a unanimous decision on June 23, 2006, the US Court of Appeals for the District of Columbia agreed with him and struck down the rule. As a result of this decision, advisors to hedge funds could continue to operate with minimal regulation and without registering!

In his testimony to congress on July 25, 2006, then SEC Chairman Christopher Cox responded saying, “given the recent invalidation of the SEC’s hedge fund rule by the United States Court of Appeals, we have been forced back to the drawing board to devise a workable means of acquiring even basic census data that would be necessary to monitor hedge fund activity in a way that could mitigate systemic risk.
The current lack of such basic data requires me to hedge when I say that the SEC’s best estimate is that there are now approximately 8,800 hedge funds, with approximately $1.2 trillion of assets. If this estimate is accurate, it implies a remarkable growth in hedge fund assets of almost 3,000% in the last 16 years.” If the Chairman of the SEC doesn’t know how many hedge funds exists, how can we expect the SEC to successfully prevent criminal activity within them?
Congress needs to remove the hedge fund exemption in its entirety. Allow the SEC to examine the books and records, just as they do for investment advisors. The SEC cannot be expected to investigate operations that can simply turn them away at the door. Blame Madoff, not the SEC.