All about investment

Successful investing, most often, is not a portfolio problem but rather a people problem. No matter how well designed a portfolio is, it can easily be destroyed by imprudent investor behavior. Unfortunately, the true enemy of every investor lies within.

The instincts, emotions, and biochemical makeup of human beings drives them to gamble and speculate with their money, even when they don't mean to. You will see that this cycle is hard wired into every human being in the world. No one is free from it. After studying the collective behavior of thousands of real world investors over the past decade, several truths have made themselves clear. It is my belief that many financial institutions are aware of the dilemma, but ignorant of the damage that they unknowingly perpetrate on the investor.

This investor dilemma is a cycle that explains why many investment decisions are driven by emotions and psychological biases that are inconsistent with your "True Purpose of Money". When skillfully coached to identify your "True Purpose of Money" (that which is the highest value and more important than money itself) few people would say that it is to gamble and speculate with their wealth, but that is exactly what most investors end up doing without knowing it. Unfortunately, the actions most people take because of this dilemma demolish their ability to maintain an ideal, life-long strategy.

In plain language, No one is immune. If you can fog a mirror, you most likely have been caught in this destructive cycle.

Below are 7 items I feel are important to understand on how emotions manifest itself in the human psyche and evolves and how we attempt to deal with it.

It all begins with FEAR of the unknown.

1) Fear of the Future is one of the most basic instincts. This keeps us awake at night and constantly alert for anything that may threaten our safety and well being. It is the drive that keeps us plugged into the evening news and makes us ask many unanswerable questions. They news media often prey's on this fear by showing clips of tragic events and doom and gloom predictions of the future. Disaster sells. It is not uncommon for this pervasive fear to cause stress and anxiety. It is a chronic affliction in our modern age.

2) Forecast and Predictions. Because the future itself is unpredictable, our place within it is also uncertain. For this reason, we are hard wired to desire an accurate forecast about the future to simplify our decision making and to relieve us from the burden of self-doubt. We assume that if someone could tell us what is going to happen with inflation, interest rates, the stock market, wars, the economy, famines, terrorism, Britney Spears and Paris Hilton - what a safer place this would be.

This deep desire for the answers in advance keeps the average investor in search of the "correct" prediction of the future. In the area of investing the thought is always, "If I can find the right guru that could tell me what stocks are going to go up, and what the market was going to do, everything would be so much easier."

3) Track Record Investing. Many investors mistakenly reason that "All I have to do is find who had the best investment or mutual fund track record in the past, and they should repeat with some consistency in the future."

The belief is always that since the individual can't predict the future, there is surely some brilliant manager with a Ph.D. in economics and mathematics at one of the highly respected brokerage firms or mutual funds company who can do it and we can just tap into that amazing insight.

4) Information Overload. The search is apt to be a backbreaking and mind-numbing task. Where

should we begin to look? If you run a Google search for "investment" you will probably get over 36 million pages of information. It would take roughly 300 years to finish your research not including books, newspapers, TV, etc. In search of the best managers, stocks, and mutual funds investors are drowning in information. These supposedly useful facts and data create doubt and fear, and make prudent investing all but impossible. In almost all cases, this causes investors to focus on the wrong things, or worse, it provides the breeding ground for emotion-based behaviors and actions.

5) Emotion -Based Action and Behavior. As investors, we are often plagued by our own humanity. We cannot escape it. Investors prefer to think of themselves as investment decision-making computers and see their behaviors purely logical. This is seldom the case. Awash in information overload it is easy to "justify" self destructive behaviors and actions with seemingly hard, cold facts. Take for instance an investor who because of fear, believes the market is going to go down and he should sell all of his stocks and wait on the sidelines in cash. Given a copy of the Wall Street Journal", such an investor can easily convince himself that the market is going down by finding all kinds of "facts" supporting his position. On the other hand, if another investor who believes the market is going up because of an emotional bias, is given the same Wall Street Journal and asked to find positive facts, statistics, and data supporting their position, they could easily do so.

Emotional bias causes investors to "see" what they already believe and, in effect, ignore what does not match their predetermined beliefs. Most investors are their own worst enemy.

6) Breaking the Rules. Investing often seems simple. But no not quite. All investors are hard wired to fail. Mans most basic instinct is to avoid pain and pursue pleasure. Why? Because in total, things that are painful are things that endanger your life. We are programmed to move toward pleasure and away from pain.

When investors receive there investment statements with asset classes that have lost money, it is often perceived as painful. The natural instinct is to sell the things that are causing the pain, and buy or purchase more of any asset class or category that may be going up. Left to their own devices, investors fall prey to this devious cycle time and time again, thereby breaking all of the rules of investing. It is an implementation problem, not a knowledge problem.

Think of it like dieting. The rules are easy; following them is not. To lose weight you must 1) eat less, 2) move more. Two simple rules, but those who have earnestly attempted to apply them in their lives and modify their own behaviors are quickly confronted with the very real obstacles that their own instincts and emotions present. In this respect, investing is no different. The rules are simple; following them are not.

7) Performance Losses. The sad, but very real truth is that most investors fail. Dalbar research reports that the average mutual fund investor trying to beat the S & P 500 only earned 3.93% per year on mutual funds from 1984 to 2004. The average holding period of the "long-term" investments was only 2.9 years. Thus, typical investors, left to their own devices fail to achieve market returns. Remember, these problems are faced by even the most intellectual and brilliant of investors. These are not problems of weak minds.

One of the most reason examples of how "emotion based investing" caused financial widespread devastation for many happened most recently in the 1990's.

It seemed we had entered a new paradigm. Every article and front cover of investing magazines promoted the power of internet stocks. It was a grand age where 21 year old kids became instant millionaires. Technology stocks seemed to make 20% to 30% per year, and "experts" reasoned that the future had to be based on technology, so what can possibly go wrong? Drawn in by the pleasure instinct to buy high, and the emotional filter to see the news programs, magazines and newspapers, most investors, brokers, and analysts bought in with no diversification. It was argued that that diversification was not necessary. The crash that followed, like so many before, decimated the portfolios and wealth of investors everywhere. Many people were horrified to lose 45 to 70% of their assets overnight. What went wrong? Investors lost a staggering 8 trillion dollars in the early part of the 2000's. This was money most investors worked hard to accumulate over a lifetime. It is a heavy burden to bear.

Conclusion:

The HEINOUS RESULT of using emotions is not having enough money and having to endure worry, frustration, and anxiety of a future without the financial backing that is required to have true peace of mind.

How we fix the problem:

Traditional financial planning is the source of much of the distress that people feel in their financial lives. Why is this the case when it seems so logical to hire a planner to escape our financial difficulties? The root of the problem lies in the way planning is carried out.

First, it is often used as a marketing tool to sell financial products. The reason? To generate commissions on the recommendations.

Second, the traditional planning process does little to educate investors and help them deal with the instincts and emotions that are at the root of the poor investment returns that they experience.

We believe that Financial Planning is the problem and Wealth Coaching is the solution.

The Wealth Coaching process gives you Peace of Mind, so you can stop worrying about your future. It helps you find happiness as it guides you in the TRUTH of investing, by teaching you how to make wise choices as you journey through your life's stages. It is all about your relationships and what you value, not your net worth.