Keep Thy Emotions In Check – Advice From Jonathan Clements

Do market drops make you want to “do something?” Something like sell EVERYTHING and move your money to a CD or sell the one stock or mutual that is down and put that money in something that’s performing better? Sure, we all talk about keeping our emotions in check when it comes to investing but I wonder how many people actually follow that advice.

Today’s Getting Going column by Jonathan Clements is about how to stop your emotions from wrecking your returns (free). The article closes by offering a few strategies for keeping your emotions under control when things aren’t going so well in the market:

  • If the market pluncges and you have an overwhelming urget to act, do something sensible. – Clements recommends sending a $100 check to your favorite mutual fund or rebalance your portfolio back to your target mix. I think this is solid advice. The main thing is to NOT make a rash decision!
  • If you are tempted to make big portfolio changes, get a second opinion. – Or, start a blog and write about your feelings. Or even better, send me an email, which I’ll post and AFM readers will offer you some support.
  • Automate your investing, so you keep buying stocks during rough markets. – I can’t tell you enough how important this point is. If you don’t put your investment plan on automatic, you’ll find yourself putting off mailing that check to your investment account until things settle down.
  • Try the “restart” strategy suggested by Prof. Loewenstein (mentioned earlier in Jonathan’s article) – From the article:

    Take your existing savings and set them aside in a diversified portfolio, such as a target-date retirement fund. Thereafter, focus your energies on building a new portfolio.

    Your monthly savings will have a huge impact on this new account’s growth, so you will have a strong incentive to save. Your savings will likely also overwhelm any hit from a market decline. What if you make some foolish trades? Because you’re dealing with only a small portion of your wealth, you won’t do too much damage.

    I’m not so sure I like the last strategy. It seems like you’re giving in to your emotions. It’s also more work!

    That said, it is very important to keep your emotions under control. Your future depends on it.

The Real Key to Acheiving Your Goals

Dreams (also known as wishes) are often vague, even pie-in-the-sky desires; they need not be realistic, or specific. Common examples might inlcude “I want to retire rich” or “I wish I looked like Jessica Alba.”

Many dreams never become reality because they aren’t true desires. I might dream of winning the lottery on occassion, but that’s not a serious objective in my life. There’s nothing wrong with having dreams, but if your true desires never make the transition from dreams to goals then they can become frustrating regrets.

Goals are more Specific than dreams. To qualify as a SMART goal, your dream should also be measurable, attainable, realistic, and timely. Setting goals with all of these characteristics almost ensures you’ll reach them if you put your plan in action and stick to it.

Specific & Measurable: “I want to have $1,000,000 by the time I retire” and “I want to lose 20 pounds” are closer to goals than dreams because they are specific and measurable objectives.

Attainable & Timely: To really make them goals you have to outline specific steps that will enable you to attain them, and you should have a deadline. Our examples would become “I will accumulate $1,000,000 by the time I turn 65 by saving $1000 each month” and “I will lose 20 pounds in six months by jogging for 30 minutes 4 days a week.”

Realistic: Of course, if your goals aren’t realistic (because, say, you’re 63 with nothing saved and you earn $50,000 a year), then they aren’t really goals at all.

It’s easy to turn your dreams into goals on paper. But the real key to acheiving those goals–and being satisfied when you do–is setting goals that reflect your true values. That may sound cheesy, but it’s especially true when it comes to financial goals.

If you pick some arbitrary net worth target or aim to accumulate expensive homes and cars based on someone else’s expectations, not only might you find it difficult to muster the motivation and discipline to get there, but you’re very unlikely to feel fulfilled when you arrive. Linking your financial goals to your values (education, family, independence, etc.) gives you the energy, encouragement, and motivation you need to work towards your goals. And you might even end up happy when you reach them.

More from Meg at The World of Wealth

Index Mutual Funds or Exchange-Traded Funds? How About Both!

Yesterday’s Getting Going column, Spicy or Mild? When ETFs Are Better Than Index Funds (free), in the Wall Street Journal took a look at investing in index mutual funds vs. exchange-traded funds. Jonathan recommends using both:

Use index mutual funds for accounts you’re regularly adding to or drawing on, while stashing longer-term money in exchange-traded index funds. That combo should trim your investment costs — and further boost your fund returns.

This idea has merit because exchange-traded funds typically have lower management expenses than mutual funds. The only problem is that exchange-traded funds trade like stocks, which means there are transaction expenses. Of course there are ways to reduce transaction charges by using a low-cost broker like Scottrade. Scottrade charges $7 per trade but will only trade full shares. Another route you could go is to open a basic account with FOLIOfn, which run $199 per year but gives you 200 trades per month on a select list of companies. On a small account $199 per year is pretty steep but gets more reasonable as the size of the account increases.

Account size also weighs in with mutual funds as most mutual fund companies have account minimums. One way around this is to set up an account and do monthly direct deposits into the account. Then as the account grows more options will open up to you.

One thing I have always liked about ETFs is their simplicity and the ability to set up portfolios the way I want them set up. For instance, I like the ability to break down the Dow Jones Total Market Index into ten sectors and invest an equal amount in each sector. I can do this with iShares ETFs but not with mutual funds.

Anyway, it is something to think about. I like to look at index mutual funds and exchange-traded funds as tools. One tool may work perfect for one job but be totally useless for another job. It’s better to have a tool box full of tools.

Millionaires Focus on Freedom

The title of this post is also the title of an article I just read on Yahoo! Finance (originally from A quote from author Keith Cameron Smith really struck a chord with me, and I want to share it with you:

The very poor and the poor are stuck in survival mode; they just want to survive. The primary goal of middle-class people is comfort; I just want to have enough; I just want to be comfortable. When you get into the rich and the very rich, their primary goal is freedom; I’m going to do whatever it takes to experience freedom. That’s the biggest difference.

It’s OK to have a plan for survival, it’s OK to have a plan for comfort, but just make sure that most of your mental energy is focused on freedom. Then you’ll start experientially understanding the old saying, “Seek and you will find.” If you seek to survive, you will. If you seek to be comfortable, you will be. But if you seek freedom, you will find it. It just takes longer to create freedom in your life than it does to create survival. Does it take longer to grow a weed or an oak tree? Financial freedom is like an oak tree, where survival or comfort is like growing a weed or a little bush; it doesn’t take too long.

This is a very interesting and important consideration. I agree that the poor are focused solely on survival and that the middle class is focused on comfort and a basic sense of security (“sense of” being the operative phrase). I also agree that those mindsets inherently limit financial and career potential of those people, as a group.

However, I’m not sure that all (or even most) of the poor and middle class can acheive financial freedom simply by “seeking” it. I strongly believe in individual responsibility and the American Dream, but the fact is that many people from those classes lack the education (formal or otherwise) and the ability to become a successful entrepreneur, which the article implies is really the only way to become financially free. Many also do not have the academic preparation, resources, or motivation to go to college, after which they could arguably obtain a decent-paying job.

Financial planners and “experts” love to look at people as individuals in a vaccuum. “Get educated!” “Save money!” “Start a business!” they preach, as though everyone is perfectly capable of doing such things but are somehow simply choosing not to. That advice may apply to many of us who typically read and write about finances–those who are already more or less financially comfortable. We grew up being told we can do and be anything we want. We were read to and educated constantly; we were taught how to handle and save money; we were expected to make good grades, go to college, and have a career (as opposed to a job).

It’s important to remember that millions of Americans never get that kind of education and guidance growing up. Many people never see or hear of a single positive financial role model. They are not expected or encouraged to become financially comfortable, much less “financially free.” Things like payday loans and savings jars (as opposed to accounts) are what they are used to–things like IRAs, savings bonds, and 529 plans are not even part of their vocabulary. And hearing about the tax breaks that a 401k has to offer is not going to change their reality or their financial situation. The poor and the middle class get their financial education from the same place the rich do–from friends and family. The difference is that their friends and family are more likely to be sorely mis-guided.

The point is not that there’s no hope for individuals from the poor and middle class to succeed. There are countless success stories (including all four of my grandparents). The point is that many of those people may need a different kind of financial advice and guidance. It’s not as simple as telling them to seek financial freedom.

More from Meg at The World of Wealth

Protecting Your Ass(ets) Should You End Up In Court

Cute title, eh?

Today’s Getting Going column, Protecting Your Assets in Case You Find Yourself in Court (Free), reminded me of my own story…

Several years ago I was involved in a fairly minor fender-bender. The lady that I ran into (the accident was my fault) got out of the car and was standing on the side of the road. She appeared to fine, just a little put out by the whole deal. She was a runner for a local dental office and the car belonged to her employer. Anyway, she told me that she had been involved in another accident not to long before our accident.

Everything seemed to be fine and dandy and I had actually forgotten about the deal until a year later when I got a call from my insurance company telling me that I was being sued. The lady claimed her foot was broken during the accident and that she was suffering from a back injury. I was both scared and ticked off! Her foot was perfectly fine when she was standing on the side of the road! Her lawyer was a TOTAL jerk (as most of those kinds of lawyers are). I could tell that they were just looking for a nice little payday and that this suit was bogus.

Anyway, the case was eventually settled for a relatively small sum of money but it scared the daylights out of me. I mean, what could have happened if this case had gone to court and a judgment was found against me that beyond what my insurance company would pay? I could have lost my entire CD collection! LOL!

Seriously though, Jonathan’s column offers up five ways that people can protect themselves:

1. Get a personal umbrella policy. This is a no-brainer. You’ll have to increase your auto coverage before you can purchase an umbrella policy. However, once you do that, you’ll find that the umbrella policy will only cost you $200 – $400 per year. That’s cheap insurance.

2. Max out your retirement plans. According to the article, your 401(k) should be protected from creditors. I’m not sure why the word “should” is thrown in there but it is.

3. Know your state’s laws. Jonathan suggests typing in your state’s name and the words “asset protection” to find out more information on your particular state. It might also be worth it call your attorney and ask them the basics.

4. Consider owning assets jointly with your spouse. Consult your attorney before you make any title changes because some changes could mess up your estate plan.

5. For those who have assets of $5 million or more. Clements suggests looking into more sophisticated protection like trusts, limited partnerships and limited-liability companies. For those, you’ll definitely need an attorney.

Clements also mentions a book that might be helpful on this topic: Asset Protection: Concepts and Strategies for Protecting Your Wealth (Affiliate Link). I haven’t read this book.

Jonathan Clements’ Recession Advice: Cash is King

Today’s Getting Going column (free) by Jonathan Clements is pretty interesting. He talks about the fact that current signs point to a recession or slowdown of some sort and that one of the ways to weather the storm is to have cash on hand for two reasons:

1. In case you get laid off

2. In order to take advantage of falling asset prices (in other words to be able to buy low)

Here’s his advice for those who are worried about a recession:

  • Keep fuding your 401(k) plan to get the full employer match. – I say keep funding it even if you don’t get an employer match or at least utilize an IRA.
  • Stockpile cash in a money market fund. – Or an online bank savings account.
  • Set up a home-equity line of credit. – Excellent idea as long as you qualify and then don’t spend the money unless you really need it.
  • Pay off credit card balances. – ALWAYS a good idea

Pretty good advice.

Small Ways Wealth Begets Wealth

Today’s Getting Going column by Jonathan Clement’s is titled The Small Ways Wealth Begets Wealth (free). It’s about how saving relatively small amounts of money can help you build wealth.

For instance, by saving just $100 per month, a person can eventually build up a savings account for emergencies so that they don’t have to put unexpected needs on a credit card. Then, as the savings account continues to grow, it will allow people to raise their insurance deductibles, which reduces their insurance rates. See how this little game works?

Of course all of this is much harder to do if a person starts off on the wrong foot. That’s why this information should be taught to students while their young and not yet able to get themselves into financial trouble. Maybe we bloggers should start a financial literacy program.