Our emotions as stocks move higher might range from optimistic to euphoric. When stocks move lower (as they inevitably will from time to time), we feel fearful , maybe even desperate. What is important to realize,however, is that these human emotions run in a loop with peaks and valleys; highs and lows.

By managing our investing/financial emotions we place ourselves in a position to accomplish long term goals. If we let one emotional stage engulf us, we place these goals in peril.

All resources are relatively scarce. That is, regardless of how much of something we possess ,it is not unlimited. If we earn $1 and spend$1.40 (like our very own federal government ), eventually it will catch up to us. We see this with clients sometimes where they believe that if they only could earn a bit “more”, all their financial issues would magically melt away. If only that were so. In most instances,  what goes out (expenses/spending) vastly outweighs in importance what comes in (income/earnings). Stated differently, what one saves matters more than what one earns. Iverson proved that as apparently he earned a lot and spent a lot more.

We can all learn from these examples if we will remind ourselves that economic laws  are universal and non-discriminatory, they apply to everyone.

One of my colleagues used to say “you have to be in ,to be in” meaning that to obtain market returns, you have to be “in” the market. Sure, we can cherry pick time-periods that show this to be false (the past handful of years have been one of these periods), but for the main, for the longer term, it holds true.That is of little import. What is important, however, is that we acknowledge that the long term numbers do not equivocate…stocks beat fixed income in almost all ten year periods and all 20 year periods. 

We also need to understand that if we treat investing as an “on or off” proposition, we will very likely miss some of the returns that accrue from patience. We encourage investors to stay focused on their long term goals and not on the day to day ,in or out type decisions. Investing is truly a lifelong pursuit and should be treated that way. You are not investing for tomorrow but 20 years from tomorrow.

At year end, investors held about $11.6 trillion in funds of various  types (including ETF’s). About half are in equity (stock) funds with the other half split between money market funds and bond funds. The net flows into equity funds last year was minus $1.31 trillion and bond funds saw flows of plus $1.28 trillion. This is happening in the face of interest rates bouncing around near zero.

Ultimately, investors are struggling with how to balance their need to sleep at night (bond funds) with being able to eat in the future (equity funds). Perhaps more so than is usually the case, the myriad of global macro-economic concerns is weighing heavily on the minds of investors. The data suggest that these issues are more important than the individual goals of investors which is interesting . None of us exert any control over the global economic issues but we do have control over our own goals and constraints. The factor where we have no control seems to be winning.

Investing is a component of financial planning and should be approached from that perspective which is inherently long term oriented. If we allow our instinct and emotion to rule our investment decisions, our future may be murky indeed. In most cases it is difficult to fashion a reasonable financial future without some equity exposure.

Quale (or qualia as plural) describe personal perceptions of something where most of the facts have been removed. For example, the red color of a rose- the color red is something that we see and judge against our experience from seeing other red roses.

Investing decisions are made against a backdrop of direct personal experience- a quale- that  tells us “what it is like”. The problem is the perception can be all wrong. Our role is to help clients push back against errant tendencies towards more rational based ,goals driven decisions.

 Save More / Spend Less – Saving regularly in both retirement plans and outside these plans is usually a common trait found in those maintaining wealth. Saving is the inverse of spending so this comes into play as well. Regardless of the level of income one has, if you spend all of it and save none, by definition you will have a poorer financial future.

 Avoid Excess Debt – Leverage can also be deadly to maintaining wealth and it certainly has been for many over the past several years. Leverage magnifies losses and makes modest financial problems full blown disasters. Leverage or debt also decreases flexibility which has proven important in navigating the often rapidly changing waters of personal financial circumstances.

 Avoid Big Bets / Diversify – Position size issues or overconcentration can also prove fatal to the goal of keeping wealth intact. This comes into play not just with financial assets but also human capital. That is, the place you earn your living. If all of your financial resources and human capital resources are within the same industry sector that can prove detrimental to your long term goals.

 In closing, reaching and maintaining financial independence today is likely a planned outcome. If we “connect the dots” between spending and saving; needs versus wants; short term versus long term, then we have a good chance. It isn’t magic but it works. Big bets; excess debt; low/no savings, these will likely ruin the plan.

 We are happy to visit with friends, family or colleagues to provide a second opinion on their finances. Our aim is to change the way people think about money.

Achieving positive long term returns above inflation requires a good measure of discipline and avoidance of the temptation to capitulate on one hand or market time on the other. It seems many investors this past year failed that test. Legendary investment author Benjamin Graham observed years ago :”There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movement more successfully than the general public,of which he himself is a part.” Advice worthy of following then and certainly is now.

We have heard all the reasons not to save so just keep them to yourself. We moved; we had kids; we got divorced, and on and on. Not saving = normal life today for most people.  Spending as a preference to saving is the “normal” condition it seems but it is also why so few reach financial independence (where work is optional). Simply put, if you prefer spending over saving today you will very likely be spending far less one day in the future because your resources (absent winning the lottery) will be diminished . By definition, if you don’t save for the future you won’t have one financially speaking.

Let’s make 2012 different by choosing…preferring to save more . Your future financial self will be grateful.