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Behavioral Finance: New Year; New Habits

2012-01-23T09:57:30-08:00

Lose Weight ... Work Out More ... Cut Back on Spending ... Get a Financial Plan – Sound familiar?

We all start with strong resolve and we are determined to crack the nut this time. But then what happens?

The Willpower Trap

Funny that this runs contra to everything we’ve previously been told: If we just have enough willpower we’ll be able to make that change … almost overnight. And yet that’s not the typical result.

Are we really that weak in our resolve? Behavioral science says “No”.

Willpower alone is not the key ingredient, and our thinking that it should be often creates a new dilemma, instead of getting us to our goal. So best to avoid that trap.

Change Your Game for Success: Create a Supportive Environment

If you think about it there are often external “forces” that affect our behaviors ... even when we’re trying so hard to stay on course. If spending is your issue, think about what makes you break-down and fall back on old patterns.

It could be a moment of weakness. Are you hungry, tired, or stressed? These emotion-driven factors will dissolve your resolve in a heartbeat. So in order to improve your odds, stop ... and ask yourself:

Are there ways you can prevent those “triggers”, so the temptation to "slip” is reduced or removed?

Are there other external factors e.g. people or messages that lead you down the slippery slope?

For example: The friend with a limitless budget who says after lunch: “Let’s go shopping” … and you’re off and running?

You get the picture. The more of these resolve-breakers you can identify - and strategize ahead of time to control – the more you increase your chance of success.

Along these lines you can see why a buddy, coach and/or support group are powerful support tactics to augment your journey towards a new habit. Take a look at your specific situation; assess; strategize and start fresh.

What are some new tactics that you can adopt?

The Good News About Repetition

Repetition is also understood to be integral to developing a new habit (similar to when we "practice" to become better at playing a musical instrument, playing a sport or learning a language). Previous convention held that in order to instill a new habit one should repeat that activity for a minimum of 28 consecutive days. It is now understood that at least 40 - 60 days of repetition is what it takes.

However, there is some good news: Studies show that even if you slip several times (and then quickly get back on track) when you’re first trying on the new behavior, your chance of success is not diminished. So if you fall off that wagon, just quickly get back on -without the guilt - and start over.

Women In The Bulls Eye: The Good, The Bad, and The ...?

2011-12-11T09:37:59-08:00

The Good:The Age of Women Is Now Fully Recognized

Well, finally, some 40 years after Gloria Steinem and other feministas did those unthinkable things to bring on the revolution, they are noticing. "They" being everyone from Madison Avenue marketers to Wall Street ... and even more recently from the heights of the president of the World Bank. The demographics - and actuarial tables - are finally indisputable.

Meanwhile women are rockin' it, and "They" know we're going to bring it.

The big questions are: Do we know? ... Are we prepared? ... and, as importantly ... Have we stepped up to full ownership?

The Bad: We're on Their Radar, But Not a Lot Has Changed

I've read two newsletters this week written by financial institutions for the intended audience of financial advisers. One described the unexpected passing of the husband and its effect on the wife as "The Perfect Storm"! 'Perfect for whom?', I was left wondering when I finished the article. Another reads: "The women's market indeed represents an attractive opportunity for all financial advisers."

While they're still trying to figure it out i.e. really understand how they can better serve their female clients with a more effective approach, I offer these three tips:

1. Do Your Homework

Prior to any meeting with financial professionals (of any designation), prepare some questions ahead of time that demonstrate you're being vigilant. Ask them about their take on a current economic headline(s) or ask something specific about a news item on a company or asset in your portfolio. Send the signal that you're in-the-know - even if you just barely have a grasp of the basics.

2. Take charge and make it an educational experience

Whether by design or not, people in the business use their own language. When the jargon is thick, and you're not getting it, ask them to reiterate in language and terms that you can relate to. Many are just unknowing and it's in our best interest to tell them how to treat us. This is just one way we can step up and "own it".

3. Continue to seek quality financial education

It's a process and may seem like a long learning curve, but ultimately any step you take makes a difference.

New Neuroscience Study Says Women Make Better Investors

2011-12-05T20:35:38-08:00

Neuroscience Says Women Make Better Investors, But Why?

"Women are better wired than men to avoid emotionally driven investing mistakes."
Women's more highly developed emotional processing capabilities make it possible says the latest from neuroscience research.

Neuroscience Tells Us So

While our general tendency of "risk-aversion" continues to leave too many women at impasse regarding investing, those who have taken the plunge seem to actually have an advantage over men according to the findings of Richard L. Peterson, psychiatrist and author of Inside the Investor's Brain (Wiley Trading, 2007) and co-author of MarketPsych: How to Manage Fear and Build Your Investor Identity (Wiley Finance, 2010). Peterson points to women's higher levels of oxytocin and a thicker corpus callosum (fibers connecting the two halves of the brain) as likely reasons for the differential between the sexes and the basis for his survey results showing women as:

1) More self aware and more likely to listen to their feelings
2) More aware of the impulses driven by greed and fear and better able to filter them out

In a world where we’re more likely to hear about women’s failure to act due to their risk-averse natures, these findings correlate with what I’ve seen in my practice: Women - who make it past the initial barriers - tend to be more self-possessed and intuitive investors. They don't jump around and chase 'hot tips' as much; they don't trade as frequently and ultimately they have better natural intuition.

The Sweet Spot: Balancing Risk-Aversion with Confidence

Recent study findings also demonstrate that men may be more likely to suffer investment losses due to their "over-confidence" along with the likelihood to overreact to short-term financial news that constitutes nothing more than "noise". While these are merely generalizations about our gender differences, there is something to be gleaned ... and, dare I say, exploited.

What we can deduce: Veer too far into over-confidence, and we're likely to pay the price; Veer too far into under-confidence (risk-aversion), and a similiar fate may await (the high cost to women of doing nothing).

Finding the sweet spot, as usual, seems to be the best course of action. Maybe Ben Franklin had it right when he advised: "Do everything in moderation, including moderation."

What is your experience? Have you given yourself permission to follow through and listen to your instincts? If you really want to gauge your instincts, write it down today and look back six months from now to see how you did. Then let us know!
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Warning: Is Your Financial Adviser An Authentic Women’s Specialist?

2011-09-08T09:04:39-07:00

It’s a tough economic environment and that means shrinking revenues for all manner of financial advisers as well as the rest of us. Searching for new clients is increasingly difficult.

By now it’s well-documented through academic studies that women as a buying group have the majority of the clout and that they control the majority of financial assets in this country. They are also known within the financial services industry to be largely inexperienced and, to some with predatory instincts, this makes them a highly desirable target. More so, it’s understood that women especially in divorce are highly vulnerable, impressionable, and since significant dollars are changing ownership, they can be ripe for the picking.

Over the last few years I’ve witnessed an alarming number of advisers who are claiming to be “specialists” in this category. I’ve even received phone calls from some financial professionals who brazenly tell me they want to “get in on that market because that’s where the dollars are … can I give them tips from my 26 years of experience pioneering in that field?”

If your adviser – whether a financial planner, money manager or divorce financial strategist – is claiming to be a specialist in women’s financial issues, it’s time to ask them some hard questions about the nature of their ‘specialized’ knowledge.

How long have they been specializing in women’s money issues? What is different about their approach with women? What specialty training have they had related to women & money? Can they give you specifics from any of the benchmark academic studies and state specifically how they have adapted their services to address those findings? If they’re advising you on divorce matters, are they ultimately hoping to manage your portfolio post-divorce?

Think about it. In vetting for authenticity, don’t be afraid to constantly test them. All too often, I have seen women – whether current clients or among the thousands I have spoken with on these issues – who have endured catastrophic and appalling abuses simply because they did not feel entitled to qualify beyond the stated credential and self-proclaimed specialization of the financial professional. In all things financial, it’s imperative to find your financial voice and use it. Given the high likelihood that you may only have one chance to do so, you want that chance to become an experience without regrets. Remember; It’s Your Money – Own It!

Why Are My C.D. Rates So Low?

2011-07-28T10:06:42-07:00

Yes, there's no denying it: Interest rates are abysmally low right now. Understanding "why" and the impact on your bottom line, can make a big difference in how you use C.D.'s in the future.

What are interest rates anyway?

Simply put, interest rates can be defined as the “Cost of Capital”, which to put in regular language just means the 'cost of doing business'. Let's take a look:

If rates are high, for example, your new home loan interest rate will be high. Similarly, for businesses looking to borrow money, higher rates for borrowing become prohibitive, so business expansion declines. Low rates, on the other hand, provide impetus for more borrowing and expansion because we say "money is cheap"; ultimately if done correctly, that spells “growth” and a stronger economy.

What causes rates to go higher?

A high-growth economy i.e. a strong business cycle will lead to higher interest rates. READ: Demand increases, rates go up. Cost of goods also increase and we have inflation. Inflation just means what a single dollar may have purchased yesterday, today now requires more than a dollar for the same item.. In so many words, the effect of which: your money has ‘shrunk’. Currently we’re in a phase of low-demand, low-growth and therefore virtually zero inflation. A healthy economy is one that strikes just the right balance between growth and demand. Not too hot, not too cool. That’s why the Federal Reserve has intervened to make rates low – to stimulate growth.

What does it mean to my bottom-line?

First it’s important to understand what the yield on a C.D. actually "Nets" you in the end. While an 8% rate on a C.D. sounds very attractive, there are two fundamentals that we often forget to consider in understanding the "Net" effect. The two things we consider to get the "Net" are "inflation" and "taxes".

As we said, inflation means, in most simplistic terms, your dollars are shrinking and buying less.

Some of you will remember that in 1981, you could get almost 17% interest on a C.D.! Sounds too good to be true? Well, it did happen. However, inflation was also running at 11%. So that means, by the end of the year, your money – including the amount you earned on the CD - had shrunk by 11%.

In effect, that 17% rate of return only netted you 6%, after adjusting for inflation’s impact. Then if we apply the second impact on your "net", you also have to pay taxes on the full amount of interest you earn. You can see that, after inflation and taxes, you’re practically at ground zero.

Lessons Learned

Today’s rates are incredibly low, but so is inflation. In the relative sense, there is nothing unusual about today’s rates.

If you’ve refinanced your home mortgage (or taken out a loan for business expansion, etc), you’ve benefitted from these very low rates. Low inflation also means we’re not experiencing rapid price increases when we go to the store for clothing, food and other goods and services. Again we’re benefitting from low inflation.

C.D.s were never meant to be an “investment” – they are simply a place to “park” money safely.

"Investing" by definition means you are attempting to “grow” your money. Growing your money means you have to first outpace inflation and taxes before you see any real growth.

Simply said: CD’s, money markets, interest bearing checking accounts provide a minute fraction of growth and should not be thought of as an investment vehicle.

So while we may feel that we are being penalized by today's low rates, remember that high rates mean high inflation ... something we all want to avoid. So go ahead and keep your emergency money in C.D.'s, but remember that the only investment in today's environment - that provides a hedge against inflation and taxes is in the stock market.

Why Signing On the Dotted Line Needs Careful Consideration

2011-04-28T11:48:00-07:00

With tax returns neatly filed and over with until next year, it seems like the perfect time to talk about what your signature means, both on your tax return and other documents as well. A signature by definition binds the individual signing the document [i.e. contract, agreement, form, etc.] by the provisions contained in the document, which means simply: You are legally obligated to whatever is contained within them. And in circumstances where you are married and signing as one of the parties to the contract—or tax return—you share in the legal responsibility, as well as in any legal consequences, that may arise.

Best Practices

That said it’s in your best interest to read and understand what you are signing, no matter what the circumstances. When someone hands you a document and says “Just sign here,” the responsibility ultimately rests with you to know what you’re agreeing to. Even though it may inconvenience you to read the information contained, in the long run, the risks far outweigh the time you will spend reading the fine print. In the case of your tax return, you are still responsible even though you may rely on your spouse both to complete the return and, as importantly, to act on it (i.e. to make the payment for the tax obligation) In the case that s/he doesn’t, then you will have to face the aftermath as well.

So you see the “Just sign here” activity can be fraught with serious consequences. In fact, the IRS even has a provision known as the Innocent Spouse rule.

Here’s an excerpt from the IRS that generally outlines the liability you carry upon signing your tax return.

“Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows. Both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. One spouse may be held responsible for all the tax due.”

While this may sound like the heaven-sent loophole that will automatically save you, it’s best to understand that you will be responsible for proving that you are indeed innocent. To learn more about this rule and your potential inabilities go to the Innocent Spouse FAQ’s: http://www.irs.gov/taxtopics/tc205.html

The bottom-line is that even though you may have an “airtight” case for being an “innocent” party, you will still have to complete paperwork and submit documentation to the IRS for a review of your case, and sometimes, depending on the scale and conditions of the case, with the aid of an attorney to represent you.

Also noteworthy is the fact that this liability will ‘follow’ you even after divorce, if you do not qualify for innocent spouse status.

It’s easy to see then that this claim process for establishing your innocence can become not only time consuming, but stressful and costly. It goes without saying then that by reading and understanding first anything you are signing your name to, you will avoid what could potentially be some very unhappy and costly moments. So the next time you are faced with signing any document, take a deep breath, take your time and read before you pounce on the yellow sticky that says “Just Sign Here”. Taking precautions now—or the next time you sign anything on the dotted line—will keep you out of harm’s way.