Personal Finance Coaching helps you override the emotional blocks to successful investing

What stands in the way of your managing your personal finances and maximizing your investment returns? Success is not just a matter of skills. A lot of it is function of emotional factors.

To illustrate how harmful your emotions can be to your money, and how widespread this is, I am referring here to a New York Times article (see source below).

The article quotes a study by Trim Tabs Investment Research that compared stock prices to what people had paid for their stock funds. While the S.& P. 500 had an average level of 1,171 in the 10 years through July 2010, the average dollar was invested in stock funds at an index level of 1,434. People had paid 22% more than current market price!

It is important to clarify what this number represents. We are not talking here about comparing stock prices in July 2010 to what they were just before the big stock market plunge at the end of 2008. The study takes into account what investors had paid for their stock funds at whatever time they purchased these funds.

So what we are seeing here is a general bias, among stock fund buyers, for spectacularly bad timing. It is not that people are unaware of the advice to "buy low, sell high". It is that emotions get in the way, and lead people to do the exact opposite. The New York Times article quotes financial experts giving their point of view on this phenomenon.

“It’s classic fear and greed,” said Christopher Cordaro, C.E.O. and chief investment officer of RegentAtlantic Capital, a financial planning firm based in Morristown, N.J. “When stocks go up and people have positive returns, they extrapolate them into the future, then the opposite happens and they get out at the bottom. It’s part of human nature.”

Christine Benz, director of personal finance at Morningstar, agrees. “It’s always hard to speak generally about what’s motivating investors,” she said, “but it’s emotions, basically,” resulting in “a pattern we see repeated over and over in market cycles.”

The New York Times article goes on to state: "Those emotions are responsible not only for drawing investors in and out of the broad market at inopportune times, but also for poor allocations to its niches."

“In individual sectors, timing appears to be worse,” Ms. Benz said. “It appears that investors get greedy with some of these categories and buy in after a run-up. Tech is the poster child for that over the last decade.”

The article comments: "That is because individual underperformance is a matter of psychology, not financial prowess, and because trying to time market turns incurs certain costs that make success harder to achieve."

“I can’t disagree that excellent market timing would trump all other strategies,” said Harold R. Evensky, president of Evensky & Katz Wealth Management in Coral Gables, Fla. But “good is not adequate,” he said, "because after factoring in taxes and expenses, break-even requires being right around 70 percent of the time."

Adapted from: In Wrecking Your Portfolio, Timing Can Be Everything, by Conrad de Aenlle, New York Times, January 9, 2011

Personal Finance Coaching helps you become more aware of your attitudes and emotions about money, investing and risk so that you can make better decisions.

Know thyself... and, as you do, override the knee-jerk reactions that prevent you from managing your money (and your life) as effectively as you can.

See also: How we define ourselves by the choices we make

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