PUBLICATIONS ARCHIVE

Barriers to Financial Security: Important Lessons / Chapter 6

2010-06-30T11:23:00.006-04:00

Hard and Fast Solutions

We will discuss solutions more extensively in a future volume of articles, but they are worth summarizing here as well.

Investor Behavior & the Buy-Sell Cycle: Investors frequently engage in a buy-sell cycle that can be destructive to their portfolios as long as they are not aware of their behavior or able to modify it. Quite simply, this cycle begins with the purchase of stock that an investor believes will be particularly lucrative. Greed kicks in and all is well until the stock begins to lose value. As soon as this happens, the investor experiences fear, regret, and, eventually, panic if the stock’s value continues to decline. The investor sells the stock just before new information comes out that will send its value soaring. Recognizing and understanding this potential behavior will help investors avoid it.

Cash Flow Models: As investors assess where they are financially and where they would like to be, they will find cash flow models to be incredibly helpful tools. Whether trying to focus on the immediate future or trying to plan for retirement, investors who utilize cash flow models can avoid making rash, costly mistakes. An informed investment advisor, and even online tools, can help you develop an accurate cash flow model.

Managing Investment Costs: A valued advisor can manage clients’ investments objectively and can assist clients in making research-based decisions, which is important since investors can only control those factors of which they are aware. Similarly, such an advisor can also help clients limit the cost of investing, which in turn increases the amount of the investment return that clients keep in their pockets.

Managing Risk and Reducing Volatility: Investors will manage risk and reduce volatility more effectively if they have an efficiently designed portfolio. For every level of risk, the portfolio should take into account the optimal combination of investments that will give the highest rate of return. To do so, investors can utilize a variety of resources to stay informed and may also benefit from working with a valued advisor.

Conclusion: Now that you have some historical context, consider where we are today. During the first quarter of 2009, investors moved 285 billion in new net capital into money market funds and withdrew a net 31 billion out of equity funds. Do these changes suggest herd behavior? Perhaps. However, what long-term investors need to recognize is that if they radically alter their well-diversified portfolios, they also need to be prepared to assume a higher tolerance for risk. For example, investors who may have significantly lightened their exposure to risk by selling stocks in late 2008 and early 2009 might not have moved back into the market to participate in the 38% rally that took place between mid-March and mid-June of 2009. (On March 9, the S&P 500 was at 676.53, and by June 8 it was up to 939.14.) Though it begins to sound like a broken record, maintaining a diversified portfolio with exposure to multiple asset classes throughout a variety of market cycles really is the strategy that has provided investors with the least volatility in their returns. And these returns also end up being the most consistent with investors’ expectations.

Investors face a number of challenges if they plan to have successful investment experiences over the years. Of primary concern are the psychological impediments that make it difficult for us to make good decisions consistently. Investors also face the certainty of market volatility, as evidenced by historical trends. Therefore, they should utilize the resources necessary to manage investment costs and to process current academic research on corporate stock pricing, portfolio construction and management.

Additionally, take the time to remember the impact your emotions can have on your decision-making abilities when you are making financial decisions. Consider carefully not only the decisions you are facing, but also why you are contemplating them in the first place. Just being aware of the emotional complexities of making financial decisions will help you achieve financial security.

- James E Wilson, CFP®

This is the fifth chapter to a seven part series on the Barriers to Financial Security. To download a full copy of the whitepaper, click here

Barriers to Financial Security: Important Lessons / Chapter 5

2010-06-14T15:45:00.006-04:00

Diversification

Most people understand the basic concept behind diversification: do not put all of your eggs into one basket. However, even people who are sophisticated investors can fall into investment traps. For example, many people have suffered losses because they placed a large percentage of their investment capital in their employers’ stock only to lose much of it during the recent downturn. Even though the employees may have understood that they were taking too much of a risk in doing so, they did not do anything to change their situations. Instead, they justified holding the position they had established because of the large capital gains tax they would have to pay upon selling the stock, or they imagined that the stock was just on the verge of taking off. In such instances, investors are too close to a particular stock, and they develop a false sense of comfort and overconfidence. They may rationalize that everyone with whom they work has invested in the company, and how could so many people be wrong? Similarly, they rationalize the importance of their investment in the company’s stock because they are professionally invested in the company and feel a certain sense of loyalty. Over the past year alone, many of these investors have felt the pain of such imprudent investment practices.

In much the same way, other investors believe they have diversified their portfolios effectively because they own a number of different stocks. What they may not realize, however, is that they are in for an emotional rollercoaster ride if these investments all belong to the same industry group or asset class and therefore share similar risk factors. For instance, investors in the late 1990s and early years of this decade learned that diversification among a variety of high tech stock companies was really not diversification at all. When a number of prominent technology stocks, including Cisco, Dell, and IBM, experienced billion dollar sell-offs between Friday, March 10 and Monday, March 13, 2000, the resulting chain reaction hit the entire tech industry.

Included with this article are charts (click here to view the full version of the whitepaper with attached charts) that will help investors understand how diversification dramatically impacts a portfolio. (It is important to remember, however, that one cannot directly invest in the S&P 500. This chart uses it as an index for illustration purposes only). So, imagine someone whose hypothetical portfolio consisted of a 100% investment in the S&P 500 (Portfolio 1). Between 1998 and 2007, he would have achieved a 4.38% annualized compound return and for every $1.00 invested, he would have ended up with $1.47. However, if he had merely invested 40% in a 2-Year Global Fixed Income Fund with the remaining 60% still in the S&P 500 (Portfolio 2), his annualized compound return increases to 4.72% and each dollar is now worth $1.51. Portfolio 5 shows additional diversification including investments in U.S. small and large value companies as well as in real estate. The annualized compound return of Portfolio 5 jumps to 8.9% while the growth of $1 reaches $2.15. Adding international stocks to Portfolio 10 even better demonstrates the potential of diversification because it achieves more than double the annualized compound return of Portfolio 1 (10.08%), and our investor’s $1 has now reached a value of $2.37. Explained this way, the benefits of diversifying are obvious; however, many people fail to take advantage of the potential of diversification.

- James E Wilson, CFP®

This is the fifth chapter to a seven part series on the Barriers to Financial Security. To download a full copy of the whitepaper, click here

Barriers to Financial Security: Important Lessons / Chapter 4

2010-06-03T09:37:00.015-04:00

Our Money and Our Brains

To feel excited when our portfolios increase in value and to experience fear when they decrease in value is perfectly normal and acceptable. However, these emotions become problematic once we start making decisions based on emotional entanglements that limit our ability to reason. To prevent ourselves from making such decisions, we first have to recognize our capacity to make poor financial decisions based on emotions in order to then recognize the emotions that drive them. In response, we can then take a more defensive stance that could potentially limit the risk of damaging our long-term financial security.

First, identify the enemy. We are our own worst enemies when it comes to managing our finances. When we understand how we tend to respond in certain circumstances, we can develop a plan to defend our finances from our emotional responses the next time we have similar experiences.

Second, recognize the challenges. You are likely very familiar with the excitement of financial gain and the fear of financial loss; however, you probably are not aware of how your brain’s wiring influences those responses. Investing affects us not only emotionally and psychologically but physiologically as well.

Neuroeconomics, the study of neuroscience, economics, and psychology, shows that any thoughts or decisions about financial profit use the same part of our brains that is hardwired to pursue pleasure. In contrast, the experience of financial loss is processed by the part of our brain that triggers a full reaction to pain or danger and causes fight or flight. Your brain is so sensitive in such situations that it even responds differently if you are planning for short-term monetary rewards than if you are planning for long-term ones (Technology Review, May 2005, Huang). In other words, your responses to investment plans and outcomes are very complex.

Once you recognize these responses in your own behavior patterns, you will have a better chance of achieving financial security. Recognizing them will also help you keep your emotions in check the next time we face a bear market, which is a part of every five year cycle. Jason Zweig, a columnist for the Wall Street Journal and editor of the revised edition of Benjamin Graham’s The Intelligent Investor (2003), expands on this mental response with an analogy: “There is not much difference in the brain between having a rattlesnake slither across your living room carpet and having some stock you own go down by 40% or 50%.” Recognizing that you may not have much of a chance battling a rattlesnake barehanded, you might resort to a flight response because you merely hope to get out alive. Not surprisingly, you may feel similarly in response to a disastrous drop in the value of your investments.

Additional psychological forces include personal biases, emotions, and past experiences, all of which can influence even experienced investors. Some psychological forces are quite obvious while others are very subtle. Nevertheless, there are psychological pitfalls you can be aware of and straightforward advice you can use to help mitigate their impact. A few of these include a fear of regret, myopic risk aversion, overconfidence, and the “herd mentality.”

Fear of Regret
Investors who are affected by fears of regret put off financial decisions because they hope to get even more information and feel even more confident before having to make decisions. Consequently, these investors sometimes hold on to losing stocks for too long or sell winning stocks too quickly. They hold on to losing stocks rather than accept a loss for two reasons: they hope the investments will eventually make gains, and they feel as though selling them confirms that they had made a mistake by buying them in the first place. Those with winning stocks sell too quickly because they want to do so before the stocks start to lose value – they hope to “quit while they are ahead.” If you tend to worry that you will regret similar investment decisions, listen to Deena Katz, a chairman for Evensky and Katz Wealth Management: “My mom always said, if you’re going to do it, don’t worry; if you’re going to worry, don’t do it. You’ve already made the commitment to be where you are invested . . . You’re there. And unless you need to get out, you’re committed” (Money, May 2008).

Myopic Risk Aversion
Myopic risk aversion certainly sounds like something you would hear in an eye doctor’s office, and it actually does relate to a type of “vision.” People exhibiting myopic risk aversion cannot focus on long-term gains because they are too fixated on short-term losses. Such a focus makes sense psychologically, but it could be an exceptionally dangerous pitfall for investors right now. Even those who are usually confident about their long-term investment goals may become anxious about recent fluctuations in the market and might end up losing money unnecessarily because they can only focus nearsightedly on the immediate future. To avoid this pitfall Robert Arnott, the founder and chairman of Research Affiliates (a developer of investment products) suggests that rather than ask yourself what you can do to make money in the next three months you should ask yourself, “What would I want my portfolio to look like over the next 30 years?” (Money, May 2008).

Overconfidence
Overconfidence is somewhat the opposite of myopic risk aversion. Recent research indicates that many investors, especially men, overestimate their own abilities as well as the accuracy of the information they gather prior to making financial decisions. As a result, overconfident investors tend to overtrade, which usually leads to lower returns. An article in the February 2007 issue of Inc. explains that “overconfidence is one of the worst failings an investor can have.” Despite the temptation to guess the future or try to control what will happen (both of which are forms of overconfidence), investors have to admit that neither is possible to do, no matter how confident they may feel in their abilities.

Herd Mentality
As Niccolo Machiavelli explained, “[People] nearly always follow the tracks made by others.” Such behavior causes us to go along with the collective wisdom and tastes of the larger masses in a variety of situations. Clothing fashions, community circles, automobile selection, and even investing habits reflect that humans are social creatures who are very likely to “follow the herd.” When it comes to investing, social environments and the media heavily influence people into jumping blindly on the investment bandwagon without employing sound reasoning and research. Therefore, unfortunately, investors will unwittingly follow the herd even if the herd’s direction is to the detriment of the investors’ personal and financial goals and even if doing so goes against their individual reasoning abilities.

The Madoff Scandal illustrates this tendency perfectly. Many people, who had long been successful investors, forgot about the importance of research, prudence, and diversification in large part because they followed peers who were investing with Bernard Madoff. Recognizing the role societal influences played, David Zarolli reported in a December 2008 story for NPR’s “All Things Considered” that “it was prestigious to invest with him.” In fact, people even joined his country club in Florida merely to meet him and get a personal invitation to invest with him. In addition to a prestige factor, behavioral finance experts explore other key reasons we are willing to follow the herd. The Market Analysis, Research, and Education group, a unit of Fidelity Management’s research company, explains that an “investor may follow the herd because he or she feels an intuitive sense of conformity, whereby aligning oneself with the consensus of a large group going in the same direction is more comfortable than making an alternative, less-popular choice.” If we follow the direction of a larger group of investors, we can act based on the assumption that many others must have access to superior knowledge. And how could so many others be wrong? Conversely, we tend to believe that the groups that we are part of are naturally more likely to be right. (Otherwise, we would not experience the sense of affinity that defines those groups to begin with.)

Including the original Ponzi Scheme, there are quite a few historical examples when a number of individuals have fallen prey to the herd mentality. One, Tulip Mania, caused wealthy Dutch investors to spend obscene amounts of money on tulip bulbs or on shares of bulbs. Some even went so far as to trade houses so they could invest in one or two tulip bulbs! Such examples are evidence of the irrational behavior humans are capable of exhibiting, and we seem to be especially vulnerable when we are following others.

An investment trend in the late 1990s also demonstrates a similar but complicated example of herd mentality. During the emergence of the “New Economy,” Warren Buffet was ridiculed for his arcane investment theory because others believed that the New Economy marked a period when globalization and the acceleration of developments in information technology began to change economic trends. The mainstream media extolled the possibilities offered by this New Economy. As early as June 27, 1994, John Huey of Fortune wrote, “The advent of the new economy is unequivocably [sic] good news for the U.S., which holds a wide lead over the rest of the world in developing, applying – and now exporting – technology.” When referring to the New Economy, a September 27, 1999 Time magazine article titled “Get Rich.com” asked, “If you're an entrepreneur, why waste your time in the old world, worrying about manufacturing things and dealing with unions and OSHA inspections, when you can put your company online in three months?” If only people had listened more to Warren Buffet and less to the media’s promotion of the New Economy.

One way to better appreciate the investment trend in the late 1990s is to study the relationship between net sales of equity mutual funds. During the first quarter of 2000, as seen at Point 1 in the graph on the next page, the stock market was coming off of five straight years of double digit gains, and many of those gains were led by technology stocks. Between 1995 and 1999, the S&P 500 advanced 251% while the tech-heavy Nasdaq advanced 457%. In January 2000, at the peak of this multi-year rally, a record number of media headlines alluded to a “bull market.” Then, as it turned out, the first quarter of 2000 ended up being the peak of the market: over the next three years, the Nasdaq plummeted 67%, which meant devastating losses for those investors who had concentrated heavily on technology stocks. Those who had followed the herd and entered the market during the later stretches of the metaphorical stampede likely suffered the greatest losses because they had joined the herd at the riskiest time.

Joining the herd as it ventures into new territory and takes new risks can be just as costly as joining it too late because those who follow the herd to supposed safety allow themselves to be led out of the stock market at the wrong times, too. In the final quarter of 2002, for example, after nearly three consecutive calendar years of downturns in the stock market, the number of headlines that suggested the possibility of a continuing bear market rose significantly. In response, investors became increasingly fearful and anxious before finally reaching the point of capitulation. Between June and October 2002 (Point 2) (open full pdf document at the end of this post to view the graph), the S&P 500 declined 16% and the Nasdaq declined 18% – in just five months. Investors pulled a monthly average of 13 billion out of equity mutual funds compared to the average monthly inflow of 19 billion that had continued during the previous five months. As the attached graph shows, people were buying when it would have been a better time to sell (Points 1 and 3) and were selling when it would have been better to buy (Point 2). It is worth noting that some investors did act individually and may not have focused only on long-term investments. Regardless, both types of investors lost money because of poor decisions and bad timing.

Just as these investors retreated from equities during the second half of 2002, many also shifted their money into money market funds because of their relative safety. In November 2002, a record of 136 billion in net sales flowed into these money market funds suggesting that many investors were turning away from stocks near the bottom of a three-year bear market. In fact, by the end of 2002, the level of ownership in money market funds reached an all-time high of nearly 35% of all outstanding United States mutual fund assets. At roughly the same time, the S&P 500 began a sharp comeback: it rose 29% in 2003, which helped jumpstart a five-year bull market rally. For those who had recently decided to follow the herd by concentrating their portfolios into cash-like investments, the move may have been very costly.

If you have ever been misguided because you followed the herd, do not be too hard on yourself. Stephen Greenspan, the author of the book Annals of Gullibility, accounted in a recent Wall Street Journal article how even he, someone knowledgeable about what can happen as a result of trust and/or ignorance, lost some of the savings he had accumulated from his book sales to Bernard Madoff. Greenspan explains in the article how “some risks are more hidden and, thus, trickier to recognize than others” (2009). Investors of all experience levels need to always be cognizant of the aspects of investing that influence their financial decisions.

- James E Wilson, CFP®

This is the fourth chapter to a seven part series on the Barriers to Financial Security. To download a full copy of the whitepaper, click here

Barriers to Financial Security: Important Lessons / CHAPTER 3

2010-05-14T11:08:00.012-04:00

Historical Perspective

Even though each bear markets seems unique, investors can gain some perspective if they review the similarities of bear markets over the last fifty years – a period during which we have faced ten particularly challenging intervals in market conditions, including the one we are now experiencing. Approximately every five years, the market enters a period of correction that is a natural process of the risks and rewards of capitalism, and each time, we have recovered from the slump in the cycle.

To better understand these patterns from a historical perspective, consider three of the most recent bear markets:

January 11, 1973 to October 3, 1974
The causes of the economic fright experienced by Americans in the 1970s include the Vietnam War, Watergate, an oil embargo, a double digit unemployment rate, and a 16.8% increase in the cost of living. Over the course of 23 months, the market lost 45% of its value, and many investors eventually turned to the safety of CDs and bonds. Such extreme conditions had not been experienced in the United States since the Great Depression.

A 1974 Time magazine cover stating “Recession’s Greetings” reflected the fear of the nation, and the cover story’s title prophesied “Gloomy Holidays – and Worse Ahead.” The article begins, “Not for many years has a Christmas season begun with so many tidings of spreading discomfort and lack of joy about the U.S. economy. Already wracked by a devastating double-digit inflation, the nation is now also plunging deeper into a recession that seems sure to be the longest and could be the most severe since World War II.”

Despite Time’s grim predictions, economists now agree that December 1974 actually marked a turning point in the U.S. market: the S&P 500 soared 37.2% and 23.9% in 1975 and 1976 respectively.

August 26, 1987 to December 4, 1987
This bear market was as extreme as it was short. On a day known as Black Monday, the crash of markets around the world on October 19, 1987 also sent the Dow Jones Industrial Average plummeting 22.61%, which is still the largest one-day percentage decline in history. (In contrast, the stock market crash of 1929 included only a 12.82% decline on its Black Monday.) As in 1974, the plummet of the Dow panicked many investors who desperately looked for financial safety elsewhere.

Again, Time magazine provided another cover story depicting Americans’ dismay. One story presented an hour-by-hour account of events, and another argued that “the U.S. . . . could not go on forever spending more than it would tax itself to pay for, buying more overseas than it could earn from foreign sales, and borrowing more abroad than it could easily repay. There had to be a day of reckoning, and it could unhinge the whole world economy.” The disapproval and pessimism of this seemingly timeless statement gave investors little hope for the immediate future. However, almost half of the Black Monday losses were recovered in the days following the sell-off, and less than 3 months later, the S&P 500 finished the year up 2.3%. Overall, the 1980s ended with a compound return of the S&P 500 of 17.6%.

March 24, 2000 to October 19, 2002
While many people remember the crash of the stock market following the September 11 terrorist attacks, this multi-event decline actually began with the earlier bursting of the technology bubble in 2000. By October 2002, at the end of an exhausting 28 month period, the S&P 500 had lost 49.2%, and a young generation that had previously felt indestructible suddenly felt very vulnerable. The September 14, 2001 Time magazine cover depicts the World Trade Center’s Twin Towers in the final moments before their collapse.

One of the many signs that our country had come to a complete halt was the closure of the New York Stock Exchange for 4 days after the attacks. Once the markets reopened, the Dow Jones Industrial fell more than 17% over the course of a week.

In 2001, the United States and its economy was vulnerable to outside forces and to the loss of it’s strong technology sector because of the exposure of hidden greed in corporate America. 2002 was defined as the year corporate titans WorldCom and Enron collapsed and the year that $2 million birthday parties funded by the corporate dollars of Tyco ended. As dark as the outlook was following the collapse of the technology bubble and the devastation of September 11, the markets eventually recovered: the S&P 500 appreciated 14.3% in value between early 2003 and late 2007.

Despite oil embargos, double-digit inflation, the burst of the 1990s technology bubble, and September 11, the past 35 years have produced a whopping appreciation of 3,725% in the S&P 500. Investors cannot invest directly in the S&P 500, but if they could have invested $100,000 in the early 1970s, their investments would potentially have appreciated to over $3.7 million during those 35 years, assuming that our hypothetical investor had not fallen victim to the greed and emotionally-driven behavior that plagues the average investor. Though a natural response is to panic when facing a challenging bear market, we are less likely to make faulty decisions if we can keep such market fluctuations in perspective.

This article is the fourth in a series of lessons about the barriers investors face as they work to achieve financial security. Previous articles introduced the series and outlined the ways investors’ behavior impacts their decisions. The next article will explore the psychological tendencies of investors and the challenge of overcoming such tendencies as we explore the emotional and intellectual responses a number of investors experience as part of the investment process.

- James E Wilson, CFP®

This is the third chapter to a seven part series on the Barriers to Financial Security. To download a full copy of the whitepaper, click here

Barriers to Financial Security: Important Lessons \ CHAPTER 2

2010-05-02T08:15:00.003-04:00

Your Portfolio’s Worst Enemy

This young century has already felt the pops and drops of two investment bubbles – one in 2002 and the other in late 2008 and early 2009. Some investors may have mostly escaped the impact of one, or perhaps both of them, but behavioral finance, a relatively new academic field, teaches us that investors can still be vulnerable to the momentum created by fear and greed, even if they are not hit by each downturn in the market.

In order for investors to continue to be safe from this momentum, they have to understand how their behavior impacts portfolio performance.

In their efforts to achieve long-term security, they may find it helpful to recognize that during the extraordinary expansion of the housing bubble and the most recent sell-off in the stock market, many responded emotionally and with at least some disconnect in logical reasoning. At an extreme level, this disconnect can lead to a suspension of the traditional benefits of business acumen and fundamental and technical analysis.

To help investors bring the challenge of emotionally driven behavior into perspective, future articles will attempt to explain some of the challenges presented by psychological forces that impede our financial success, and they will cover the following aspects of investing:

- A historical journey to better understand economic cycles;

- Psychological tendencies and the challenge of overcoming these tendencies to become good investors;

- How our financial survival depends on our ability to identify these challenges;

- Hard and fast solutions.

Investors should understand how their own behavior impacts portfolio performance.

James E. Wilson, CFP®

This is the introduction to a seven part series on Barriers to Financial Security. To download a copy of the full white paper, please click here.

Barriers to Financial Security: Important Lessons \ CHAPTER 1

2010-04-19T14:54:00.007-04:00

Why is Investor Behavior So Important?

Perhaps the most important ingredients to long-term financial security are the decision-making abilities and behavior of the investor.

DALBAR, Inc., a company that provides standards, research, and ratings for those in the financial industries, published a report in 2008 that shows the effect of investor behavior on financial investments. According to that study, the S&P 500 earned an annualized return of 11.81% during the 20 years ending in December 2007, which was a period of strong bullish markets, while the average equity investor only earned 4.48%.

Despite the opportunities, in other words, the average investor earned only 38% of the available return as a result of making poor decisions throughout the twenty year period.

To better understand the practical implications of these numbers, consider the following: assume an investor had put $100,000 into an S&P 500 mutual fund in 1988 and earned its average return of 11% between then and 2007. Even after the bursting of the 2000 - 2002 Tech Bubble, the value of that investment would have grown to $806,231. Hampered by flawed decision-making abilities, however, the average investor actually achieved a 4.48% return during the same period. That hypothetical investment of $100,000 would only have grown to $240,249. The behavior of our hypothetical average investor ended up costing him a difference of over $560,000. This is a loss of 69% of the available return of $806,231.

Unfortunately, most investors fall prey to a thought process that prevents them from always making logical decisions instead of decisions based more on emotional responses. The consequences may mean the difference between retiring with financial security, peace, and confidence and the alternative of retiring in what would feel like relative poverty.

James E. Wilson, CFP®

This is the introduction to a seven part series on Barriers to Financial Security. To download a copy of the full white paper, please click here.

Barriers to Financial Security: Important Lessons \ INTRODUCTION

2010-04-03T08:11:00.004-04:00

When you consider the current economy, the last thing you are probably experiencing is “irrational exuberance.” Federal Reserve Chairman Alan Greenspan was the first to use this phrase in the mid-1990s. Only a few years later, Amazon.com, once merely a retail book company started in a garage, was trading at $91 a share with a history of negative earnings (MarketWatch, 2002). In other words, people were willing to invest in a company by purchasing stock that had and would continue to lose money. If you contrast this level of performance with that of the average stock in the S&P 500, you can see how those Amazon investors were gambling with their money in response to irrational exuberance. When Greenspan coined the phrase, the stock market was booming, so few people were likely to heed what we now recognize was a warning. Shortly after he made the comment, world markets slumped.

During global economic crises, we read alarming headlines. Consider the following:

Recession Starts Taking a Toll: Will it lead to another crash? “Worries are building that today’s sagging economy may be on the brink of collapse.” U.S. News and World Report

The Death of Equities “7 million stockholders have defected from the stock market [this decade], leaving equities more than ever.” Business Week

Running Short of Cash “The United States and its allies scrambled to head off a global financial disaster. Finance ministers from the United States, Britain, France, Japan, and West Germany met last week near Frankfurt to find a way to avert a global economic collapse.” Newsweek

These were not pulled from today’s headlines. They come from November 1974, August 1979, and December 1982 when investors were experiencing great fear in the midst of bear markets. Fortunately, the financial world did not come to an end at any point, not in 1974, 1979, nor 1982. And though national and international efforts certainly played a role in the investors’ returns, what may have played the most significant role were individual investors’ abilities to make logical decisions in the face of financial fear. Investor behavior does matter, and it arguably poses the greatest risk to successful long-term investment experiences. Furthermore, the outcomes of investor behavior are even more dangerous to the financial security of people transitioning into or living in retirement. This article is the first in a series about investor behavior and psychology, historical perspectives, the importance of diversification, and possible solutions to the challenges investors face.

Investor behavior does matter, and it arguably poses the greatest risk to successful long-term investment experiences.

James E. Wilson, CFP®

This is the introduction to a seven part series on Barriers to Financial Security. To download a copy of the full whitepaper, please click here.