If you want to learn how to make investments that make money, you must find a way to keep your emotions out of the mix. Investment mistakes happen easily when your emotions run high.
They happen even more frequently when you have easy access to your investments. I realized this during my conversation with Bill last Friday.
Like lots of other folks, Bill was concerned about his investments. He had taken some ugly hits over the last six months and wasn’t interested in taking any more. He needed this money for a home purchase. When things looked bleakest, he sold his investments. When things started looking better, he was ready to get back in. A perfect formula for selling low and buying high. When I asked him why he was approaching the market this way, he looked at me as if I was from Mars.
“I want to make more money of course.”
Now, I want to be very clear and say that this strategy may work out well for Bill. But this market is meshuganah. Nobody knows what’s going to happen. Not me. Not you. Not Bill.
Having said that, it’s more likely that such a strategy will end up hurting Bill. And even if his approach does help him get through this particular market, using his gut to guide his investments will most likely result in Bill having a bad stomach ache — and worse.
Since Bill was already 100% in cash, I suggested that he put 10-20% of his money back into the market over the next five-to-10 months. This is just an application of dollar cost averaging.
Bill liked this idea, but he still wanted to have the ability to get in and out of the market. And he didn’t stop there. He investigated different investments and tore apart prospectuses to determine what the mutual fund holdings were. When he was sure he had it all figured out, he decided he was ready to go.
This was a huge red flag. I explained that despite the market being very fickle these days, the greatest threat to his own financial well-being was his insistence on being able to use his gut to guide his investments. I made it as clear as I could that Bill’s priority should be to find a strategy he felt comfortable with and stick with it no matter what. I reminded him that he was saving money for a house and should be very conservative with his funds. And that his suggested approach was anything but conservative.
I wasn’t sure if I made the point clearly enough. This was a desperate situation. Bill left me no choice. I had to use my most potent weapon. I had to use my chocolate addiction to illustrate the point.
As I’ve written before, my wife is very clever. What I may not have mentioned before is that she is an amazing cook. I mean A-M-A-Z-I-N-G! I’m no chauvinist, it’s just that Mimi is a world-class cook and I’m…well let’s just say I’m not. And she learned years ago that I have no control when it comes to chocolate. None.
So when she makes brownies or chocolate cake, she makes sure I don’t know about it. She has no choice really. I’m not really proud of that, but I have to be honest with you about it.
So my wife is the wall between me and my chocolate. She hides it. She doles it out. It may sound childish…but it works. Bill needs a wall between himself and his “chocolate” too. In his case, his “chocolate” is his money. His “wall” could be his spouse, his advisor or his financial plan.
I’m lucky because I know I need that wall. Bill isn’t 100% convinced that he needs a wall, and that is the part that worries me. Do you need a wall between you and your money? Do you have one already? How does it work for you?
One last bonus question: Do you know what the wall in the picture is made of? Take a guess.