© 2004 Tom Madell, Ph.D.
The biggest thing that is different about this site is not that we give you forward-looking investment advice, since scads of sites do that. Rather, it's that we also show you what our on-going advice has been going back 5 years, allowing you to decide whether it might be worth it to you to start to follow our current advice from now on. (We think you will find that it will be.) And additionally, we take a well researched approach that differs from that presented by most other investment advisors, as will be explained below.
First a little background is important. For my first 40 years, I had virtually no time nor interest in the world of investing in spite of growing up in lower Manhattan, just miles from Wall Street. This was the era before employee-funded retirement programs such as the 401(k) sprouted up at most jobs. It was all I could do to keep up with the customary concerns of getting established in a career (as a psychologist), making a marriage and a place to call home, and raising our daughter. Even if I had found the time to get involved, I reasoned we did not have enough "extra" money to put any of it at risk in any investment whose outcome was unknown and exposed us to the possibility of ending up with less money than when we started.
Even the one brief time I relented back in the '70s and agreed to have a small amount of self-funded retirement money deducted from my pay to go into a stock fund, I later discovered that, even after a few years, my balance was less than the total of my deductions. And, several years later at the beginning of the '80s, I had a similar experience. We had been given some money by my parents in a bond fund toward my daughter's education but whenever I infrequently got around to checking its price, it always seemed to be lower than at the previous look. So after wondering for a while how these investments were going to help accumulate money for retirement and college, neither of these investments were destined to remain in place to the ultimate fulfillment of my long-term goals: straightforward cash seemed like a far wiser choice.
Unfortunately, when it comes to investing, a few bad experiences can easily reinforce our worst doubts and fears. And so it was and could have stayed that way -- end of story. But after hitting my early 40s in the mid-'80s, and primarily as a result of finding myself with more spare time following a divorce, I began to do a little investigation. Ordinary investors, I discovered, in spite of suffering through occasional periods of poor performance, really did seem to be earning far better returns over the long run than those like me who were merely content seeking out the best rates on money market funds, bank CDs, or other stable investments.
So around 1985, I began to regularly devote a small amount of time for learning more about investing, an activity I still engage in today, and then, to follow what I learned in my own systematic program of investing. And, as of today, I have nearly never regretted that time spent! As a direct result of these efforts, I was able to realize my long-standing plan of leaving my full-time job for good while still relatively young, without any decline in my bill-paying ability along with a huge increase in self-satisfaction.
I have often asked myself in hindsight what was the most important factor enabling me to succeed at my investing to the extent that I did. Back in the '80s, after reading my umpteenth article in the likes of Money magazine, and even several books, I had primarily learned the view of investing success that the consensus held and still does today. This view, in a nutshell, is if we are to do well in investing, we should pay attention to the economic factors that determine how well various alternative investments will do. Since, however, few ordinary investors have the time or even the knowledge to do this, short of that, we should at least examine the past performance of any given investment when making our buy and sell decisions in the hopes this will tell us something about possible future performance (despite the disclaimers that it won't). Finally, most advice suggests that even without these, that by merely "buying and holding" any reasonably chosen investment, we will wind up "doing OK" in the long run.
Without ruling out the importance of the above three factors, my own experience as an investor began to suggest that something crucial was missing from this picture and from the way most investors, including myself, were in fact doing their investing. In reality, our ability to transcend our present experience of events is somewhat limited, "locking" us into our perceptions of the immediate far more than our ability to anticipate the future might suggest. As a result, we tend to be influenced by short-term happenings, emotions, and ideas far more than we often acknowledge, and even in spite of our best intentions to make our investment decisions based on long-term considerations.
For a variety of reasons, the markets seem to "behave" mainly on the basis of short-term factors. But, unfortunately, the reality is that far too many investors wind up shadowing these movements rather than adhering to a long-term plan that might better serve their interests.
This is not helped either by the fact that most of the information typical investors have readily accessible, namely their daily newspapers, nearly always attribute the movements of the markets to a particular event or perhaps an economic statistic released that day. (Incidentally, how any journalist could possibly be sure of such a connection, I could never quite figure out. To justify such a conclusion, the typical article sometimes states "according to analysts", but still, I wonder how even the most knowledgeable analysts can know for sure what causes a significant number of people to either buy or sell an investment that day.)
So where could I find this type of essentially psychological information that might really make a difference to my long-term success? To my dismay, back then in the '80s, there was relatively little I could readily find in this area (although more recently, a few more writers have begun to address this topic). So I basically had to make do with the information I did have and to learn as I went along from my own misses and hits.
Nor could I find much that warned me, or even better, helped me to counteract, the fact that so many of the short-term conclusions that were suggested turned out later to have led to just the opposite of what would have been smart long-term moves. To fill this void, I found myself starting to apply my own knowledge of individual and group psychology acquired over a 20 year academic and mental health career. As a result, I was able to give myself a much greater degree of understanding of the behaviors of investors, including myself, as well as the overall psychology of the markets.
Looking back, I am convinced that as a result of adding this knowledge about the psychology of investing, I really started to do more of the right things with my investments than the wrong things, a greater percentage of the time. And I really believe that it was this knowledge that has served as the key differentiator in creating my success. Can this knowledge enable you to achieve your goals as well? When combined with the framework of systematic investing I will describe, I am likewise convinced that the answer is yes.
One thing I have discovered more recently is that investing necessarily entails almost totally different actions to different individuals, depending on who they are and what their goals are. As a result, no one source of advice on investing is likely to be useful to everyone. For example, consider the above-mentioned, time-honored principle of "buy-and-hold" espoused by so many advisors and investors. Even such a solid strategy for many people is rendered relatively meaningless if your investments were not intended for the purpose of achieving relatively long-term goals but rather were made for any of a number of "non-essential", discretionary, or short-term purposes. Likewise, virtually no strategy or advice on investing can serve the needs of all readers, listeners, etc.: We have to take into consideration, then, the goals and even the potentially "hidden" predispositions of the investor himself that I will address shortly.
Many of us are working toward fully realizing at least one or more financial goals for ourselves and our families for which there may be considerable uncertainty as to whether we will reach them or not. If, on the other hand, we are not among those that have defined such specific goals, or we have already successfully created the resources to achieve them, then our reasons for investing, and as a result, our strategies, would probably be completely different. This website, unlike many others that assume the same investing formula applies to everyone, will help you to recognize what your goals are and show you how to use the correct strategy or strategies for those goals.
Most people readily see the connection between working hard at their jobs and the achievement of their financial goals. They often work harder than is probably healthy, putting in extra hours when necessary, and often neglecting other important facets of their life. Unfortunately, for all but a small minority, the fulfillment of specific financial goals can only be arrived at gradually through numerous years of such efforts, combining earning and saving enough to make their achievement possible. However, too many of us fail to realize how beyond our commitment to work and a career itself, we can also exert a major influence in determining how successful we are in ensuring that we and our families achieve some of our most important financial goals.
It is well-known that most families' budgets expand to accommodate their rising incomes. Thus, increasing one's income alone cannot ensure that all financial goals, especially distant ones, will be met. What becomes essential, on the contrary, is that income safely exceeds spending at whatever absolute level to allow for future savings since not all goals can reasonably be achieved by current assets alone.
But even when saving is factored in, many of us will still have too little to meet future needs unless we can reliably ensure that these savings can grow significantly down through the years. As a result, nearly all of us need not only to save, but to invest. And further, we usually need to do reasonably well in our investing, especially if our savings rates are not as high as might be ideal.
Astonishingly, a recently reported survey in the NY Times revealed that 73% of respondents born between 1946 and 1961 with household incomes of $35,000 to 100,000 felt that their "savings and investments would not be enough to allow them to stop working (italics added) in their retirement years." A concluding quote within the article aptly summed up this finding: "This generation is woefully unprepared."
But if investing and "doing well" at it is nearly a necessity for the typical individual or family to achieve its major financial goals, we must all now recognize that "doing well" is certainly not assured. This point has become even more apparent during the last few years when the great majority of ordinary investors have suffered sub-par returns right alongside most professional money managers.
At the end of the 1990s and even into the beginning of the 2000s, led on by chorus of overly-exuberant analyst cheerleaders and by their own unrealistic hopes, many investors succumbed to what most experts now clearly recognize as a gross psychological excess within the markets. As a result, years worth of investor gains quickly evaporated. Even the buy-and-hold investor may have not done well if they did not react in anticipation of the bubble that emerged or at least during the extended period that followed in which it became much more apparent what was happening.
But even the foresight to avoid the above kind of steep losses alone will not be sufficient to enable investors to ensure meeting their goals. Investors must also continue to average reasonably high gains year-in and year-out to adequately fund their dreams, especially their long-term ones.
Another major psychological pitfall of investing has been revealed as a reality as well: In several recent long-term studies, research has shown that even when overall market returns are outstanding such as they generally were throughout much of the '80s and '90s, the typical mutual fund investor has not performed anywhere nearly as well as the funds' own performance data or the major stock indices would indicate. For example, data gathered by the Financial Research Corporation show that over the '90s, while the typical fund had an average return of 11.74% over any given 1 year period, the return earned by those investors in these funds as modified by purchases and redemptions averaged only 6.68% over the same periods. And perhaps even more humbling, Barron's, a financial weekly, reports that from '84 through '00, when the average yearly return for the S&P 500 was 16.3%, the same return for stock fund investors was a scant 5.3%! The same very poor results were shown by bond fund investors in relation to what the underlying bonds themselves earned.
You are probably asking yourself how can this be possible. While the securities in the fund portfolios usually performed well on average over an entire year, many investors only bought after good gains had already happened, or, sold after a period of underperformance but prior to subsequent gains. As a result of such inopportune timing, these investors' own personal results were far lower than the performance of the fund itself! Clearly, the majority mutual fund investors are making buy and sell decisions that are severely harming their ability to enjoy reasonable profits from their investments.
As most people already know, even market professionals and fund managers tend to underperform the market averages. Why? Aside from the burden of transaction costs and fees, a serious examination of the patterns of market behavior show that a majority of investors, professional or not, make their investment decisions in completely the reverse manner than what usually leads to successful results! That is, most of us are conditioned to invest in those investments that have already been clearly doing well, often for already extended periods. Since, however, investment results are typically cyclical, once evidence appears to be unambiguously positive to support an investment, the economic and psychological "seeds" that eventually determine asset prices may have already been planted for just the opposite outcome. Additionally, professional money managers have the added burden of keeping up with the crowd or else face the real risk of losing their jobs. Therefore, they have less flexibility in taking a chance on investments whose prospects are not already quite so positively perceived.
Given the difficulty in predicting future market moving events and the current shortage of information pertaining to psychological factors within individuals and markets that can cause them to react inappropriately to such events, most investors consistently fail to outperform the market averages. For many such investors, factors outside of their ability to control and/or plain blind luck appear to solely determine whether or not they are successful when they invest. Consequently, many investors today have come to feel they have an extremely limited ability to do anything that might improve their results.
But unlike the feelings of futility often associated with trying improve your investment results through predicting unknown future events, this site can show you steps to help accomplish this improvement that are within your power to anticipate and control. As an investor, you can exert a large measure of control over the way you react to market events and over the ways in which you make decisions about your investments, all of which can considerably affect your subsequent investment performance. The aim of this site, then, is to help the typical investor do better than his typically underperforming peers through a better understanding of both economic and psychological factors affecting performance results.
The content will challenge much of the pessimism and skepticism that I have observed many ordinary investors have come to feel regarding doing well in their investing, especially since the end of the '90s, now that that decade's great returns are no longer "guaranteed." Likewise, it will also help to suggest ways of avoiding some of the overconfidence that equally impairs large numbers of investors during times when the investment cycle appears favorable, trapping otherwise sensible people into unwise decisions.
If you, like me during my first 40 years, feel you are "too busy" to acquire sufficient knowledge on investing, you are certainly not alone. And there is no doubt that gathering information on investing can be intimidating to some, if not even outright risky in the event the information you locate makes sense for someone else's goals (or commissions), but not for yours! But the good news is that, contrary to what so many individuals may feel that they are "too busy" to deal with the mediocre or even poor performance of their investments, they can, with just a small amount of effort, learn enough about what they need to know to have a very good chance of outperforming the great majority of other investors. This site tries to show you how to best invest that small amount of time, along with your hard-earned money, in order to have the best chance of achieving your goals.
I have created a Newsletter for ordinary people, with or without prior experience in investing, on a very practical, rather than an overly financial jargon, level. It will provide you with non-wishy-washy advice on how to reach your investment goals, including for many people perhaps the most important long-term goal, that of a successful retirement. The site and accompanying Newsletter are the culmination of nearly 20 years of study of how ordinary investors, and the markets themselves, react to certain events and the effects of these reactions on investors' performance.
As of this writing, this site may be the first to comprehensively apply what investment professionals call a psychological or behavioral finance approach to mutual funds investing. While perhaps a dozen or more books have discussed this approach with regard to investing in individual stocks, this site will focus primarily on investing in mutual funds. However, there is no reason why the principles and strategies discussed might not also equally apply to other types of investments.
The approach I present will allow you to understand, and when necessary, modify your reactions to various external events at crucial choice points within the investment process. It will also enable you to understand and modify your own "investment personality" and your associated conscious attitudes that frequently determine the nature and subsequent degree of success of your investment decisions.
Although a handful of books on investing currently try to fill in the scarcely covered psychological information which many professionals and academicians are now starting to recognize as essential, virtually none specify the type of reader they are aiming at. Rather, it appears that their sole purpose is to help someone improve his investment performance, regardless of his reasons for investing. This site is not just about doing better as an investor merely to "get more" than the next guy, nor about how to become rich or financially independent as so many of the books on "smart" investing are. Rather, it's designed to help you define, implement, and ultimately achieve your financial goals, whatever they may be.
Since investors have different goals, investment strategies must be tailored to the needs of different types of investors. And since successful investing involves so much more than just buying and selling, a major focus of other sites, a need exists for information that covers the entire process of investing, all from a psychological perspective. This site aims to present just such a comprehensive investment approach. It will help the typical investor overcome a variety of psychological and "crowd-following" pitfalls. It will also help you understand the psychology of the other players within the overall marketplace and to begin to use their mistakes to your advantage!