Why You Need to Read This
Welcome to this monthly newsletter.
The Psychology of Money and Investing.
Congratulations on taking this important step to increase your financial education and give you an edge in achieving your financial goals.
A great deal is written about the topic of investing with very little emphasis on understanding how or why we invest as we do, and how to develop a plan that works. We can all benefit from understanding, why and how we spend our hard-earned dollars. The Psychology of Money and Investing is about giving you important information to help you understand how to earn more, save more and invest wisely. Combining a sound plan for earning and saving with a strategy for investing will help guarantee your future success.
As a psychologist, I can offer you a unique perspective on this topic. It is not just because of my formal training, but also due to my practical experiences in business and investing. I really don’t fit with most psychologists and I’m not an academic. I live on a small farm in Blenheim, Ontario. I invest in some stocks (you’ll get to see a bit later why I choose the ones I do buy) but primarily invest in real estate, small businesses and myself through ongoing education and training.
For many years, I had no plan and no clue of what to do with my salary once all my bills were paid. I would toy with penny oil stocks in the 80’s or listen to my well-intentioned stock broker who would do trades for me. If luck was on my side I would break even, but rarely would I make a profit. In the 80's, I can remember getting paidat the end of the month, and after all the bills went out the next day, I had only 26 cents left in the bank. Does this sound familiar?
About two years ago, I set very specific goals on what I wanted to achieve and what I wanted my life to look like. For me, living in small town Ontario, my goal was to be able to work 1 or 2 days a week as a psychologist, and have a team of amazing intelligent co-partners and staff to work with me to help others. I wanted to explore other business opportunities and expand my real estate holdings. I wanted more free time—to think, problem solve and start new businesses. In June of 2009, I achieved these goals.
I want you to get to your destination quicker than I got to mine. It’s time to start learning what you need to know to take action.
A Psychological Principle at Play
Why Canadians have over a Trillion Dollars in the Bank
Why do Canadians have more than a trillion dollars in the bank at virtually zero percent interest? A psychological principle we call “Loss Aversion” may help explain this behavior. Simply put, we would rather do something to avoid a loss than take action to realize a potential gain.
Having been “burned” by the recent stock market crash this past March, many investors and home owners are afraid to lose more money. This is a greater motivator to behavior than taking a risk to gain on investment income. Loss aversion is a significant motivator right now for most Canadians.
But this is a huge mistake. In March when the market had dropped significantly, most Canadian Financial stocks were also tanking. But nothing had changed for them. They were still making money from service fees. And because they were doing business in conservative Canada, they were not exposed to the risks of the US real estate environment. But that was a time when most “experts” were telling their clients to sell and wait out the storm.
In March, I was quite bold and in my practice newsletter discussed this issue and talked about why I felt investing in the Bank of Montreal made sense. I had driven by the branch in Blenheim, Ontario, all seemed in order, people were going in as always and since the bank had been there for close to 100 years, it looked pretty stable. At that time, the stock was trading in the low 30’s and high 20’s. It was paying a dividend of close to 10% because of the low price. I felt it was a good investment.
Today it’s about $53 and all looks about the same. It was very difficult to buy. The Loss Aversion factor was pulling me to sell everything. Each time I turned on the TV, doom and gloom was the topic of the day. But I resisted and was rewarded handsomely.
Be aware of Loss Aversion and how it is affecting your investment behavior. Make sure you consider it as a factor that may explain why right now, you are reluctant to invest.
Next month I’ll discuss why many of us have a hard time selling a losing investment, despite the evidence and common sense that tells us we should.
The Group Optimism Index
October 2009: 35
September 2009: 25
0 (Most Negative) - 100 (Most Optimistic)
The Group Optimism Index is a number from 0-100 that reflects my opinion on the optimism in Canada today. It is a measure of collective hope.
The number is based on my analysis of several factors including how the current state of affairs together with economic, political and environmental factors are leading to a “group feeling of optimism”.
Remember that there can be a significant difference on the level of optimism based on the city or region of Canada that we are discussing. Currently Windsor, Ontario would have a score of 12, yet Kitchener-Waterloo a score of 55.
Nationally, the score is generated based on an analysis of factors this month that includes:
- Political uncertainty. The threat of an election and incompetent politicians including those south of the border.
- Change in the world as we know it. New paradigms are making us afraid. Do we really believe in global warming when the average temperature has gone down in the past 5 years?
- Economic uncertainty. This is pretty obvious as more Canadian financial types are being arrested this month for Ponzi schemes and other frauds against investors.
- Uncertainty in jobs. Manufacturing is changing, and cities are being decimated as plants continue to close. The Ford plant in St. Thomas is just one example.
- Lack of leadership. There are very few true leaders in politics or big business today.
- Corruption. Who can you really trust? The scandal at the London Health Sciences Center and in Chatham Kent with the Capital Theatre Scam reinforce these feelings.
This month's score of 35, while somewhat better than last month, continues to reflect a lack of hope—psychologically (just my opinion of course)—among Canadians.
In one memorable episode of Seinfeld, George comes to the conclusion that every decision he has ever made was wrong, and so to start doing the right thing, he should do the “opposite” of his first impulse. I’m doing a "George" right now. Investing more in businesses, buying selected investments and expanding on new ideas is how I'm reacting to this collective lack of hope. There has never been a better time to be an investor. What do you think?
Psychology and
The Beginning Investor
Mutual Funds or Pay off the Mortgage?
You have $1,000 given to you. The choice is to buy a mutual fund or pay off your mortgage. What seems to make the most sense? Let’s say you are paying 5% on your mortgage. Payments are quite manageable. Most of us would want to “buy” something as opposed to paying something off.
We have been conditioned to feel great when we can buy something. It makes us feel great even if just for a moment. It is exciting. We feel like we are moving forward, saving and investing for our family's future. The problem is you need to step back and decide which would be your best investment. Even if the mutual fund guarantees a return equal to your mortgage it is not a better investment. Depending on your tax bracket you would need from 7 to 10 percent on your mutual fund to equal the 5% your would be making by paying down your mortgage.
The other issue has to do with the security of the mutual fund itself entirely another factor.
It is your call of course, but rarely will you find an investment that will equal the return of paying off the mortgage of your personal residence. It is also a secure and guaranteed investment strategy.
Another option may be to put $500 in a conservative investment fund and
use the other $500 to pay down your mortgage. Just my two cents.
The Shrink's 3 Picks
Okay smart guy, what would you do?
Please remember the disclaimer below and do not make any changes in your investment strategy until you consult with your financial advisor or professional. I am not a financial advisor or professional.
I continue to own the stocks listed below. Under each, I will explain how psychological and demographic principles led to these purchases. I only invest a small portion of my assets in stocks or mutual funds (less than 10%).
Stock: Bank of Montreal
Current Price: $53.42
Dividend: 5.2%
Why? I’ve already discussed this, but with loss aversion Canadians are letting banks use their money to loan to borrowers at rates from 2-20% and paying savers almost nothing for the money. Loss aversion will be the key to increased bank profits.
Stock: Killam Properties
Current Price: $6.90
Dividend: 8.1%
Why? I love real estate. Killam owns properties primarily in Nova Scotia. Unlike Ontario, the laws of Nova Scotia, favour landlords over tenants. They provide safe, clean B+ buildings and land lease communities. It's a boring stable business. As more Canadians reconsider their large homes once their children have moved out, living in an apartment in their home community will make more sense. Stable, strong, likely MY response to loss aversion.
Stock: Eli Lilly
Current Price: $32.71
Dividend: 5.9%
Why? I hate the US dollar, but you can’t ignore this company. Quality of life for Canadians depends on good health. As we age we increasingly value the products and services that will help improve our quality of life and increase our activity levels. This company has a niche in this market.
Book Selection
for Beginning Investors
The Total Money Makeover by David Ramsey
They should have given us this book in high school. It is by far the best source to help the beginning investor learn how to manage and spend money. If you have no credit card debt and are doing well, buy this book and give it to someone that needs to learn Ramsey’s basic principals. There is also a version for high school and college aged students so a present to your own children would be a great idea. His podcast is also available for free at iTunes.
Book Selection
for Seasoned Investors
No More Mondays by Dan Miller
You might think this is a Dave Ramsey newsletter, because Ramsey loves this book as well. It will help you see the end first. What do you want your life to be like? What would make you happy in your work? An interesting read about self discovery and growth – particularly if you are between jobs or careers.
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