How Instant Gratification Has Killed The Stock Market

instant gratification

instant gratificationAs technology has made things quicker and faster, we have become conditioned to want things now. Twitter is a perfect example of this as are the 24-hour news channels. With Twitter, news breaks instantly and goes viral. The problem with this is that there is no fact checking. Just look at all of the tweets about dead celebrities that go around.

With the 24-hour news channels, it’s the same thing. The moment something happens, a reporter needs to be on the scene and people need to be interviewed. This causes two problems:

  • First, you have people that speculate on what happened/is happening. When the truth of what happened comes out, conspiracy theorists go to town, citing the original reports, which were never fact-checked in the first place.
  • Second, you have the news channels trying to find experts to talk at length about situations. Many times, the channel is so desperate for experts, they don’t do any background check on the person on the phone. Many times, like in the case of the “OJ Chase” it ends up being a person from The Howard Stern Show.

The Need For Instant Gratification Is Everywhere

There is no place that is safe from the desire of instant gratification. If traffic isn’t moving, we get mad, needing to know why we are stuck. If the car in front of us isn’t moving fast enough, we have to get as close as possible to show them they are driving too slowly. If we call up a customer service line, we get mad when we are put on hold. Heck, it’s healthy to lose up to two pounds per week yet if we haven’t shed 35 pounds by the weekend, the diet obviously doesn’t work.

I could go on and on about weight loss too. Workout DVDs are getting shorter and shorter. Did you know you can get six pack abs at your desk by using your stapler two minutes a day? Just tighten your core as you staple those papers and you’ll be a fitness magazine cover model in about a week!

Even the stock market is not immune to instant gratification.

Stocks And Instant Gratification

We all need to get rich quick. I browse investment forums regularly and always see posts by new comers asking what to invest in to make $100,000 quickly. I tell them to take $50,000 and fold it in half (I can’t take credit for that joke, I heard it somewhere).

Many investors feel this way. They will look at the prior year returns and invest in the mutual fund that returned the most last year. When they don’t see their money quadruple by the end of the week, they call the fund a dog and jump to the next fund on the list. They are committing the biggest financial sin: not investing for the long-term.

The problem isn’t only with investors either. It’s with the companies whose stocks are traded as well. The Board of Directors and stock analysts want to know if the company is going to hit its quarterly target. If it doesn’t, the stock drops and the CEO gets fired. I’m no expert, but it takes time to turn things around in the business world, much longer than just three months. Plus, there are things you cannot control.

Imagine being the CEO of a clothing retailer right now. The temperature on the East coast has been below normal for most of 2015 so far. If this trend continues and it stays cold well into the spring, imagine trying to sell shorts and polo shirts! Not making any sales means you are going to miss your quarterly estimates. Better start networking for your next job now!

Focusing On The Long-Term

What Boards of Directors and CEOs should be focusing on is the long-term. There is no point in making patches to a foundation so you hit your quarterly goal and get the $10 million stock option. You should be focused on making decisions that will bulletproof your business so that when times change, you can embrace that change and change with them. But they don’t because they are only interested in the moment. Instead of a long-term plan for success, they are forced to adopt a 90 day plan because that is when they need to report earnings again.

It wasn’t always like this. Back in the day, companies looked at the long-term, as did investors. It was common for an investor to buy shares of General Electric and hold it for 20 years or more, collecting nice dividends along the way. But not anymore. The second bad news hits, investors run as fast as their legs will go.

Here is why individual investors need to focus on the long-term. By focusing on the short-term, you are guaranteeing yourself a 2% annual return. That doesn’t even beat out inflation! When you focus on the long-term, you ignore the hype that others, including the news and Wall Street, are trying to get you to act on. Once your emotions enter into your investments, you are guaranteed to lose. If focusing on the long-term is hard for you, consider an automated investing service.

There are a few other tips, along with focusing on the long-term to improve your odds at investment success:

Be Conscious of Costs: the lower the expense ratio you pay for your investments, the more of your money that stays invested in the stock market, allowing for compound growth. The easiest way to see how much you are paying in fees is to sign up with Personal Capital and use their 401k and Portfolio Fee Analyzer. They are like Mint.com, but more geared toward investments. It’s 100% free and allows you to see all of your investment accounts in once place.

Diversify: One sector may be “hot” today, but chances are it will be cold next week. You don’t know what is going to perform well and what isn’t. Just look at these charts for proof. Your best option is to create a well-diversified portfolio and stay invested. Need help creating your portfolio? Check out my post on model portfolios.

Have A Plan: If you don’t know where you are going, how will you ever get there? The first step to investing success is having a plan. This plan will help keep you on track for the long-term so that you don’t let your emotions suck you into a bad decision. When you do get emotionally, you can refer back to your plan to help keep things in perspective.

Final Thoughts

The bottom line is you have to stop looking at the short-term when it comes to investing and embrace the long-term. While CEOs will continue to focus on hitting their short-term estimates, you need to learn to tune out this volatility and look long-term so that you can grow your savings. Learn to see the short-term dips as buying opportunities and nothing more.

Remember, the long-term trend of the stock market is positive. With more people focusing on the short-term, there will be more bumps along the way. But if you can look past this, you can be a successful investor.

If you want a guided path to investing success, pick up my book, 7 Investing Steps That Will Make You Wealthy. It’s only $10 and is a quick read that is packed with all of the information you need to know to be a successful investor. It contains the tips and strategies that great investors like Warren Buffett use to be successful investors.

How To Save $100,000

moneyIf you’ve ever read Pete Briger’s bio, you may be wondering how you can win at the financial game, too. Here’s how to make the necessary changes so that you can save your first $100,000. Sacrifices now can mean big savings for the future.

5 Tips To Saving $100,000

Reduce Your Debt

It’s tempting to buy a new car, get a huge home, or treat yourself to a brand new home theater system. However, if you have to use credit to get any of those things, it could take you years to pay off both the loan and the interest. Your first step to saving money should be reducing your debt. Take stock of your loans and figure out how long it will take you to pay them down. Talk to your creditors, too, to find out if you can get a lower interest rate. If you absolutely need to take out a loan, make sure to shop around until you find one with a low interest rate. [Read more…]

Take Big Risks With A Little Bit Of Your Money

My Asset Allocation

My Asset AllocationThis isn’t advice you typically see, but this is a personal maxim that has helped me get more enjoyment and energy out of my investment life. I spent a lot of time in my early investment years thinking about my risk tolerance. I decided that I was fairly open to risk. I had a 95% stock/5% bond allocation in my IRA for many years. But as I’ve gotten a little older, I’ve lessened the amount of risk I’m willing to take on, currently I am at an 80% stock/20% bond allocation. (You can learn the importance of having a good asset allocation in this recent post.)

After all, I’ve made the money I’ve made through lots of time and hard work. I don’t want to risk losing it all. But with less risk, there’s less reward. I found that using my buy and hold approach to investing was rather boring and while I am OK with that, I still wanted a little more excitement.

To put the spice back into my investment life, I decided to take 10% of my portfolio, and invest it however I want. I only do this because my other investments are doing well. I’m secure, and if I lost this 10%, I wouldn’t go under (I refer to this a lot as my “play money”). So I invest it in risky ways, but I also try really hard not to lose it. And so far, I haven’t. On the contrary, I’ve made a lot of money with it. Here’s how. [Read more…]

Strategy vs Luck: Which Is The Better Investment Approach?

Periodic Table of Investments

When the stock market is “hot”, everyone is an expert telling you where you should invest your money, and when the stock market turns south, everyone is an expert as well, telling you why to get out. (Of course, very few of these “experts” have IMCA’s CIMA designation, certifying them to manage investments.)  They tell you where you should invest your money, or even if you should be pulling everything out of the market. The interesting thing about this is that the average investor only earns about 2% per year whereas the market earns roughly 8%. The question is, if all of these experts know what to invest in, why is their return so poor? The main reason is because they use luck as their investment strategy. I will show you why this is a losing formula for investing success and why a simple strategy can help you to earn more money investing and even limit your losses.

Market Timing

The vast majority of investors, including myself during my early years of investing, are market timers. They get in when the market is rising and they jump ship when it is falling. They give in to their emotions when they should not be listening to them. A classic market timer became so scared in 2008 that they pulled everything out of the stock market and stayed out until recently. They bought back in and now are worried again because of the recent volatility.

While it seems simple to time the market, it is actually much harder to do in real life. Too many people will sell once the market reaches bottom and they won’t get back in until close to or at the peak of the market. It’s a classic scenario and it plays itself out over and over again. Next time you are out and talking with friends or family members and the topic of the stock market comes up, ask them what their strategy is. [Read more…]

My Personal Capital Review: Is This The Answer For Investors?

personal capital

personal capitalI’m sure by now many of you have heard of Personal Capital. If you haven’t, then good news, you are about to learn everything you ever wanted to know about them! But before we jump in and start talking in-depth about Personal Capital and why it is so great, I need to explain to you why I am even writing about them in the first place.

Searching For Answers

I’ll admit it, I’m a finance nerd. Anything related to the stock market gets my attention immediately. When I was living with my best friend, we would watch Fox News Channel on Saturday mornings because of all of the investment shows from 10am – 12pm. In fact, we called them our Saturday Morning Cartoons.

Ever since I started investing, I wanted to track my investments. I wanted to monitor my returns and see graphs and charts showing everything imaginable. Just ask my wife and she will tell you that for our net worth statement, I have at least 3 graphs and charts showing different information. I can’t help it. It’s my drug of choice.

Back in the day, I used Microsoft Money for my budgeting and to track my investments. It was nice for what it did, but then Microsoft decided to kill it off. For years, I aimlessly wandered, looking for something to help me track my investments. Everything I came across focused on budgeting and not investments. Sure, with Mint you can add your investments, but you can’t track them in-depth. I was about to give up hope. Then Personal Capital came into my life. [Read more…]

Better Investing Strategy: Buy And Hold Or Active Trading?

better investing strategy

better investing strategyWhen it comes to investing, there are two main approaches: buy and hold or actively trade. In this post I am going to compare the two options in various categories to see which one comes out ahead as the better investing strategy. As longtime readers know, I am all about buying and holding for the long-term. However, I will put my beliefs aside and look at the two strategies as unbiased as possible. Let’s get started.

Better Investing Strategy Rules

Before I start comparing the two strategies, let’s get the ground rules set up. First we have to define what both buy and hold and active trading are:

  • Buy and Hold: This strategy consists of doing the research to pick solid investments, buying them and holding on to these investments for the long-term to capture price appreciation over time. New money invested will be put into these same holdings over time.
  • Active Trading: This strategy consists of researching investments to find ones that are undervalued and buying them for the price appreciation. The holding period is short as the investor is looking to take advantage of the price swings and lock in gains (and limit losses).

I have picked 7 categories for the two strategies to compete in: [Read more…]

What To Look For In Mutual Funds

Mutual Funds

what to look for in Mutual FundsWhen it comes to investing, mutual funds are a great option for many investors. This is because mutual funds allow you to get started investing with a small amount of money and still be diversified from the start. But where do you even start? After all, there are thousands of mutual funds to choose from. This post talks about what to look for in mutual funds. The 5 areas explored here will help you narrow the field of mutual funds down to a more reasonable amount. From there, you can check out my posts on the advantages and disadvantages of mutual funds to knock the list down even further. By the time you get done reading these 3 posts, you should be left with a handful of mutual funds to choose from.

What To Look For In Mutual Funds

With close to 10,000 mutual funds to choose from, how do you know which ones are worth investing in? I did a non-scientific survey of a few random people on the street: Other than relying on their financial advisor to tell them which funds to invest in, the majority responded that they choose which fund to invest in according to the fund’s performance.

The ironic thing with this is that every piece of literature you receive from a mutual fund company states that past performance is not an indication of future performance. The funds are telling you not to pick a fund based on this. Granted, they tell you this in an almost unreadable miniscule font at the bottom of the page. In big fonts are the past performance numbers right in the middle of the page. (Sounds like a conflict of interest to me.) Yet, past performance is how the majority of people pick their investments. The industry knows this, which is why they structure their advertisements this way. [Read more…]

What To Look For In An Investment Manager

investing success

investing successBefore you start looking for an investment manager, it’s important to ask yourself what you want to gain from hiring such a person. Active investment managers are controversial. That’s not because some of them are great at their jobs. It’s because some of them aren’t. So how do you know if yours is good or not?

Look for active managers like the ones at MFS. The goal of an investment manager is to “beat the index”. An index is the overall trajectory of the entire market. It’s based on thousands of stocks. While some of those stocks are succeeding, others are failing. But the overall momentum of the whole market is usually positive growth. This has been the case since the markets were founded generations ago. So people who put their money into broad funds, based on the growth of the entire index, get the benefit of the overall growth of an entire nation’s economy.

But individual stocks sometimes do WAY better than the overall index, growing anywhere from 10 to 400% or even more in a single year. This is where active managers come in. They scope out stocks all over the world and pick their investors the winners, before they win. It’s a hard act, but some managers do it extraordinarily well. MFS does it three ways:

  • Global Outlook: MFS has analysts all over the world, seeing economic realities of different nations in the flesh. They are able to tell how these factors plan into the global economic ecosystem and make sophisticated decisions based on this broader outlook.
  • Risk Management: MFS knows that you can’t predict the future, and that it’s hard to even make an educated guess. So they never act until compensation is guaranteed or very likely.
  • Long Term View: Sometimes investments have to sit for years or decades to pay off. MFS knows when to wait, instead of listening to industry noise.

You can learn more about MFS in the video below:

What To Look For In An Investment Company

passive investingWhen your bank account starts to swell and you’re looking for ways to make your money work for you, investing it is one of the best options. However, if you know nothing about investing, you will likely want to hire a company that does. There are plenty of great investment companies out there, but the trick is knowing how to pick the one that is right for the investments you want to make.

Identify Your Goals

The first thing that you need to do is clearly identify your goals, which is the most important aspect of any investment. Choosing the prefect investment company completely depends on what you hope to achieve. While identifying your goals, write down three tasks that you want your investment firm to accomplish. Most people who invest are looking for firms that can capitalize on opportunities that present themselves, increase their wealth and minimize the amount of loss they suffer. You won’t want to even consider an investment company if they can’t meet your goals. [Read more…]