This covers the situation where the unit trust deed directs the appointment of agents or delegates in certain circumstances and the trustee or the manager is given no discretion. In some offshore unit trusts, the appointment of a custodian or investment adviser in certain markets or abroad may be made mandatory by the trust deed. Sometimes, an investment adviser’s contract may have been entered into prior to units being offered to the public. Thus, a property manager may have been appointed for a property trust. It is also very common for advisers to be appointed for futures and options funds, country funds, and trusts of specialized sectors. Read the rest of this entry »
Focusing on the Investor, Not the Investments
Every day, defined contribution plan participants make investment decisions that will affect their income in retirement. Some make these decisions easily; others are less confident that they are making appropriate choices. Benefits, Inc. understands that participants‘ investment decisions should be driven primarily by an accurate assessment of their retirement income needs and the time they have to accumulate the appropriate nest egg. But Benefits also understands that participants‘ own personalities and attitudes toward investing are often a barrier that prevents them from doing the right thing. Benefits therefore attempts to target the plan design and communication programs it develops for its clients to take into account these behavioral differences. By understanding that there are different types of investors with varying concerns and needs, plan sponsors have an opportunity to provide employees with suitable investments—ones that improve the likelihood of being utilized effectively by participants. Read the rest of this entry »
As mentioned above, one group of activists has social rather than primarily financial agendas for U.S. companies. In the view of these activists, U.S. companies should help achieve social goals such as saving animals, protecting wilderness or alleviating poverty. Let’s consider whether these social goals are appropriate for most mutual funds and then for the subset of funds specifically geared to socially responsible investing.
Social activists who attempt to change corporate policies or challenge corporate practices take many different tacks in pursuit of their goals, but all are motivated by one fundamental principle: corporations shouldn’t be solely profit-maximizing entities; rather, they have an obligation to take into account their impact on social issues. Activists seek to influence companies through a variety of means—including litigation, picketing and public relations offensives—in an effort to encourage a company to alter its social policies in some fashion. Read the rest of this entry »
This is a counterintuitive commandment. Normally, when the market experiences a significant downward trend, people sell off some of their holdings or even get out completely. Vanity makes it hard for people to face their portfolio’s decline in value. Anger with the market makes them want to get out. Instead, these down periods are opportunities to invest a bit more than normal.
In moments of doubt, consider these facts: The Dow dipped below 8,000 after 9/11/01, but then rose to over 10,700 within six months. At the beginning of the Iraq war in March 2003, the Dow went below 7,400 and was over 10,000 by the end of the year.
The market is more resilient than anyone thinks during the times when it reaches its nadir. Time and again, it has bounced back, and you want to be invested in it when it springs upward.
Anger becomes a deadly investing sin when it isn’t managed. Anger in itself isn’t a problem; the actions it prompts you to take, though, can cause major losses. To help you prevent these losses, here are two sets of tips. The first relates to monitoring your investing moods; the second involves avoiding specific, anger-induced investing mistakes.
Mood Monitor
If you’re vulnerable to the sin of wrath, you need to be vigilant for signs of anger in all its forms when you’re contemplating your investments. Be alert for the following emotions and take the suggested precautions if you spot them:
1. A red-hot desire for vengeance. You want revenge against the market in general or a broker who you feel gave you bad advice or the media for ruining a great investment. When you’re contemplating a given investment, all you can think about is how the “enemy” will rue the day they crossed you. Your goal is not financial as much as it is that sweet feeling of defeating your adversary. Read the rest of this entry »
To a certain extent, all investors react to good or bad news regarding the market. Investing gluttons, however, overreact. They are so hungry for action, they respond to the rumor of a merger or the hint of regulatory move by buying and selling. They become so worked up at the hint of bad news involving a stock they’re holding that they reflexively sell; they become so eager for profit at possible good news that they immediately buy.
The irony is that these gluttons think they’re getting a jump on the market, but in reality, they’re lagging behind it. Stocks can often move before the first trade by 5 percent on good or bad news. As a result, investors that use good or bad news as a trigger for a trade usually are dealing with unfavorable price movement. They deceive themselves into thinking that by reacting quickly to a news report about a stock or a broader economic trend, they are going to get a jump on other investors. In reality, they are lagging behind the market as well as other investors who make less frequent but more strategic investing decisions. Read the rest of this entry »
Sloth is often a function of time. It may be that you don’t have the hours or don’t want to put in the hours necessary to be a good investor. That’s fine. Though there is a minimum amount of work every investor needs to do, you must find the right investing mode given the hours you are willing to expend. Your sloth may result from being in the wrong mode; you’re trying to do it yourself when you really should be relying on a money manager. The three modes, therefore, are:
- Doing it yourself
- Focusing on mutual funds
- Using a money manager
Read the rest of this entry »
Are you actively looking for the next Dell? Do you want to find a stock that is under $1 a share (as Dell was, split adjusted, prior to 1996) and ride it to $50 (which Dell reached in 2000)? If this is what your goal is, you are better off studying gambling techniques and visiting a casino. Trying to make a killing causes you to invest in stocks that carry a lot of risk and that have relatively low odds of rewarding the risks you take.
If you feel the urge to make a killing and you’re particularly vulnerable to sins such as greed and gluttony, here is a good way to follow this commandment. Tell yourself that if you want to make a killing, rather than searching for a rags-to-riches stock, your money would be better spent by taking a risk on:
- Opening a restaurant
- Starting an Internet grocery store
- Buying real estate
- Buying swamp land in Zimbabwe
I’m not suggesting you actually do these things, only that you should consider them and then realize how much risk is involved in trying to make a killing in the market.
To help you manage the three secondary sins just mentioned as well as the seven major ones, I’ve put together a list of ten things you should and should not do. They compliment the sins, in that they are action items as opposed to “warnings.” Just as the ten commandments of biblical fame suggest ways to avoid the seven sins, these commandments function in a similar manner. Keeping a list of these commandments handy next to a list of the sins should provide you with the model you need to maintain your virtuous investment path.
Let’s look at each commandment and how to obey it:
- Thou shall not convert thy neighbor’s investment
- Thou shall not make a killing
- Know thy investments better than thou know thyself
- Thou shall not make unto thee a graven image of profits
- Thou shall not take the name of the Lord in vain or issue nay foul-tempered oaths while investing
- Thou shall not commit adultery chasing some thy little stock of the moment
- Honor they mother, thy father, and the market in good times and bad
- Thou shall not steal from thyself by forgetting about taxes
- Thou shall not worship false idols or deceitful financial advisors
As we noted, angry investors sometimes lack a specific target and disperse their anger over the market in general. They rant about the market’s cruelty and indifference, and it is like ranting about fate. Many times, though, investors focus their anger on a specific person, group, or event. In some instances, this target is worthy of their ire—a CEO made a bad decision that negatively affected the stock price. In other instances, however, investors made mistakes and set up targets as scapegoats—they blame others for their oversights and lack of due diligence. Understanding what the common targets are and how they trigger our anger gives us a weapon to defend ourselves against it. Keep the following targets in mind the next time you find yourself furious at them for an investing loss: Read the rest of this entry »
Greed is one of the most difficult sins to manage because it is always there. We invest to make money, and every promising investment raises the possibility of making a significant amount of money. We wouldn’t be human if part of us didn’t dream a bit about what might be. Good investors, though, keep that part of themselves in a controlled, isolated environment. If you are particularly vulnerable to the sin of greed, you’ll do likewise. Specifically, you’ll do some or all of the following:
- Invest slowly, knowledgably, and logically. Speed, ignorance, and reflex are the greedy investor’s enemies. Force yourself to move relatively slowly before making an investing decision, even when you’re certain that even a moment’s delay could cost you thousands. In the vast majority of cases, delaying your decision for a short period of time won’t hurt. In most instances, it helps because it gives you a bigger window of time in which you can think, reflect, learn, and talk about an investment. Greed preys on people who just react. When I say invest knowledgably, I mean do your homework. Learn about the fund’s or stock’s performance historically. Compare the fund or stock to the appropriate index or benchmark. Read as many reports as you can related to the investment. Don’t worry that your delay makes you spend an extra 50 cents a share because in the long run it won’t make a difference. Finally, logical investing means reasoning out your investment decision. When you hear a great tip or read something that makes you believe you’ve found a great fund that will make you millions, step back and write down the logical steps that have led you to this conclusion. Specifically:
Read the rest of this entry »
As you’re reading this, you may think to yourself, “I’m never going to commit this sin.” Everyone thinks this thought. When you’re reading about other people, their lustful investing behavior seems completely irrational. In the heat of investment decision-making, however, lust can hit you when you least expect it. Certain situations present themselves and rational thought takes a back seat to the moment’s infatuation. It pays, therefore, to be alert for the following situations where you’re most vulnerable to lustful investing:
There are all sorts of direct and indirect messages that make you feel your company stock is going to perform better than any other stock. You observe that your organization is extremely well-managed, that the company has great products and services and that its leaders are inspirational and honest. As our WorldCom example illustrated, it is not unusual for people to invest their entire retirement funds in their own company stock. You may receive stock options and other incentives to buy the company stock, and your boss or some other executive may assure you that it’s the best investment you could possibly make. In some cases, management may apply pressure for you to invest in the company and they may monitor your equity holdings. For some people, it feels disloyal to invest in any other company’s stock.
If this describes your investing, I don’t want to suggest that you’ve been brainwashed, but you certainly have been smitten. Why else would you entrust your livelihood and your life savings to one company? As great as your company’s management may be, people change companies. As wonderful as your company’s products are, new products with new technologies render established products obsolete. Read the rest of this entry »
As you read through the descriptions of the sins and the accompanying monologues, it’s likely that you had an inkling of the ones to which you are most vulnerable. You may have found one or more than one, seeing your own investing behaviors in the descriptions. While it’s important to be aware of all seven sins—most of us fall victim to all of them during the course of an investing lifetime—pinpointing the sins that are most likely to hurt your investing performance is key. To help in doing this, I keep a journal of my trading activity. In the journal, I note where and when I first heard of a particular company, what research I did into it, the reasons behind my decision to buy it (or not buy it), why I sold it, and so on.
To help you pinpoint your vulnerabilities, I’m going to list some common investing mistakes and the specific sins that catalyze these mistakes. As you’ll see, more than one sin can cause some mistakes, so you won’t always find a one-on-one relationship between mistake and sin. Still, this exercise will help you hone in on your vulnerabilities, narrowing the list down from seven to one, two, or three. Read the rest of this entry »
If everything you’ve read up to this point describes your investing behaviors, you should also know that the simple remedy to this sin is trading less and enjoying it more. Reducing the frequency of trading may sound easy to those who aren’t guilty of this sin, but to investing gluttons, it seems antithetical to their entire investing philosophy. If you’re a glutton, you firmly believe that highly active trading is the key to success. If you want to stop being a glutton and stop losing money, then you should be aware of two studies that will disabuse you of your belief in hyperactive trading.
The first study was completed in 1998 by Brad M. Barber and Terrance Odean, professors at the graduate school of management at the University of California at Davis. They examined the trading activity of 78,000 investors over a six-year period and found that the average investor turned over the stocks in his portfolio 80 percent annually, which may explain why individuals usually don’t perform as well as the overall stock market. More significantly, Professors Barber and Odean broke down households into groups based on how frequently they turn over their portfolios. The low turnover group averaged just 1.5 percent turnover per year, meaning that they rarely traded out of stocks. Read the rest of this entry »
The good news about this investing sin is that you have a number of ways to reduce its negative impact. Here are some steps you can take to reduce your gluttony and find a more healthy balance between active trading and watchful waiting:
A. Reserve 5 to 10 percent of your portfolio for aggressive trading.
Just as a diet isn’t designed to eliminate all food—or even all junky food—a good regimen for the investing glutton isn’t to cut trading entirely. For whatever reason, you enjoy and need the action of buying and selling. What you don’t need is for this need to eat away at your portfolio. Therefore, reserve a small percentage to feed this habit. If you only actively trade 100 shares instead of 1,000, you probably won’t do much damage.
Remember, though, that this 10 percent high-end percentage is absolute! Invariably, a time will come when the actively traded 10 percent will be performing well, and the inner glutton’s voice will say, “Don’t be a sucker; you’re a much better investor now than before; up the percentage to 20 percent?’ Do not heed this voice. It is the same voice the dieter hears after losing ten pounds, the voice that says, “Another slice of chocolate cake won’t hurt you? Read the rest of this entry »
It’s likely that most investors, at some point in their investing careers, buy and sell much too quickly. Perhaps they get caught up in a market upturn or downswing or they are going through a difficult period in their personal lives and turn to day trading as a form of escape. If overactive trading is an anomaly rather than a pattern, then you probably aren’t guilty of this sin. On the other hand, if you find that you periodically fall into the habit of overactive investing, gluttony may be a problem you need to address. Read the rest of this entry »
Certain types of investing seem to trigger anger in certain investors, and if you’re vulnerable to this sin, you should do everything possible to avoid these types. Specifically, don’t:
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SEEK HIGHLY VOLATILE, MICROCAP STOCK INVESTMENTS
Read the rest of this entry »
For all the seven sins, the goal is to keep your emotions in check when making investment decisions, but it is especially important here. Anger flares up faster than any of the other sins and it can be so powerful that before you know it, you’ve made an ill-advised investment. Besides the previous recommendations, here are some proactive steps that can keep Your anger out of the process:
- FORCE YOURSELF TO TAKE BREAKS FROM THE INVESTMENT WORLD IN GENERAL AND YOUR PORTFOLIO IN PARTICULAR
The more you immerse yourself in an investing mindset, the angrier you’re likely to get, especially if things aren’t going your way. Rubbing your nose in your own mistakes or the market’s unpleasant surprises for hours every day will just raise your hackles. As a long-term investor, you don’t need to be tracking your stocks nonstop or be up on every market development. While I strongly advocate being aware of events that have an impact on your portfolio, you can maintain this awareness by monitoring it every few days or by spending just a little time on it daily. Reducing your exposure to the investing world will reduce your aggravation. You will be less likely to blow your stack or your investment dollars from the accumulated pain associated with nonstop market monitoring. Read the rest of this entry »
Gluttons are addicts, only instead of being hooked on food they cravethe action of trading. While people who eat a lot may grow large, people who invest a lot often see their portfolios shrink. This type of investor sells bad stocks in the hope of finding good ones and sells good performers in the hope of finding better ones. Read the rest of this entry »
Some investors experience significant losses but take counterproductive actions in the wake of these losses. Rather than becoming aware of how their sins created their investing woes, they allow sloth and pride to cloud their vision, shielding them from the truth about the mistakes they have made. Read the rest of this entry »
