The BIGG Successs Show
Why Your Brain May Not Be the Best Money Manager
You may be surprised to learn that our human tendency to buy high and sell low. Find a written summary of today's show at BIGGSUCCESS.COM.
Welcome to The Big Success Show. Today, we'll discuss why your brain may not be the best money manager. The Big Success Show with George and Mary Lynn. Morningstar recently held their annual investment conference and if you're not familiar, Morningstar is one of the most pristine names in financial information. I mean, they've got good stuff. They do and their report shows that people are jittery right now because of all the volatility in the market and, you know, that's pretty understandable over the past year. It's been going up and down and up and down and people are going, whoa, what should I do? That's right. And so, jittery investors often lead to trading, right? And one of the things that I think it's important that we all understand is that trading usually doesn't work. In fact, it's kind of interesting when you look at the studies over the years, there's very few days, in some cases, that make huge portions of the return and man, if you're out of the market, you miss that opportunity. Well, and what's kind of funny is one of the guys who was the speaker at this conference, Jason Zweg, is the author of the book, Your Money and Your Brain. He says that our brains are our own worst enemies when it comes to investing. Mine's my own worst enemy, no matter what, I think. The thoughts that go through this brain of mine, I tell you. At least you can keep it together for the show. But he was saying that we have these emotional and logical sides to our brains and we tend to use the emotional when it comes to our money. Well, and he specifically talked about the whole reflexive and reflective side, right? The reflexive is the emotional side, and that's the one we just- The knee jerk. Yeah, so we just sort of naturally operate with that. And what I found initially, Mary Lynn, was he says that the reflective side, we actually have to turn on. Consciously, we have to say, okay, I am going to make a logical decision here. So the best case scenario when it comes to your money is that you want to buy low and sell high. Hey, that's what we're all looking for, isn't it? But what he's saying is because of our emotional reactions, sometimes we end up doing the exact opposite. Yes, we buy high and we sell low. Dead gummit. Yeah, I think that's exactly where a lot of people are right now. They're sort of wondering, okay, I'm seeing what's happening in my 401k. Should I keep investing? Should I take some money out of stocks? What should I do? So what research shows is that if your investment horizon is five years or more out, you should just stay the course, keep your money where it is, and don't worry about it. The reason for that, of course, is because in a five-year period of time, if you're investing in a fairly broad group of stocks, stocks tend to go up as long as it's five years or more. Okay, but if you need that money now, you're going to be retiring within a year. Maybe you need the money now because you need to put your kids into college or whatever. Then you should talk to a certified financial planner and figure out a strategy for getting some of that money out. Absolutely, and I think, Mary Lynn, it's important to just understand this whole concept of buy and hold, keeping your money in the market. We've actually come up with a little example to help people understand. So help us understand, right? Exactly how this works. George, you've simplified this so that it'll be easy to see this in your head, even if you're driving right now or whatever. Yes, and you can imagine us riding on the imaginary whiteboard, right? The big board. That's right. The cool thing I think about this is the example we're going to give is that the stock ends up right back in the same place it is today, and yet you still make money. People don't understand in many cases how that could possibly be, but you'll see it with this example. That's coming up. Today, we're talking about what to do with your money during tough times, and specifically how our brain helps us or hinders us, I guess, in doing that. Now we want to talk about how to make money with a stock that goes nowhere. So let's say that today you're going to invest $100 in some broad market index. Let's just say the S&P5. It's $20 a share just for this example. It's not $20 a share, but let's say it is. So you invest $100. It's $20 a share. You buy five shares. So you own five shares now. Now let's say in a month that stock has fallen, that index fund has fallen to $10 a share. It's 50% off. I'd say that's just my luck. That's a pretty big drop, isn't it? Well, the thing is, you're going to invest another $100. This is important. You got to invest that second $100. So you shouldn't bail. Don't bail. No, that would be buying high, selling low, right? So keep investing. So now you buy $100 worth of shares, which is 10 shares. So now the thing is you own 15 shares, five from last month, 10 from this month. Now, if you sold out at that point, you'd be down a total of 50 bucks. We don't want to sell. We're in this for the long term. So the next month rolls around. Let's just say it's back up to 20. Now, if you think about it, hasn't gone anywhere, right? It started at 20. It's back up at 20. So you're going to invest your $100 again. You buy five shares. So now you own a total of 20 shares, five from the first month, 10 from the second month, five from this month. Those shares are selling at $20 a share. So you have a portfolio worth $400. You've only paid $300. You're in the black. That's right. You're in the black, but think about that. The stock is at the same point that it was when you started, and yet you've made money because you dollar cost averaged, you bought low, and now you're sitting there, you could sell high. Okay, that's a great example. And I guess the point is you can't predict the market. You don't know what it's going to do, and trying to anticipate what's going to happen. It could just drive you mad. Well, and not only that, Maryland, it also would cost you money because research shows once again that basically there's a few days every year that sometimes lead to the biggest declines or the biggest gains. And if you happen to be out of the market when those biggest gains are happening, you may lose most of your return for the whole year. You can find a written summary of today's show on our site at big success at bigwith2gsuccess.com. We also have links to the two articles and the book we mentioned in the show today. Next time, we'll talk about how to remember names and faces. We're going to talk to a leading expert. And Maryland, I can't remember the name. I knew you were going to say that. So I'm going to definitely tune in. Until then, here's to your big success. The Big Success Show at B-I-G-G Success.com. [BLANK_AUDIO]