Emotional Markets

 Transcript:

Introductory clipping- “Hee Haw”

Speaker 1: I guess you heard about the terrible misfortune?

Speaker 2: No

Speaker 1: My great granduncle died

Speaker 2: No, that’s bad

Speaker 1: No, that’s good.

Speaker 2: How come?

Speaker 1: Well, when he died he left me $50, 000

Speaker 2: Oh, that’s good!

Speaker 1: No, that’s bad!

Speaker 2: How come?

Speaker 1: Well, when the internal revenue got through with it all i had left was $25,000

Speaker 2: Oh, that’s bad!

Speaker 1: No, that’s good!

Speaker 2: How comes?

Speaker 1: Well, I bought me an airplane and learn to fly

Speaker 2: Oh, that’s good!

Speaker 1: No, that’s bad!

Speaker 2: How comes?

Speaker 1: Well, I fly it upside down the other day and feel out of the darn thing

Speaker 2: Oh, that’s bad!

Speaker 1: No, that’s good!

David Scranton: Following the roller coaster stock market lately is felt just a bit like watching the old ‘That’s good that Bad’ routine from ‘Hee Haw.’ There is just no telling how Wall Street is going to react to any bit of economic or political news. The jury is still wondering if the markets ultimate fate will be good news or bad news!

David Scranton: But every investor should be prepared financially or emotionally or both. It’s not time to tune up hype and focus on the facts, facts that matter you the income generation.

David Scranton: Let’s get started; get ready to separate the reality from debt

David Scranton: Hello, I’m David Scranton. A few weeks back we did a show in market volatility and the possibility that we could be seeing the start of a new major market correction, one that can possibly be on par with those that begin in 2000 and then once again in 2007. In fact, we discussed hedging strategies and focused on this issue strictly from a financial perspective. But, you know, there is an important psychological and emotional aspect to the issue as well. And that is exactly what we’re going to be focusing on today, and helping me will be Drs.Ted and Klontz, Financial Psychologists, Authors of the book ‘Mind over Money,’ but first let’s take a look on what has been happening in the market since that show a few weeks ago.

David Scranton: The volatility that made February one of Wall Street’s most chaotic months in the decade, continued throughout March, and in the first week of April it has been more of the same. On Monday, the stock market has the worst April start since the great depression, with a dow dropping of 158 points and the S.A.P back in correction territory. Then, on Tuesday, stock grew sharply again and finishes the day on a positive note. Then on Wednesday, you guessed it, the Dow started the day down again by some 460 points, only to end up the day up by a couple hundred points!

David Scranton: Now you’re instinctively reaction to this might be, that’s bad, to which I would argue, no that’s good! At least there is something good about it. You see, every since the 10% market correction that occurred the first week in February, it seems that the markets were at least starting to acknowledge the fundamental realities again. For years now, we’ve had a market largely disconnected from reality and influenced most strongly by the effects of artificial stimulus; that is quantitative easing. What I have always liked in quantitative easing to an athlete breaking record only because he was pumped up on anabolic steroids. It may look impressive on the surface but ultimately we all know it’s largely artificial and dangerous for the athlete.

David Scranton: We know the same goes for artificial pumped up the stock market, and what we are seeing now might just be a demonstration or at least the start of a demonstration of the inherent danger of artificial stimulus. As the steroid or the stimulus in the case wears off, it becomes necessary for the markets to realign with fundamental realities; the most important one being that stock prices are overvalued in relation to economic growth, and we discussed that a few weeks ago also. While, the stock market grew about 20% in 2017, reading for GDP growth for the year was according to the burrow of Economic Analysis’ only 2.3 %. So, recognizing that the market overvalued needs to make fundamental sense again, it seems that Wall Street is no longer able to shrug off that bad news or potentially bad news.

David Scranton: In the last few weeks, quick sell-offs followed by cautious partial rebound have become the norm, and I stressed partially rebound. And ultimately the stock has not regained the peak that it hit on January 26th, and since then it has shed $2.3 trillion worth of net worth, nearly 40% of the gains made since President Trump’s election. So, with three quarters of the year still ahead, are we looking at good news or bad news ending to all of this? Well, the market start growing again will that happen, or have we already passed the tipping point for the third sustained major market crush from the year 2000? Well as we pointed out a year ago, there are different opinions about that and ultimately, it’s probably still too early in 2018 for us to tell. But if your instinct is to cling to optimism and quickly dismiss all the preponderance of evidence that another major stock market crash might be in the works, that could have more to do with psychology than with actual situation. And I mean euro psychology personally and human psychology in general. Which is why I want to focus on such an important topic on today’s show. So for example, if you happened to be an optimist by nature, you probably feel that more often you optimism have served you well. And I agree in most cases that it probably has.

David Scranton: Let’s face it, optimist are much more likely to be successful in business, successful in life more so than the pessimist. And generally optimism is a wonderful trait to have, but you know like anything else, it has it also has a potential downside, and I see it frequently as a financial advisor. Clients who are optimists always looking for any shred of evidence that reinforce their optimism. At the same time they instinctively try to minimize or ignore evidence that works against it. And this as you can imagine can have incredibly major consequences when it comes to investment decisions. For example, ask yourself this, during the last prolong secular bear market in the stock market from 1966- 1982, almost 17 years. Who would the investors most likely to have stayed in the market, through three major drops for almost 17 years only to get 0 net growth during that time? You think it might be a pessimist or perhaps the optimists? Who always thought that, that recovery is always right around the corner? I think the answer is pretty obvious, and it shows how optimism can actually work against you psychologically in the financial markets.

David Scranton: And you know on a subconscious level we are of a certain trait like that, a trait like optimism influences our decision making more than we realise. One, is that most people are wired to make decisions emotional first, and then tried to justify those decisions logically afterwards. It’s funny how I learned this first hand, many years ago a very wise car salesman. He could tell that I already made the decision back then to buy a certain brand of car and all the questions I was asking him at that time were simple efforts to justify the decision I already had made emotionally. And with the stock market coming off a year of 20% growth, many people have subconsciously made the decision to stay put and hopes of gaining another 20%. And as the market struggles, they are only seeing the positive data that justifies that decision to stay put, and subconsciously dismissing the negative data, without realising they are conforming to one of the two the basic emotions that thrives financial decisions; fear and greed. They are forgetting to be a good investor you really should be a contrarian and we’ll talk a lot more about that later on in today’s show.

David Scranton: Right now it’s time to welcome today’s guests appropriately. My guests’ today area father and son team in the emerging field of financial psychology, often referred to as the people whisper, Dr. Ted Klontz is the Associate Professor of Practice and Financial Psychology at Creighton University and Director of a Financial Psychology Institute. He and his son Brad are co-authors of the book ‘Mind Over Money,’ which identifies and helps readers deal with the twelve most common money disorders. Gentlemen welcome o the show.

Drs.Ted Klontz and Brad Klontz: Thanks for having us.

David Scranton: Now, it’s interesting because Ted I am going to point this to you first. In your book you say, “Our disorder relationship with money are not our fault, instead they are by product of subconscious beliefs and though patterns rooted in our childhoods.”So Ted is this true, psychologist I know love to say everything goes back to our childhood? Now, be careful when you answer this Ted because your son is with us and we are going to get the real answer from him.

Dr. Ted Klontz: Yeah, well I think he will be a perfect example of learning exactly the lessons I taught him without knowing that I taught him that. One of the things that happen is that young girl or young boys love songs growing up when they are two or three years old.  The favourite one of my granddaughter was “Hush little baby don’t say a word, Mama is going to buy you a mocking bird,” She loved it, and the message is if you want to be happy you buy things, that’s just one example.

David Scranton: Yeah, and it true, so Brad when you think back when you do some self analysis, your financial habits I mean, did most of those comes from your upbringing? You find that true in your case?

Dr. Brad Klontz: Yeah absolutely, you know some of it is unconscious and that’s one of the big issues around money is so much of what we do and how we feel about money we don’t really talk about it, so it lies underneath out conscious awareness. But for me, I got really interested in financial psychology when I got out of graduate school and I saw I had a bunch of debt. I had $100, 000 in debt, in growing up were we grow up I was very much afraid of being poor and being stuck in this family cycle of poverty which is our family story. So having that debt created a lot of anxiety for me, and when I got out of graduate school I saw some friends make a $100,000 a year selling stocks and I though what a great idea to get rid of that debt within a year. And, so of course I sold, I did what I reasonable person would do. I sold everything that I had of value, put a dollar in the stock market and unfortunately I put it right at the top of the tech bubble at which point I saw it melt away and that’s what really got me interested in financial psychology. And, Ted and I started having conversations and I learnt a bunch of stories that go back from grandparents to great grandparents which totally explained why I approached money in this way.

David Scranton: Ted gave an example before about spending money, how we are addicted to money. You know, Brad you see that as being one of the biggest short comings that comes from what children get from parents today in general is this society of I’ve got to have it today?

Dr. Brad Klontz: Right, absolutely. You know hmmm, one of those things, I remember when I was growing up all we had was this Zeus catalogues to show us what we didn’t have. And, now our society and young people are now inundated, 24 hrs a day on their mobile devices now, with all of these thing that they don’t have and the promises that if you had these things you would be happier. They’ll will somehow made you happier, raised your social status and so we easily fall victims to this with impulsive buys because we are trying to fill the emotional and psychological hole to try to fit in with our friends and fit in with those around us, which I think has gotten much much  worst in this culture.

David Scranton: Sure, and things like Amazon Prime sure don’t help much at all either.

David Scranton: So Ted in the forty five seconds or so that we have left, tell me, I mean how much you think improved lines of communication; intra family communication would help this problem? Solution or make it worst?

Dr. Ted Klontz: Yeah well, communication done well always helps things. Typically, we don’t talk about money because it never goes anywhere as productive and so we don’t talk about money, religion; any of those things, politics. Not, because we shouldn’t but because we don’t know how to, but to be able to talk about my experience has been as family learn how to talk about it about each other’s thoughts and believe about it, it’s always fun time, of course it has to be structured  in a way that people are actually having fun.

David Scranton: You have to admit that you and Paris talk about things with your children, they start to realise more themselves about some of the mistakes they made and how good useful communication, so stay with us we are going to be right back. And, you stay with us too much more in terms of words of wisdom from Mr. Klontz and Mr. Klontz.

David Scranton: If you’ve ever been to Palm Beach Florida, you’ve visited the high end shops, boutiques and restaurants of Worth Avenue. Usually, Worth Avenue is packed with shoppers, diners and the businesses are just thriving. That’s because the even though the merchandising meals here are quite expensive, Worth Avenue is located in a very affluent area of Florida. A good percentage of their clientele are multi, multi millionaires who can easily afford to shop there. That’s why you can imagine I was shocked one day several years ago, to drive down Worth Avenue and what should have been a peak business hour to find it nearly disserted. If it were Street out West it would have tumble weeds blowing down it. I had asked one of the shop owners what happened, he had said it has been that way for months. Why? Because a lot of Palm Beach residence in the area around Worth Avenue were recent victims of Bernie Madoff’s Ponzi scheme.

David Scranton: In fact some had lost millions, of course the reality it most of these people could afford to lose million and still live lavish lifestyle because they had many million left. So I understood right away what was happening. The fact that these millionaires and billionaires had abandoned Worth Avenue, wasn’t really result of the financial impact of their lost, instead it was of the emotional impact. You see, psychologically, the fear and uncertainty that comes with a financial lost has much greater impact than the sense of pleasure or satisfaction that come with a financial gain.

David Scranton: Think about it for a minute; let’s say you’ve been thinking about buying a new car and you have750, 000 in investments. And, all of a sudden overtime that 750 drops to increases to $1,000,000. Odds are, you are going to feel pretty good and confident about that $1,000,000 enough so, to go and but that new car. But conversely let’s say you have 1.25 million in assets and it drops to $1 million. Now, you might have second thoughts about buying that new car. In both scenarios you have the same money; that $1 million. But your decision changes because the emotional impact is dramatically different based upon the direction from which you’re approaching $1,000,000 financially. And that’s exactly why all those affluent shoppers stopped visiting Worth Avenue even though they still had enough money to shop there. Some may have lost as much as $25 million to make of; some didn’t have all their money with them. So most had probably at least $25 million dollars left and I wanting to bet that when there net surpasses 25 million on the way toward accumulate $50 million, they had absolutely no qualms about shopping on Worth Avenue. But when it surpasses 25 million on the down side, coming down from 50 million they were reluctant to spend. Why? Because again, this time it felt very different. And that is the emotional and psychological impact of a major lost. I wanted to share all this today because it’s extremely relevant to what’s happening with the stock market this time.

David Scranton: Again, no one really knows yet if good news or bad news will be out, no one knows if the markets are going to stabilize and possible add another 10 or 20 %, or if we are on the verge of a tipping point that’s going to lead to the next major correction. A correction that is historically must be between 40 and 70% in magnitude. Either way, when deciding on to allocate your assets for retirement, it’s important to consider the emotional impacts of each scenario. So let’s say for example that you got out of the market now, and we are conserving perhaps 5% per year, and then the market did go up by a full 20% but you weren’t in it. Odds are you might feel a little badly that you missed out on the additional 15% growth, but instead now alternatively le’s say that you stayed in the market, and the market did experienced another 40 and 70% drop. In that situation wouldn’t you fell a lot worst? Of course you would, in part because your lost will be far greater than the money that you might had gained. It’s almost like going to a casino game where if you won, you won $15 and if you lost, you lost $70. Would you even play that game in the first place? Probably not, but even if you felt that you could afford a loss of that size, chances are you’ll feel worst, why again because of the direction that your finances are moving. See when it comes to psychological impact the direction makes a much bigger difference than the actual net worth number, especially after retirement because at that point your entire mentality changes. And we also are going to be talking a lot more about that in today’s show.

David Scranton: Now it’s time to welcome back Drs. Ted and Brad Klontz. My apologies to both of you, right after the last segment I said Mr. And my producer yelled at me in my ear right between segments here. So, Ted I would like to ask you, what are some of the most common financial psychological disorders that you see when you talk to people?

Dr. Ted Klontz: I think that the primary one  deal with are people who spend more than they can, and what I mean by that is they spend more they can support. But in today age it has allows us, the world we live in allows us to spend more than we have and up to a certain particular point in time and then spending that we done is crushing.

David Scranton: Kind of sort of catches up with you after awhile if that happens, doesn’t it?

Dr. Ted Klontz: Yes and the second I would like is the most common is one where the people just refuse to pay any attention to it whatsoever. And I think the third would be the people who are afraid to spend anything.

David Scranton: Yeah that’s interesting. The opts in spectrum again, the books ends, the people who spend too much and the people who are afraid to spend anything.

David Scranton: Let’s talk Brad, about that middle category, the ones that just don’t want to do any planning. They bury their head in the sand; they just don’t want to do anything they are in denial. How do you deal with those, how do you help a person cope with that? And really refrain from burying ones head in the sand?

Dr. Brad Klontz: Yeah, there are a lot of reasons for doing that and we’ve done several studies on this, and one of them is category of beliefs surrounds money that’s called money avoidance. And these are beliefs as most of our surrounds money comes from our parents or grandparents or culture around us. But they are built up of couple different types one is one that we would call anti- rich people beliefs. These are the beliefs that money is somehow evil or corrupt, or rich people are greedy, so there is this avoidance I don’t want to become one of those people. Another belief pattern around that money avoidance cycle is…….

David Scranton: But Brad, you do understand that being very conservative station here that those people are mostly democrats and none of them is watching you speak right now so I just wanted to clarify that.

Dr. Brad Klontz: Yes, of course, you are spat on. Research does show that there are some differences along clinical affiliation. But a big part of the message that a lot of the viewers already know is you can do incredible wonderful things with money. So, the degree of which you have this aversive sort of belief about money, all of our studies show that it’s highly self destructive to your relationship with money.

David Scranton: So Ted, you come across somebody that is like this to money from a tactical standpoint. How do you help that person, how do you help that person when they just don’t do anything because money is evil, money is dirty?

Dr. Ted Klontz: Well one thing that we learn and we emphasize is words are cheap and the brain is not or very little affected by words. What we try to do is show them, in some kind of sensory way exactly what we are talking about. And my premise is that if people are not doing the right thing they just don’t understand what the right thing do is. And it’s because words don’t give us that, we have to show them in practical terms what exactly what we are talking about, what it look like. I can tell you that you have a bad back, but if I can show you as a doctor your x-ray, you can get it and that’s essentially what we do.

David Scranton: But, you know if it’s about beliefs or value some of those things are at your core, they are much deeper. So, you can show people, you can tell people but Brad, I mean how you’d get down to that values level, that belief level to get people to take the message and implement it?

Dr. Brad Klontz: Right, absolutely and a huge part of that is knowing your story about money, because all these beliefs make total sense if you can understand the story from which they emerge. And so if you can look back in your family history and realise this aversion that you have towards spending or spending too much or thinking that money is going to make you happy. If, you can link that into a family story it really does empower you to understand how you can shift this family cycle for in many cases it has been going on for generations.

David Scranton: It’s funny to hear you say that because it is true. Even when you are speaking publicly I always say, people don’t always remember information they remember stories. And as educators, I am sure both of you realise that also. So, I hope the two of you have time for one more segment to stay with us.

Dr. Brad Klontz: Absolutely,

Dr.Ted  Klontz: Sound great!

David Scranton: Excellent, We’ll be back in just a minute!

David Scranton: If you are near or in retirement, head over to ‘theincomegeneration.com’ and download your special report written specifically for the needs of the income generation again those born before 1966. I am David Scranton and you’ve been watching ‘The Income Generation.’

David Scranton: If you are a regular viewer and I certainly hope that you are. You know I talk often about the fact the financial market is driven largely by emotion. Ideally its emotion is in line with the economy and geopolitical realities. But as we’ve talked about that hasn’t been the case now for some time. Thanks mainly to the overused of financial steroids; artificial stimulus. What we’ve discussed less frequently on the show is how personal financial decisions are also influenced by emotions, and how those emotions are also clouded by artificial, psychological factors. We see several examples already so here is one more.

David Scranton: We all like to believe that humans are forward thinking, but for the most part it’s not true. People have an extinctive tendency to look backward more often than forward, and make decisions based upon what they see in the rear view mirror. The trouble though is that our view through the mirror doesn’t go very far. If it happens more than two or three it’s no likely to have much influence on the decision we make today. So, think about that in terms of the financial markets. It’s been over nine years now since that they were trending consistently downward; that means last nine years the markets have been an upward swing. In being growth mood over that period and hitting new records throughout many many years, it’s no surprise that all that most people can see in the rear view mirror and it has a big influence what they are anticipating down the road is an increase; is a steadily increasing market. You can think of your psychological rear-view mirror as a convex mirror. You know with one of those warning stickers on them which say objects may be closer than they appear. And they typically are closer than we realise, and fortunately stock market doesn’t come with the same warning sticker as your pickup truck.

David Scranton: One of the psychological terms for all of this is normalcy bias. It will cause us to under estimate both the likelihood of a disaster as well as its possible consequences. Why? Because we are hard wired to believe things will continue to function the way they normally have. And what still looks normal to us through a rear view mirror right now is a growing stock market; a stock market capable of shrugging off bad news. But, as we’ve just discussed may be changing, just as it changed in 2007 even though we can no longer see that far back in our rear view mirror. So yes, it’s important to understand how psychology and emotion influence our response to that potential change.

David Scranton: Now it’s time to welcome back one final time Financial Psychologist, Drs. Ted and Brad Klontz. You know as you heard our show today, we were really talking about the psychology of people of ‘The Income Generation,’ people who reaches age 50 years and over and how they suffer often times from things like normalcy bias, hindsight bias and it affects their investment decisions; when to buy, when to sell, do I stay the course, do I get out? Dr. Ted, how much of a problem you think that is, once people actually do accumulate a good chunk of money and get close to retirement.

Dr. Ted Klontz: Well, my experience is that the more that they have the closer they are to retirement the greater the risk of them doing something that can jeopardize their future. And, what they do is really based on what they believe in, what they’ve experienced and what they’ve done with those experiences.

David Scranton: Okay, but Dr. Brad what do we do when we have students in the spectrum, one person that they panic, they over react, the markets down 100 points, they sell.  And, then you get the other person  that sat there in 2007, you know at the end of  2007 seemed obvious was a financial crisis coming and they just sat on their hands and did nothing. You are dealing with two ends of the spectrum, I mean how do you deal with those, how do u differentiate those? How do you help those people?

Dr. Brad Klontz: Yes, so I think the first part, and the most critical part is recognizing that human beings are utterly irrational when it comes to their approach to money. Their approach to investing and these behaviours are really driven by emotions, so whether it’s a lot of excitement about a bull market that’s taking off and you just want to jump in because you feel like you’ve been missing out, or its intense fear that the market is taking. Just understanding that, you are wired to do the absolute wrong thing, when it comes to investing and your relationship with money. Knowing that that can give u caused to let yourself calm down that emotional brain and make more rational decisions, but it really starts with admitting that when it comes to money also wired to be crazy.

David Scranton: Very good point, but Dr. Ted, you know the solution that most people say is go get a financial advisor and of course as a financial advisor, I think is generally a pretty good decision. But you know, financial advisors are humans also so how can we tell if our financial advisors are making logical decisions or emotional decisions?

Dr. Ted Klontz: Well, am if you call them and you are scared and they go me too, it’s probably not a good advisor. But I think, and actually I had one do that during the 2007, 2008 crash, he happened to be my financial advisor he isn’t any longer but he was.

David Scranton: I knew you would say that by the way, “he isn’t any longer.”

Dr. Ted Klontz: Well the truth is most people leave a financial advisor because relationship breaks down not because of performance of the portfolio. But the idea is that planner tells you the truth about how money works. They prepare you for the news; that it’s going to drop 500 points, 700 points. It should not have come as news to me as the client and that we have a plan for that. If I do my job as financial planner, I am not going to get those calls the market drops 700, 800, 1500. I will understand that there are, it’s the sea sometimes there is the dip of the wave, you’re at the bottom sometimes you are at the top and your job is to hang on keep steady as we go.

David Scranton: So it sounds like one of the best answers then  is really for our  Income Generation members watching the show to talk with their financial advisor and ask them what is plan if the markets are down a 1000, if they are down 2000. Do we get to a point where we stop the bleeding or what’s your plan?

Dr. Ted Klontz: Absolutely

David Scranton:  And I guess having a plan in advance is a big part of it that removes the emotions. I had a story and that’s kind of a sad story. Right about 2007 where I felt like the market was really high, I saw the financial crisis right kind of on the horizon and I had someone who came into my office, whose brother happened to be his broker and I over begged  him  to reduce the stock market exposure as he was approaching retirement. I gave him words of wisdom to go back to his brother and to tell his brother look get me out and put me here. Of course he went to his brother and as u you imagine his brother talked him out of it. I bumped into this fellow a couple years ago and sadly, they weren’t even talking anymore because his brother had talked him out of that and you know what happened 2008 with the markets. So Brad, where is the happy medium, where is the happy medium between  somebody over reacts but may be the other person  is so calm, they don’t react at all, go write it down 58% that we say back in away.

Dr. Brad Klontz: See, well you know I think that the advisors are just as human as investors are, and so a skilled advisor already sort of predicting what might be happening in the future. And, they are actually doing it for their clients, they are minimizing the potential down side, they are actually emphasizing that in varying visual ways. As Ted  has mentioned ,where instead of talking about a percentage drop you are actually taking about so how you are going to feel if the market if you lose $200,000 in your portfolio? Because what we know to be true, and you know this to be true, what has the biggest impact on our financial wellness is not what happening the market is what we are doing and how we are reacting to that. That’s where we messes up ourselves the most.

David Scranton: Yeah, how do we know Dr. Ted, what, how somebody is going to react, people are more motivated by the carrot; by doubling their money. Some are more motivated by the stick; not losing money. How do we determine which category each of us is in, to determine whether we really risk averse or maybe we are not going to be bothered if our money gets cut in half?

Dr. Ted Klontz: Yes, I would say that if I am the client I am pretty much unaware of how I am either and if my financial planner does an extraordinary job of listening to me and listening my stories, my sense of it all then he will have a really clear picture of how to help me and what I need and be prepared. I caught the inoculation that financial planner can inoculate me so that the fever doesn’t go as high and I don’t get as sick and make kinds of decisions.

David Scranton: That’s right; it’s the financial advisors job to proactive and not an in order taker, I agree 300%. Gentlemen, thanks so much for spending time with us on and discussing this important topic. The book again is ‘Mind over Money’ by Drs. Ted and Brad Klontz. Thank you both very much.

Dr. Brad Klontz: Thank you.

Dr. Ted Klonz: Thanks for the opportunity.

David Scranton: We’ll be back in just a minute with a lot more of ‘The Income Generation,’ stay with us.

David Scranton: If you are near or in retirement, head over to ‘theincomegeneration.com’ and download your special report written specifically for the needs of the income generation again those born before 1966. I am David Scranton and you’ve been watching ‘The Income Generation.’

David Scranton: The focus of today’s show gets back to a truism that I shared before on the show as well as in my books. And that is that most people simply aren’t wired to be good investors. You see to be good investors you contrarian; you often need to follow the road less travelled and to do the opposite of what everyone else is doing. To be good investor you need to be in control over the basic human emotions that controls most of your investment decisions and that are primarily fear and greed. You often need to recognise that optimism that serves you so well in many areas of your life can actually work against you when it comes to investing and your hard earned money. In short, you need to understand that psychology plays a major role when your financial decisions and it does so in ways that are often difficult to even recognize or with little control.

David Scranton: So, how does all that’s apply to what’s happening in the markets today? Well again, just when you think all looking good, suddenly it’s all looking bad, like that old ‘ Hee Haw’ sketch. With so much uncertainty and so much conflicting options about what comes next. How would you be sure that psychology is working in your favour and not against you when it comes to making financial decisions? Well, just being aware of all the psychological and emotional influence is a step in the right direction, arming yourself with education and information.

David Scranton: Another way is to actively work against negative psychology. Don’t allow yourself to be controlled by fear and greed. Recognize when your natural optimism might potentially do you more harm than good.  And, probably most importantly except that being a good money manager often means being a contrarian; it means doing things that are counterintuitive and the opposite of what a lot of people are doing in that time. Think about it, you have lowered your stock market risk in mid January when stock market was in the midst adding another 6% growth to last year’s 20% growth, wouldn’t that at the time felt to be counterintuitive? Wouldn’t that happen been the opposite of what most people were doing? Absolutely so! But would be regretting that decision right now? I bet the answer is no!

David Scranton: And again, no one can say for sure that whether the markets are already on the brink of a third major market crash that would be them fall, I believe by ultimately 40- 70% or whether they’re going to regain their falling  and manage to add another 10 or 20%. But, even if it turns out to be the latter, the question becomes you’re really going to regret missing out on that little bit extra gain, more than you’d have regretted a 40-70% lost? I bet the answer to that is also, no! Which is why I would argue, that your contrarian decision would have been the right one, if you are retired or within 10 years of retirement. You no longer have to worry so much about whether the ultimate news for the market is good or bad, because you switch your focus to protection and income. By doing so, you are already doing what a good capitalist is doing. In other words, rather than just choosing to sit there crossing your fingers and toes and hopes that things are moving in the right direction you are taking charge of your portfolio. And with your portfolio now focused on secured strategies, insulated for market turmoil and designed to generate reliable income through interest in dividence, you could then watch all the chaos and uncertainty from the side lines. And if you want, you can choose to get back in again at the right time. That means buying back into the market when it’s on sale, at a lower point, lower than it is today, some point during the next major market correction. It might once again seem counterintuitive and it probably won’t be what everyone else is doing, but again that’s the psychology of being a successful investor.

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David Scranton: So normalcy bias and optimistic nature and the tendency to feel complacent about your finances unless they are moving in the wrong direction. Those are all psychological factors that can work against your decision making process. But there are also some psychological influences that can work in your favour.

David Scranton: Early in my career, I had a client named Ed. Most people would probably seen Ed as the last man in the world that had a worry about his retirement fund, and the truth is he wasn’t actually worried, but he was diligent. See Ed, was retired and had some $6 million invested municipal bonds, earning 6% interest. Can’t get that anymore but that was the rate of interest available back then, as $360,000 a year of tax free income, and the good news to me his goals and to live the life style he wanted he only needed $150,000 a year. Ed has been a Vice- President if a major company, he is a smart guy and obviously he was playing smart financial defence in doing well. And every time we meet he’d insists that I run through the numbers again and prove to him that he wasn’t going to run out of money before he die. Finally one day, I said Ed why are you so insistent in going through these numbers with me every single time? His answer is something that helped shaped my business model for the rest of my career to this day. He said Dave, “You don’t understand, when you retire your whole mentality, your whole world changes. You see all these years getting a pay check, going to work, getting pay checks, spending money, saving some money for, again your whole life. But then one day, you retire you give up that pay check and you give up that whole way of life. It’s downright scary no matter how much money you have.” And you know I realise since then that Ed was absolutely right. For all my financial expertise even at the time, I really didn’t understand the psychology of retirement, why? Because I’ve never been through it, in fact I was nowhere near it at the time, and if you are not retired yet you probably can’t really understand it either.

David Scranton: Think about it, when we had that last major correction from 2007- 2009, odds are you were still working. And even if your saving took a hit, you still had your pay check coming in. In other words you weren’t relying on your saving for income, but it you are retired now or close to retirement, the next major correction is like and feel a lot different and end up getting caught in the down draft, because now depending on your savings for income. And now you understand what that dependency feels like psychologically. For me, Ed really helped cement the concept about financial defence after protection and how those things should be number one priority for investors over the age of 50; members of the income generation.

David Scranton: I was already developing that business model based upon my research in the market history, which told me that we were back on the way in the 1990’s to a long secular bear market cycle include at least three major market drops. And, we’ve experienced two of those market drops so far as we’ve seen a lot of fundamental, technical and historical evidence has started to suggest that a third may be close at hand, if not already on the way.

David Scranton: If that the case investors need to make good decisions and to understand how psychology can influence their decision making process for better or for worst.

David Scranton: Well, just want to thank both your guests for joining us for another episode on ‘The Income Generation,’ also I want to thank you, our new and returning viewers. The financial markets are nearly always inflicting to some degree, but we’ve experience the last two months is unusual. Usual but not unprecedented, we’ve seen periods of extreme volatility and uncertainty like this before. We’ve seen high P.E ratios out of whack with economic growth and heard warnings about them. Still no one can answer the question for certain yet, will stock market rebound and start growing again, or have we already past the tipping point for that third sustained major market corrections since the year 2000? As you review the evidence and think about that question for yourself, be aware of how emotion and psychology make play in your answer, and your decision into whether or not to take action. Be aware that optimism can work against you when it comes to financial decision making.

David Scranton: Also, be aware that humans have a tendency to invest in rear- view mirror and that our view from that mirror only stretches back a few years. Be aware of normalcy bias, where we naturally expect things to stay the same. Know that normalcy bias undermines our ability to anticipate disaster or to prepare for it. Be aware that most of us are wired to be concerned about our own financial situation only when it’s moving in the wrong direction. Also, be aware that mentality, your mentality changes once you retire, and that you can’t really know what it feel like until you are going through it. And last but certainly not least; be aware that you can choose to have a handle on the emotion and psychology of financial planning and to control it more effectively than it controls you.

David Scranton: Thanks for watching, if you are close to retirement and you really, really, really want to know how to protect and maximize your money, it’s absolutely essential that you stay informed and up to date today and right here is where we can do in on ‘The Income Generation.’ Thanks again and we’ll see you next week.