Fight Fear, Get Rich

Shortly after the end of the 2007-2009 recession, a relative (between you and me, we’ll call him ScaredyPants) asked me to manage his money. He was seventy, widowed for many years, generally a happy-go-lucky sort of guy, and his portfolio was worth about a million bucks.

Eighty per cent of the portfolio was cash, the other twenty per cent was invested in one-year term deposits with the total portfolio earning less than 1.0%.

In 2010, inflation ran at 1.5%; in 2011, 3.0%. Meaning, as long as the rate of inflation exceeded investment return, ScaredyPants was losing money. But he was fine with the slight hit to his portfolio. Because after the Great Recession, ScaredyPants was terrified of losing money.

Today, more than eight years later, ScaredyPants asset allocation has not changed. Drawing seventy-five thousand a year for living expenses and to pay income taxes, having no revenue sources other than his portfolio and a small government pension worth about sixteen thousand annually, his liquid assets have dropped from a cool million to less than $500,000. At this rate, ScaredyPants will be broke if and when he reaches the age of eighty-five. Yet, he refuses to change his portfolio – such is the debilitating grip of fear.


unknown

Enter Buddha

It is perfectly natural to be fearful. When fear comes upon you, embrace it, watch what is happening to your physical body, how it tightens. Watch what is happening to your thoughts, how they turn cloudy and negative. And wait for the feeling of fear to pass, because it always passes. And once fear passes, only then may you make wise decisions.


Sidestepping the Groove

Here’s the thing about fear: it stops us from getting to that really groovy place where we want to dance and sing and shake it all out because we feel financially independent and free!

As investors, as managers of our own money, we don’t have a whole lot of constructive use for fear. Rather, fear is a destructive emotional anchor, driving us to stuff money under the proverbial mattress, miss out on investment opportunities, let cash sit in a bank savings account earning next to nothing, or invest in ultra-safe-barely-pays-any-interest federal government bonds. All of which are surefire ways to NOT walk the path toward financial freedom.

Nervous Nellies

No one enjoys lingering in a state of fear or high anxiety. Still, it happens to all of us because we’re biologically wired this way: fear being an evolutionary mechanism designed to (1) signal danger, threat or conflict, and then (2) activate an adaptive response.

Okay, so we’re locked into human biology. But for the purpose of retiring early AND not running out of money before reaching our final resting place, isn’t it possible for savers and investors to flip the fear off switch?

Hey, smart guy, look around. The world is crazier than ever; the reasons for being fearful are endless!

I know, I get it, you don’t have to look too hard to find one geopolitical crisis or another that makes you want to stockpile supplies and hide out in a desert bunker. On top of this, there are your personal financial circumstances, be it shaky job security, unexpected expenses, or any other uncertainty that holds you back from contributing more to investments.

But the thing is, running away from financial markets is not the solution to being the CEO of your own show one day. In fact, it’s the exact opposite. If you let fear stop you from investing, then financial independence will remain a pipe dream.

Shift Your Perspective

To manage fear, to build wealth, shift your take on events. For example, when ScaredyPants thought of investing in the stock market, all he could see was the risk of loss. Well, there’s also the other side of the coin, the risk of gain, especially for long-term investors.

Granted, ScaredyPants represents an extreme example. For many others, risk is acceptable when it seems there is little chance of loss. So … when does the stock market offer such conditions? Well, when stock prices are going up, positive vibes fill the media, and fear has been relegated to the backseat. But, but, but … this is the exact wrong time to invest!

You want to invest when fear is in the air, when stock values are depressed and ON SALE.

But this is not what happens for most investors. Instead, time and time and time again, people do the exact opposite of what should be done; they buy high (when fear has receded) and sell low (when fear is ascending).

Your path to financial freedom would be that much shorter if you could shift perspective, and see depressed prices as actually presenting less risk, and potentially greater reward.

Easier Said, But Definitely Do-Able

Here’s BuddhaMoney’s guide to what needs to be done to address your fears, and maximize portfolio performance:

  1. Diversify. You’ve heard it so often that maybe you tune it out: don’t put all your eggs in one basket. Because a diverse pool of assets goes a long way to reducing fears, minimizing risk, and lessening major moves in portfolio value.

What kind of risk gives rise to fear? Market performance, economy performance, interest rates, inflation, and longevity (the possibility that you will outlive your money). To alleviate fear (and ulcers) caused by stock market value gyrations, hold some bonds. If you think the domestic economy is about to tank, buy foreign securities. If the bull market is slowing and you’re fearful of an impending crash, increase your cash position.

  1. Balance and ReBalance. Naturally, given that you’re a BuddhaMoney devotee, you have an investment plan setting out how much money is allocated to certain assets. For example, 60% stocks, 30% bonds and 10% cash, invested in domestic and foreign securities, exchange traded funds (ETF) and/or individual securities.

Well, if your stocks have increased in value and now make up 70% of your portfolio, then its time to rebalance, to sell 10% of the stock holdings (sell the winners; and when you sell at the ‘high’ price, it sure feels good) and allocate the proceeds to bonds and/or cash. Why do this? Because rebalancing reduces risk, reduces those situations where you feel fearful, and when you have a thoughtful investment plan in place its best to stick to that plan to achieve future goals.

  1. Pay Less Attention

The stock market is a roller coaster. And the ride makes a whole lot of folks queasy. But by no means does that mean you should jump off. Instead, tweak your behavior: stop checking prices every day or even every week. Because it’s dangerous for your health. When your hyper-focused on daily stock prices, you become more and more emotionally invested in both small and large movements. In turn, this may cause you to forget your long term goals and make poor decisions based on short term price swings.

  1. Keep Costs Down

Managing costs contributes to minimizing financial risk, i.e., the lower your investment costs, the more money in your pocket.

This may mean choosing low cost Index Funds; using the services of a Robo-Advisor; managing your own investments with a discount broker; or negotiating lower fees with a financial adviser.

  1. Recognize Noise For What It Is

Media knows that we read what we connect with, and most often that connection is on an emotional level. When the stories lean negative, this may affect our decision-making, and not necessarily for the better. So don’t let the stories suck you in and throw your well thought out plan off course. Because your financial plans, your financial future, should not be adjusted based on media stories or even what you discuss with friends. Instead, your plans should be based exclusively on your current needs, short, medium and long-term goals, and tolerance for risk.

Sure, we’re all susceptible to fear. But when you’re able to harness that fear, you sure do stack the odds in your favor that financial independence will be reached according to your plan.

You’re Retired! Um … Now What?

During the late 1990s hi-tech boom when I ran my own law practice, I had a client who was the CEO (Big Shmo) of a publicly traded company. The company was successful and Big Shmo was handsomely rewarded through a combination of salary and capital gains made through cashing in stock options.

So there was Big Shmo, a guy in his early forties, self-made son of an immigrant, married with one child, rich enough to gain entry to the top 1%. Yet, he continued working 10-12 hour days, 6 days / week.

‘Why not retire?’ I asked him.

Big Shmo smiled and waved away my question.

‘Listen’, he said, ‘I get what you’re saying. I’ve amassed a small fortune so why should I continue working? You want to know why? Because for me, working is not about the money, it’s not about earning more. I don’t need more. In fact, I don’t need most of what I have. But what I need is the challenge! I love building the business, the competition, working with people, giving it everything I have. That’s what matters for me. Besides, with what I do everyday, I don’t even consider it work.’

It took me a few moments to realize what Big Shmo meant by ‘I don’t even consider it work’.

What he meant was that he lived in a state of Flow.


Chewy Bit. Flow refers to an energized focus allowing for total involvement in the process of activity to the best of your ability.


When you live in Flow, you understand that life is a process lived on a continuum; it is a direction not a destination that involves stopping and starting.

I learned a lot about living in Flow from Big Shmo. And I’m certain that his perspective on life played no small part in leading him to achieve balance and financial freedom.

Getting The Party Started?

One day you’re hunkered down in your cubicle, walled office, or on a kitchen stool plugging away at work earning your keep. The next day, a day you planned for, dreamed of, for a decade or two or three, you’re free. Retired. You have enough dough to make it through the rest of your life. WHOO HOO! You did it. Good for you. Now, looking forward … what’s next?

If you’re like most people planning for retirement, you focused on hitting the magic number that would bring you to this day. Then … it happens! And you celebrate for a day, a week, a month, maybe more. But eventually you stop and reflect and realize that, uh oh, you didn’t give anywhere near as much thought to planning what life would be like after you closed up shop.

Adjusting To The Retirement Stage

If you thought of retirement as a ‘stop work … start the rest of my life event’, you’ll experience a period (how long it lasts is up to you) of significant emotional and psychological adjustment.

Why?

Because retirement is a HUGE life event! You have just abandoned your sense of purpose, removed your self from a social group, relinquished your calling card, all of which tends to bring about sadness stemming from a sense of loss, isolation, and vulnerability to suffering from fear of the unknown.

And when you experience this adjustment, it’s not uncommon to ask yourself:

  • Who am I?
  • What’s my identity?
  • What do I contribute? Am I useful for anything?
  • Will I lose touch with my workplace friends?
  • Will my other friends still like me, respect me, find me interesting?
  • What about my spouse? Will she/he want to be with me?

Dark Side of Retirement

The truly unfortunate folks fall into depression or debilitating addiction. The worst of it: suicide rates are highest for those over age 65, moreso men than women. The thinking being that men more often have their identity wrapped up in their career; occupation being the primary source of self-image, a marker for measuring your self, for finding a place for your self, a sense of belonging.

Not so for women. Generally speaking, women tend to engage in fulfilling activities outside of their career, throughout their life, intuitively gravitating toward a life of Flow.

Bright Side of Retirement

For many others, retirement is a beautiful blank slate. An opportunity to design your life any which way you like: pursuing new activities and adventures, forging new or deeper connections with friends and loved ones, engaging in long delayed dreams.

Resetting The Dial

Here are a few tips for finding your Balance and getting into Flow:

  • Stay socially connected. We are social animals. We need other people.
  • Contribute to life. We feel good about our self when we are helping others.
  • Volunteer. Get involved in your community. Join a club. Take a class.
  • Make plans, but be chilled about your plans. Be flexible. Leave time to just “be”, daydream, meditate, go for ice cream, ride a bicycle, read a book for fun.
  • Stay active. Be physical. Keep the body healthy as well as the mind. Body, mind, spirit, it’s all connected.
  • Be kind to your self. Be patient. Accept that your life will change and know that you will adjust on your own schedule.

Find Your Flow, Find Your Wealth

Regardless of whether you experience fear or excitement or both post-retirement, if you don’t find your Flow then the stage of life known as retirement will not be the party you dreamed about, no matter how much money you have.

 

Pathway to Financial Freedom

If it’s okay with you, dear reader, I would like to step back from talking about investing to ask why we invest our money in stock, bond and other financial markets?

A softball question? A naïve question? Absurd? Do I know anything about investing and money, you may ask? Alright, before I have to fend off any more imaginary attacks on myself, I’ll say that, of course, a primary reason we invest is to make money. Sure, but why do we want to use our discretionary income to make more money? Drum roll please: Continue reading “Pathway to Financial Freedom”