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Why Your Behavior Influences Your Own Wealth More than Market Movements

Every so often I meet a personal investor who will tell me that now is the right time or the wrong time to invest, depending on whether the markets are going up or down as well as depending on that individuals past experience.? Despite having 30 years of investment experience I never get into an argument with them because I know something they dont. Namely, very, very experienced investment professionals rarely, if ever, out think the markets. Even the greats such as Warren Buffet and Anthony Bolton acknowledge that markets cannot be outguessed in the short term and their own success owes more to long term holdings rather than short term trading outlooks.

In any event, many people who are inexperienced?in dealing with?investment markets (and even some who are experienced) tend to look for signs that they are right in the perspective of what is happening at any point in time. They look for reassurance about what they are thinking, or more correctly hoping, can be confirmed by one or more public facts about the markets. In Behavioural Finance terms this is referred to as Confirmation Bias. Put simply, people favour information that confirms their beliefs or hypotheses even if such confirmations turn out later to be false indicators.

This behaviour is also closely linked with Herd Mentality. In essence this is where people are influenced by their peers by adopting certain behaviours and?follow trends as well as possibly purchasing items. Investment history is riddled with Herd Mentality events from Tulipmania?in 1637 through to recent times when global property bubbles made?many seem smart before looking extremely foolish.

Why Your Behavior Influences Your Wealth More Than MarketsNewness Bias is also a well documented behavioural trait and is the desire to give more weight to recent information and ideas usually to support a particular investment outlook. This helps to support the belief that one is right because the latest set of economic data says so. Does this sound familiar?

The use of these three outlooks on investing works both ways. If markets are going upwards, they are used to justify why one should invest. Similarly, if markets are going in the opposite direction they are likewise used as justification as to why one should not invest in particular assets. It just depends on your starting position.

So the question is, if one cannot outguess the markets what should you do?

The starting point for all investing lies not in what markets are doing but rather in what you actually need in your own personal life. By defining what our own individual objectives are we can then set about expressing these in financial terms. Of course, such planning is not a simple process and requires a lot of thought but in my experience once this whole area is addressed properly investment decisions and their long term effects become more realistic, as does the evaluation of competing investment options.

After that it comes down to long term planning, and?not short term reactions to investment flavours of the month. The great thing about such an approach is it allows investors to exert control over their financial outlooks rather than being held hostage to them. In other words by controlling what we can control, namely our behaviour, we can have a disproportionate positive effect on our financial well-being. This isnt just my view or any recent perspective. Considerable research has been done on this.?As far back as?2000 Meir Statman, a distinguished economics professor based in Santa Clara University in California, produced research which showed that 93% of investor returns are influenced by their own personal decisions and not those of individual fund managers or indeed the performance of investment markets.

The bottom line? Before you make a decision to jump in and out of markets, think about what your investment objectives are and whether they are aligned to your, correct, asset allocation. If there is a mismatch then the issue isnt markets but is more personal. And for that you need to be aware of your own behavioural impulses as these influence your financial position more than anything else.

What is the Ideal Advisor?

Every person is unique and has unique needs and circumstances.

Each client wants to be related to and served differently because their financial personality is different. This should be one of the primary drivers of who they seek out as their advisor to build a life time advisory relationship with.

Leadership in the Financial Industry

However, foundational to the choice for clients is that the advisor is capable of providing them with a comprehensive service that holistically addresses all of their life and financial needs. The CFP Board has recently conducted a research study that found:

91% of those surveyed said they wanted their financial advisor to take into account their total financial situation, while 70% said they would prefer to work with an advisor who provides comprehensive financial planning services. Thirty percent said theyd prefer to work with someone who specializes in one area such as retirement.

This research provides good insights for advisors building their practice.

Read more at the Think Advisor website.

Although, comprehensive planning is required by clients ? it is still important that advisors know their strengths and struggles so that they always play their A game in attracting and serving the right clients.

To learn more about uncovering the advisory blind spot, please visit the Financial DNA website.


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10 Behavioral Strategies for a Successful Year-End

With the end of the year?approaching, it’s time for a review of your business performance in 2012.

What were your favorite strategies for improving personal and business performance this year? What did you accomplish and what are your goals for 2013?

The following 10 behavioral strategies?will?lead you through to a successful year-end and help you plan for the new year.

  1. Demonstrate customer appreciation based on knowing what motivates each customer.
  2. Complete an organizational talent review to determine whether each of your employees is using their unique talents.
  3. Review your team members’ communication styles as well as the strengths and blockages within your team.
  4. Evaluate current levels of customer engagement in your services.
  5. Know what motivates each employee to implement a non-financial employee rewards program.
  6. Build customer workflows that manage each customers expectations and meet their service needs.
  7. Review your leadership legacy.
  8. Learn how each of your family members likes to be communicated with.
  9. Address the amount of risk you are currently taking in your investment portfolios.
  10. Reflect on your Quality Life goals.

To learn more about our DNA Behavior solutions for addressing these areas, contact us at inquiries@dnabehavior.com.

Are You Considering More Than Just Investment Risk?

Traditionally when the topic of risk comes up financial advisors and wealth managers think of investment risk. How much loss can my clients tolerate when the market goes down? How aggressive or conservative should the investment strategy be?

Then there are advisors who have focused less on the investment side and gone to the life planning side. This too is important in the context of knowing the client and helping them achieve their goals.

However, what sits between whether the client creates and protects the wealth to achieve their goals is their behavior.

In a nutshell, there are many more risks than only the clients current investment risk tolerance that need to be known in building a long term financial plan and investment policy statement. What must also be known is the clients natural hard wired risk behaviors, their financial behaviors (eg spending and financial habits) and their relationship behaviors which if not managed can cause financial risks.

To learn more, watch the interview Advisor TV.

Visit www.financialdna.com for additional information or contact us at inquiries@dnabehavior.com.

Discover Your Investment EQ

The most common cause of low prices is pessimism It’s optimism that is the enemy of the rational buyer.
- Warren Buffett

Ask a group of investors to share the secret to successful investing, and youre likely to get many different quantitatively focused answers, ranging from, hold for the long-term, diversified asset allocation, quality research to the much touted buy low, sell high mantra.

However, recent research into the human mind has found that the secret to success in any long-term endeavor, whether it be in business, relationships or investing, is an attribute called Emotional Intelligence (otherwise known as EQ). EQ is a type of intelligence thats significantly different to the standard IQ-based definition of smart were all used to. The topic of EQ has received significant coverage in the business world in the last few years, fueled in particular by Daniel Golemans books which are aimed at helping business people use the skill to further their careers and effectiveness.

Following the four facet Goleman model for EQ, the emotionally intelligent investor would, for instance, make investment decisions calmly based on a higher consciousness of who they are and with a positive personal relationship to money (the first facet of self-awareness). This is instead of making decisions based on an emotional impulse which sabotages their financial position. They also handle stress, disappointment and uncertainty more rationally, and dont allow those feelings or circumstances to control or initiate their decisions (the second facet of self management).

Going further, the emotionally intelligent investor would also understand the emotions of others such as their partner, spouse or family members, recognizing them and responding with empathy (the third facet of social awareness). Finally, a person with high Investment EQ would have the ability to maintain quality relationships with others around them when making investment decisions knowing how to, effectively and appropriately motivate them and manage their money energy using subtlety, delicacy and tact (the fourth facet of managing others).

But the role of EQ in investment has been little publicized, even though its application can be invaluable for investors. Whether this is because the investment process is seen as an objective, numbers-based, non-emotional process, or whether the investment industry has simply not been made sufficiently aware of the existence of EQ, is unclear. Certainly, we believe that both a high level of EQ, combined with sound financial knowledge, strategy and advice, can make the difference between great investors and the also-rans. But sound financial knowledge will not do it alone.

So why is understanding Investment EQ so powerful? It is the ability to give a person enough confidence, focus and rationality to remain committed to their strategies even when the market value of their portfolio is declining, not living up to expectations, or being superseded by other strategies. Investors with a high EQ, in the long term, worry less about their investments, reap higher returns, and make fewer mistakes.

Daniel Goleman, with his co-authors Annie McKee and Richard E. Boyatzis wrote in Primal Leadership, Negative emotional surges can be overwhelming; theyre the brains way of making us pay attention to a perceived threat. The result is that these emotions swamp the thinking brains capacity to focus on the task at hand, whether its strategic planning or dealing with news of a drop in market share. For investors, the perceived threat, whether it be sluggish investments or a drop in portfolio value, causes the brain to be overwhelmed with negative emotions. Without EQ, or an awareness and ability to manage these emotions, they can and do cause havoc for individual investors, and on a larger scale, for investment markets generally.

Its a reasonably well-documented fact that chasing last years great performers is a poor investment strategy. However, thats how many players in the investment game, even seasoned investors, have made decisions. How often do you see investors with a strategy then not stick to it? It hurts to see someone else doing better than you are, it hurts to see your portfolio performance lagging behind the investment of the moment. Its not the feeling of hurt per se that causes investment damage, but allowing it, even subconsciously, to determine your next investment move.

Emotionally intelligent investors are like the patient driver, sticking to their lane. This doesnt necessarily mean that theyll put up with a poor investment past its used-by date. However, because they have researched their strategies thoroughly, invested in asset classes they understand, and undertaken the volatility level they know they are comfortable with, these investors are able to operate above the emotional level, sticking to their plans unless there are reasonable and rational arguments to do otherwise. They take time to rationally consider their past successes and mistakes, and analyze possible consequences before making the deal.

However, emotionally unintelligent investors often let fear or panic take control, and are more like the aggressive driver, switching lanes whenever something more profitable comes along. They are often after the quick kill, looking for that one deal that theyre going to be able to talk about for years to come, even if this desire is subconscious. These investors often commit to investments they know little about or are not suited to, and when things dont go as planned, panic and confusion sets in ? the worst possible state of mind in which to be making investment decisions. This is certainly not a deliberate strategy, but when our brain chemistry reacts to danger, it causes us to become emotionally charged ? a fight or flight reaction.

Another dangerous trait of the emotionally unintelligent investor is that theres a high likelihood he or she possesses an inflated ego. Research shows that most investors believe, even subconsciously, that they have an edge on others in the market, that they have better intuition than most players and that their technique, whether it be watching stock indices, predicting the behavior of businesses or CEOs or taking the pulse of the investment community, is inherently better than those techniques employed by others.

Ask most players in the investment game which investor they would most like to emulate, and there are good odds that most of them would answer Warren Buffett. Buffett is a prime example of emotionally intelligent investing. His success, in his own words, is not a result of academic-style intelligence, luck or intuition, but rationality, a key factor of EQ. It was this rationality that keeps Buffett committed to his strategy. During the tech bubble, Buffett was widely criticized for not investing in technology stocks, despite their meteoric rises. His rationale was that he didnt understand them, so he wasnt going to invest in them ? an approach that caused more than one of his critics to label him irrelevant. But even if tech stocks hadnt had their dramatic rise and fall, from an EQ perspective, Buffett still did the right thing ? he stuck to his very rational and logical guns ? guns which he knows intimately.

Discovering Your Financial EQ

The good news is that your Investment EQ can be developed. The starting point is with you learning more about your Financial DNA. The following steps will help you with developing your Investment EQ:

? Using the Financial DNA Core Life Profiles, understand and accept your natural instinctive propensities to risk. This will provide very predictive insights into how much uncertainty you will be willing to bear over the long-term and hence how committed you will be to a long-term strategy particularly, when under pressure.

? Then complete the Financial Directions Profile to understand the influences of your environment, experiences and education on the preferences you have for making investment choices. There will be investment strategies which you will have a greater aptitude towards based on what you have learned, whether they be in the stock market, managed funds, real estate/property or with other investment classes.

? Then analyze the Financial Behavior Analysis which documents your complete Financial DNA. This involves reviewing your level of investment alignment by comparing your natural instinctive propensities based on how you are hard-wired to your learned preferences.

? Another important step will be comparing your Financial DNA to the good and poor financial decisions you have actually made in the past. This will help you pinpoint the investment decisions you will be comfortable in making and to identify areas where greater investment education is required.

? Finally, use this behavioral knowledge of your Financial DNA to help you become personally aligned and become more aware in an overall life sense of what decisions you will be comfortable with. The overall dynamics of your life will impact every investment decision and the lives of others you have relationships with.

For more insight into this topic, please read Hugh Massie’s book:
“Financial DNA – Discovering Your Unique Financial Personality for a Quality Life”.