$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ WEALTH HEALTHY WOMEN [TM] Healthy Attitudes ==> Wealthy Women [TM] Volume 2, Number 3 May, 2001 $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ WELCOME to Wealth Healthy Women [TM], a free e-mail newsletter for women seeking greater financial freedom and well-being. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ IN THIS ISSUE: 1. Note From Your Editor, Lynne 2. Article: Mind Your Business: Taking the Emotion Out of Your Portfolio - Part II 3. Spotlight - Minding Your Business Survey 4. WealthHealthy Announcements ************************************************************ Note From Your Editor During the month of April, we began seeing signs of life in the stock market. There is a great deal of speculation about what is to come--a slow but steady rise out of the ashes, a short-lived "teaser," or a fluctuating pattern that is hard to predict? What is your view? My perspective is that we can only speculate about such "external" events. However, we can have a lot more impact and control over "internal events" - our attitudes, emotions, and behaviors. This issue of Wealth Healthy Women [TM] contains Part II of last month's feature article, "Mind Your Business: Taking the Emotion Out of Your Portfolio, written by Matt Kawalec, Editor of The Beacon Street Financial, a business monthly published by Tucker Anthony, Inc., brokerage and investment banking firm. In Part I, Matt covered critical psychological factors that influence our investment decisions--overconfidence, optimism, selective memory, the herding instinct, and regret. In Part II, Matt discusses three additional emotional biases: the tendency to see patterns where none may exist, framing, and myopic loss inversion. Help Wealth Healthy Women [TM] answer a commonly asked question: Do women differ from men in the way that they view or handle their financial lives? Respond to the short survey later in this newsletter. And, if you are willing, ask someone of the opposite sex to complete it as well! In addition, take advantage of the free WealthHealthy teleclass "Beat Your Biases" to help you to become more "clear-visioned" about your finances. See the WealthHealthy Announcements section for more details. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Feature Article: Mind Your Business: Taking the Emotion Out of Your Portfolio - Part II Trends, Trends, Everywhere Most of us will agree that the future is uncertain. But most of us also prefer the security of knowing what is about to happen. How can we reconcile these conflicting realizations? According to those who study behavioral finance, one way would be to find a trend in the recent past and project it into the future. The human mind is especially adept at detecting patterns in an otherwise chaotic environment. So adept, in fact, that there is a marked tendency to find patterns even where none exist. Investors can be fooled into thinking some recent activity, whether across an entire market or a single stock, is representative of things to come. Acting on this perceived trend could prove costly. Investors should realize that historic, long run averages are more relevant than short-term, very recent activity. But this tendency--like other psychological biases--is firmly entrenched and not easily ignored. People become more optimistic when the market is up, just as they become more pessimistic when the market is down. Consider this: At the height of the Japanese market, Yale University Economics Professor Robert Shiller found that 14 percent of poll respondents expected a market crash. But right after the Japanese market actually did crash, 32 percent of those polled said that they now expected a crash. They simply extrapolated the most recent event into the future, and made their predictions accordingly. Another term for this is anchoring, as in using a recent event as an anchor for further predictions. Framing and Myopic Loss Inversion When given a set of options in life, whether investment related or otherwise, we "frame" the issue in our minds to separate it from other concerns. Framing allows us to concentrate on the matter at hand more clearly, making our final decision (hopefully) in line with our best interests. But those who study investor psychology find that many of us cannot frame issues in a way that benefits us. We tend to make choices based on a narrow outlook, often forgetting the bigger picture. A more common pitfall is to consider the near term more carefully than the long term. Investors who are aware that their long term goal is to gather wealth--and frame their decisions accordingly--will be more comfortable with the idea of short term volatility. Investors with a narrow framework can lose sight of their larger objectives and make poor investment decisions because of it. A related issue is myopic loss aversion, a kind of tunnel vision that causes investors to focus more acutely on losses than gains. Rationalists who believe that emotions play no part in investment decisions would be surprised to find how powerful the irrational fear of loss can be. Amos Tversky, one of the founders of behavior finance, and Princeton psychology professor Daniel Kahneman found that people are far more concerned with a potential loss than they are pleased with a potential gain of the same amount. The prospect of losing 10 dollars or gaining 10 dollars should generate a roughly equal negative or positive response, but that isn't the case. Knowing this, researchers have found that people will assume even more risk than usual if they are sure to lose money. This strategy caters to the psychological desire to avoid the unpleasantness of losses in any way possible. Needless to say, such a strategy is fraught with hazards over the long term. Look in the Mirror Did any of these traits sound familiar? They should. Many of these behaviors grow out of healthy, common sense thinking, and all of them are exceedingly common. The best any investor can do is to examine their own behavior carefully to identify which mistakes they are prone to making. We've included some helpful tips....to help you become a more rational and less emotional investor. (Sources: Investor Home at investorhome.com; Aspects of Investor Psychology by Daniel Kahneman, Ph.D) $$ TIPS $$ We all know someone who could use a few tips to make their investment decisions more rational. Here's a collection of useful strategies to help anyone looking to become a smarter, more disciplined investor. * Honestly note instances when overconfidence affected your decisions. You'll gain a more accurate understanding of your ability (or lack thereof) to predict the direction of the market. * If you tend to be overly optimistic, go over the reasons why you have a good feeling about a certain investment. Does the available information support your view, or are you simply following a good feeling? * Understand that you may feel even more regret about a failed investment if you realize later that it was simply driven by a hunch. * Following the herd places your financial decisions firmly in the hands of someone else. Instead of buying and selling stocks as they come into and fall out of favor, look for companies with solid fundamentals and invest in them for the long haul. * Set realistic goals for your investments and refrain from switching in and out of them when they don't meet your expectations. Short term setbacks should not be a factor in altering your long term goals. Author: Matt Kawalec, Editor of The Beacon Street Financial, published by Tucker Anthony, Inc. Reprinted with permission. Lynne's Comments If you identified with any of these emotional biases, or those mentioned in Part I of the article, you may be feeling a bit uncomfortable right now. However, please note that author Matt Kawalec makes an important point: Many of these behaviors (the tendency to see patterns where none may exist, framing, and myopic loss inversion) grow out of healthy, common sense thinking. All of them are exceedingly common. Keep in mind a key element of the WealthHealthy philosophy: INFORMATION ABOUT YOURSELF IS EMPOWERING. Often, information can initially feel dissettling or uncomfortable. Think about that as a good signal--discomfort can be the energy source for change, if you can take a step back and "read the data." Consider taking a FREE WealthHealthy teleclass on "Beat Your Biases." Learn how to recognize and move beyond emotional biases that are influencing your financial decisions--in a friendly, supportive environment. See the WealthHealthy Announcements section for more details. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Spotlight - Minding Your Business Survey Help Wealth Healthy Women [TM] research the frequently-asked question: Do women and men REALLY differ in how they view or handle their financial lives? Please complete the following 7-item survey. If you can, ask a member of the opposite sex to answer it too! See directions for submitting your responses at the end of the survey. Deadline for submissions is June 15, 2001. Instructions: Choose the answer that best describes you NOW. Place an X on the line in front of your response. If you are not currently investing, check the response that would best describe you if you WERE currently investing. Choose only one answer per item. Your Gender: _____Female _____Male Age: _____20-29 _____30-39 _____0-49 _____50-59 _____ 60-69 _____70 and over I have been handling my own finances for _____0 years _____1-5 years _____6-10 years _____11-15 years _____16-20 years _____other (please specify) 1. My ability to predict shifts in the financial markets: _____ I am very confident in my ability. _____ I'm probably no better and no worse than anyone else about predicting market shifts. _____ I have no confidence in my ability to predict shifts. 2. Significance of my gut reactions _____ IF I have a good "feel" about an investment, it's likely to be successful for me. _____ I don't give much weight positively or negatively to how I feel about any particular investment. I invest based upon the information I gather. _____ Even if I have a good feeling about an investment, I tend to focus more on the risks, such as a drop in returns or even losing principal. 3. Perceptions of my investment decisions _____ I tend to remember my financial successes more than poor returns or decisions. _____ I equally remember (or forget) successful and poor returns or decisions. _____ I tend to remember my financial mistakes more than my successes. 4. Influences on my investing (stocks, mutual funds, bonds, CDs, or other options will be referred to generally as "financial products") _____ I prefer to invest in financial products that family or friends invest in, or stocks\funds that are popular. _____ Sometimes I invest in what others are currently buying and sometimes I buy a product that looks promising to me. _____ I prefer investing in what I view as a good financial product regardless of what others are buying. 5. My feelings about financial losses _____ I dread a negative outcome when I invest and feel a lot of regret when I've picked a losing financial product. _____ While I don't like poor outcomes, I feel less regret when someone else has invested the money for me than if I'd invested it myself. _____ While I don't like poor outcomes, I feel little regret over financial decisions whether I chose the investment or someone did it for me. 6. My perceptions of market trends to come _____ Based on what has happened this year to technology stocks and dot-com companies, I'd predict that a similar rise and fall will happen in new "hot" sectors in the future. _____ I'm not sure what to think about future financial events based on what has recently occurred. _____ I don't believe we can predict anything about future financial events from past or current situations. 7. Where I put my investment focus _____ I have a long-term investment strategy and refrain from switching in and out of investments when they aren't meeting my expectations. _____ I worry when my investments aren't earning what I expect, and occasionally will switch in and out of investments. _____ I monitor my investments every day or so, and actively switch in and out of investments that aren't performing up to my expectations. To submit: Using your "cut and paste" function, "cut" the survey. Then click on the following e-mail address --Lynne@WealthHealthy.com -- and "paste" the survey into the body of the message. Put "Survey" in the Subject box of your e-mail. If the address does not automatically open into an new e-mail message when you click on it, simply do it manually. Access your e-mail system, open a new message, type Lynne@WealthHealthy.com in the To: box, type Survey into the Subject box, and paste the survey into the body of the message. THANK YOU FOR CONTRIBUTING TO OUR RESEARCH! The results will be announced in an upcoming issue of Wealth Healthy Women [TM]. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ WealthHealthy Announcements FREE WealthHealthy Teleclass on "Beat Your Biases." Examine your particular set of emotional biases when making financial decisions. Develop strategies to replace them with more effective WealthHealthy attitudes. Join other like-minded women in an informal, interactive 50-minute class--easily accessible by telephone from the convenience of your home or office! This teleclass will be offered on Wednesday, June 6, at 7:00 pm (EDT). Register by contacting Lynne@ WealthHealthy.com. Please put "Beat Biases" in the Subject box of your e-mail. Include your name, phone number and e-mail address in the body of your e-mail note. You will then receive a confirmation of the date and time, and further instructions for accessing the special phone line for the call. $$$$ To hear a 10-minute description of the WealthHealthy approach, as well as a bit about me, you can call 1-212-461-2660. If you are interested in coaching, simply e-mail me at Lynne@WealthHealthy.com or call me at (202) 387-5923. Please include your name, e-mail address, phone number and brief description of your interest in being coached. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Pass this newsletter along to friends, family, and colleagues who also may be interested in moving toward greater financial freedom and well-being. They can get their own free subscription by going to http://wealthhealthy.com and signing up - it's as simple as typing in their e-mail address. Or, send an e-mail to whw-request@WealthHealthy.com with the word "subscribe" in the body of the letter. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NOTE: Wealth Healthy Women [TM] is intended for informational and educational purposes only. It is not a substitute for financial, legal, accounting, psychotherapeutic, or other professional advice and consultation. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Copyright 2001 Lynne Hornyak All rights reserved. The above material is copyrighted but you may retransmit or distribute it to whomever you wish as long as not a single word is changed, added or deleted, including the contact information. However, you may not copy it to a website without my permission. Reprint permission will be freely granted upon request. Advance written permission must be obtained for any reprinting of this material in modified or altered form. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CONTACT INFORMATION Lynne Hornyak, Ph.D. WealthHealthy.com Phone: (202) 387-5923 Fax: (202) 986-8980 e-mail: Lynne@WealthHealthy.com Web: http://WealthHealthy.com