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Your Emotions and Your Money

expert-session_joan We’ve all witnessed the ups and downs of the stock market. Recently, it seems there have been more “downs” than “ups.” There are a number of ways to respond. We’ve heard from many people that they’re afraid to open their quarterly statements.

In another Bigg Success Show Expert Session, we talked with Joan Sotkin. Joan is the creator of the popular web site Prosperity Place and the author of the award-winning book, Build Your Money Muscles. Joan has been helping people understand and improve their relationship with money for over 25 years.

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5 Feelings People Associate with Money

Joan has an interesting take on money. She says that the emotions you bring to your money – those underlying feelings you have – greatly impact how you manage your money.

During our Expert Session, Joan told us about the five major feelings that people associate with their money: 

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joanWhat you bring to your numbers is based on who you are – how you think, what you believe, and how you feel. In my book, I identify the five major feelings that people act out through their money – anger, shame, deprivation, a sense of being trapped, and a sense of aloneness. One of the main feelings people act out with their money is their sense of aloneness. “I can’t run out of money; I can only run out of people, because money is always attached to people. So if I owe you money, you won’t forget about me.”

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We found this very interesting. Owing someone money may enter our minds as a good thing, because it means we have a relationship.

Another thing we like about the Expert Session is Joan goes into the feelings about retirement plans. She digs in deeper to explore feelings of anger and fear.  

Why more money may bring more struggles

A lot of people find that the more money they make, the more difficulties they have. Why is this? Here’s what Joan says:

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joanThere are nine exercises in my book. I start with turning the toilet paper around in a new direction so you can get used to changing. People have to adapt to the process of change because it’s very uncomfortable. When you change, you go through a period of disorientation. When you move from one house to another house you want to be in, stupid things happen. You don’t where anything is. You lose your keys or your wallet. You bump into walls. I call those the “moving stupids.” When you start changing how you “be” in the world – when you start responding differently to things – your life is going to change. That gets uncomfortable. I spoke to someone the other day who said, “I’m just at that place again. Every time I start making more money, something happens and I get back to the same old point again.” Because you have to learn how to deal with more money. It feels different. It’s amazing how much feeling comes with money — $10,000 feels different than $1,000. It’s that disorientation of change that makes people give up what they’re doing and go back to their old ways of doing things.

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Even before this financial turmoil we’re going through kicked in, we read that there is the psychological profession is experiencing growth helping people understand the psychology behind their money decisions. We applaud Joan for being ahead of her time, because she’s been looking at this for years!

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We dig even deeper in our Bigg Success Show Expert Session
called
Finding Peace in Financial Chaos.

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In addition to what we’ve already discussed, Joan talks about how your financial identity and the vocabulary you use affect your results. You’ll also learn how to connect to your feelings so you manage your money better. And there’s so much more in the forty minute discussion in one easy-to-download track!

Next time, we’ll talk about time vampires. Until then, here’s to your bigg success!

 

Direct link to The Bigg Success Show audio file:
http://media.libsyn.com/media/biggsuccess/00251-102708.mp3

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When It Comes to Investing, Time is on Your Side

time_money On Tuesdays, we usually talk about time issues – time management, productivity and getting things done. But today, with the volatility of the stock market, we thought we’d take a look at how time affects your investments.

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It took many years to create a portfolio of value. It’s been frustrating to see that value fall so quickly. But we’re reminded of a Gordon Gekko quote from the movie Wall Street:

“Don’t get emotional about stocks. It clouds the judgment.”       

Yet that’s exactly what we tend to do. We get emotional and do the opposite of what we should do. We should buy low and sell high. We buy high on exuberance and sell low in a panic.

The smart money does just the opposite. It buys low in the panic and sells high on exuberance.

A look back at the Dow

We ran some calculations to see if there is a benefit to buying and holding for a period of time. We specifically looked at the Dow Jones Industrial Average because it’s the basket of stocks with the longest history.

Going all the way back to 1896, we assumed we bought the Dow on the last day of every year right before the close. We looked at every period up to December 31, 2007. Then we looked at holding periods of:

  • 1 year
  • 2 years
  • 3 years
  • 5 years
  • 10 years

We looked at two specific things for each holding period: our return and our chance of losing money.

Risk and return results

We found that the longer we held the Dow stocks, the better our return with one exception – the average 3-year return was lower than the average 2-year return.

Even more interesting, we found that the longer we held, the less likely we were to lose money:

  • In one year increments, we had a one in three chance of losing money.
  • Over five year time frames, we had a one in four chance of a decline in the value.
  • Of the ten year periods, we only lost money in one out of five cases.

Then we looked a little deeper – to the size of the volatility. The range of highs and lows went down over time, so the downside was as follows:

  • About 14% for the 1-year increments
  • About 2.75% if we invest over 5-years
  • 0.55% for the 10-year ranges

So based on these historical numbers, the longer you hold your portfolio, the less likely you are to lose money and, if you do, the less you are likely to lose.

Just remember – the past doesn’t necessarily predict the future. However, it’s not unreasonable to use it as a guide.

Beyond the Dow

You’ll most likely invest in a bigger basket than the Dow. You’ll also probably want to invest in more than just U.S. stocks. You’ll also almost certainly invest in bonds and other assets. As a general rule, the more diversified you are, the more likely longer time periods will work in your favor – even beyond what we’ve shown here.

You, CIO

Here’s something we can’t possibly emphasize enough – no one will look after your money like you will. You are the Chief Investment Officer for you and your family. So it’s important to understand investing basics.

DIY doesn’t work

Having said that, do-it-yourself investing doesn’t work well for most of us. So plan to outsource and inspect. Your most critical decision, then, is the hiring decision. You’re not trying to figure out specific stocks to buy, how to allocate your assets among stocks, and those kinds of decisions.

Turning to professionals

With full knowledge of investing basics, you’re ready to work with a certified financial planner to help you plan your retirement portfolio. You’re also ready to invest in mutual funds with proven managers.

Time is money in the bank

As we saw with the Dow, time is money in your account. So keep investing – month after month or paycheck after paycheck. In times like these, you’ll get a sweet deal. The smart money is getting it too! You’re buying low so you can sell high later.

That puts time on your side!

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Smart Investors, Tough Times

investing People who find joy in bad news have to be pretty happy lately. The financial crisis has dominated the news, as we watch Wall Street and Washington scramble.

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We don’t usually do this – in fact, we’ve never done it in the 230 shows we’ve done so far. But this subject is so important and so timely. So we want to share some valuable information that our newsletter subscribers received in their In boxes last Friday.

In the last edition of The Bigg Success Weekly, we discussed “Profiting from Panic”. It was about maintaining the proper mindset in the midst of all this turmoil.

We started with the safety net that exists for depositors, investors, and insureds. Here are some links directly to pages that can answer your questions about banks, brokers, and insurers in a hurry. 

Banks

In general, banks are insured by the Federal Deposit Insurance Corporation (FDIC). However, not all money invested through banks is insured. What would happen if your bank failed? If you have accounts with a failed bank, what should you do? How can you obtain a release of lien, if a failed institution is your lienholder? The following links provide the answers to all of these questions:

What is the FDIC

A Guide to What Is and Is Not Protected by FDIC Insurance

FDIC Bank Find (make sure your institution is FDIC insured)

When a Bank Fails- Facts for Depositors, Creditors, and Borrowers

Is My Account Fully Insured?

Obtaining a Lien Release

Brokers

Accounts with brokerage firms also offer some protection through the Securities Investor Protection Corporation (SIPC). The coverage isn't anything like that offered by the FDIC, but it's still important to know what remedies might be available to you. 

How SIPC Protects You

Insurers

While banks and brokers have federal backing, insurance companies have backing through associations at the state level.

The National Conference of Insurance Guaranty Funds

If your insurance company fails, you'll want to contact your state's Department of Insurance, since insurance companies are overseen by that department in each state in which they operate. Click here for a directory of each state's office. 

Your State's Department of Insurance or Guaranty Association

Two billionaires, two eras, one mindset

Warren Buffett, the richest man in the world according to Forbes, recently invested $5 billion in Goldman Sachs, in the midst of all this turmoil. That’s pretty typical of how he’s made his fortune – he says he’s “fearful when others are greedy and greedy when others are fearful.”

He has also opined, “We want to do business in [a pessimistic] environment, not because we like pessimism but because we like the prices it produces.”
 
From: The Warren Buffett Way: Investment Strategies of the World’s Greatest Investor, by Robert Hagstrom, Jr. 

Warren Buffett is not alone.

J. Paul Getty was one of the first billionaires and the richest man in the world in his day, according to The Guinness Book of World Records. He said, “I began buying stocks at the depths of the [Great] Depression. Prices were at their lowest, and there weren’t many stock buyers around. Most people with money to invest were unable to see the forest of potential profit for the multitudinous trees of their largely baseless fears.”

He went on to say that he made over 100 times his investment on many of these stocks!

From: How To Be Rich, by J. Paul Getty.

Our best strategy

So we can learn from these two men that we shouldn’t panic, even in turbulent times. Now, you may not want to rush out and buy a bunch of stocks. However, you probably shouldn’t sell out right now either.

These two billionaires made a fortune by going against grain. So keep making those 401(k) contributions. By investing consistently over time – paycheck by paycheck – you’re dollar-cost averaging into the market. In bad times, you’ll buy more shares with the same money than you can in good times – just like the billionaires. 

Above all – diversify, diversify, diversify. Diversification is one of the four key investment principles, according to William Sharpe, a Nobel Prize winning financial economist. Our newsletter subscribers read about these as well as some ideas to simply put them into practice.

Today, more than ever, it’s important for you to take on the role of Chief Investment Officer for you and your family. You can’t count on Wall Street or Washington to do it for you!

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If you would like to get the newsletter we’ve referred to here, just e-mail us: bigginfo@biggsuccess.com, with “Profiting from Panic” in the subject line. We’ll send it to you and sign you up for The Bigg Success Weekly!

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Next time, we’ll discuss why it’s so important to move beyond personal productivity. Until then, here’s to your bigg success! 

 

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I Need Money! Should I Cash Out My Retirement Plan?

frustrationThe financial news seems to be all gloom and doom these days. The reports are that we’re not in a recession, but times are tough for a lot of people.

No matter how tight things get, we still have bills to pay. People are responding to this very intelligently. They’re turning to public transportation, eating out less, seeking cheaper forms of entertainment, and cutting back on unneeded items.

But what do you do if that isn’t enough?

Tapping your retirement plan …

It’s tempting to pull money out of your retirement plan, like a 401(k), especially if you change jobs. In fact, about 40 percent of job changers in their twenties and thirties have done just that, according to a recent report by the Financial Industry Regulatory Authority (FINRA).

… could cost you $130,000 …

If you’re under 59½, it’s usually not a good idea to cash out your retirement plan. Let’s look at the example that FINRA used:

You’re 30-years old with $20,000 in your 401(k). If you earn just 6% on that money until you retire at 62, you’ll have nearly $130,000 in your account, without making any additional contributions.

… and then some!

Of course, you can start over. But you lose the power of money compounding on top of money on top of more money, all accumulating tax free until you take it out. So it’s like taking at least two steps backward.

But that’s not all. Here are 4 other steps back:

  • You’ll have to pay income taxes out of this money, since it was invested pre-tax.
  • There’s also a 10 percent penalty for early withdrawal (unless you’re over 59½)
  • Your employer is required to withhold 20 percent toward income taxes.
  • If you owe money, your creditors can’t touch your 401(k) unless you cash it out.

By the time you get a check, that $20,000 will probably be more like $14,000 net of everything. So cashing out of your retirement plan is a short-term solution with long-term consequences. 

 

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Take More Risk to Earn Greater Returns

By Bigg Success Staff
06-10-08  

Bigg Success with Money

coins 

There’s something that men seem to do better than women – accept more risk to earn a higher return.

Now granted, anytime we stray into generalizing about the sexes, or any other group, we risk over-generalizing. But long-standing research seems to support this notion.

Women may be too risk-averse. One of the basic tenets of modern financial theory is that taking greater risk should lead to greater rewards. Granted, it may be a rough ride with more volatility, but in the end it pays off.

Especially if you’re investing for the long-term.

Research shows that risky assets (e.g. stocks) overcompensate for the risk taken over long periods of time (e.g. five years). So if your investment horizon (i.e. the time before you’ll need the money) is five years or more, you can probably afford to accept more risk.

It can make a bigg difference. For example, let’s say that one 22-year old new college graduate invests $500 a month in stocks while another invests only in treasury bills. It’s not unreasonable to expect a 6 percent premium per year, after inflation, for the stock investor.

What’s the difference if they both retire at 65?

Over $1.2 million!

This figure is based on commonly reported historical returns. If anything, it’s understated based on historical standards, but hopefully the $1 million difference gets your attention anyway!

It pays to take some risk if time is on your side.

Hear today's lesson and laugh on The Bigg Success Show. 

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