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Does your investment strategy need to be on Ritalin?

Are you aware that your investment strategy can end up with a social disorder? Do you currently need to put your investments on Ritalin? Here’s your fiscal check-up. Open wide…

PrescriptionsIs your investment strategy ADHD?

Let’s begin the discussion with a great definition of what it means to be ADHD (from Wikipedia): “Attention-deficit hyperactivity disorder (ADHD) is a neurobehavioral developmental disorder. ADHD is primarily characterized by ‘the co-existence of attentional problems and hyperactivity, with each behavior occurring infrequently alone.’ While symptoms may appear to be innocent and merely annoying nuisances to observers, ‘if left untreated, the persistent and pervasive effects of ADHD symptoms can insidiously and severely interfere with one’s ability to get the most out of education, fulfill one’s potential in the workplace, establish and maintain interpersonal relationships, and maintain a generally positive sense of self.’ (emphasis added)”

So how can your investment strategy end up with a social disorder? Let’s evaluate each underlined section above.

  1. Each behavior occurring infrequently alone – This is for those of you who don’t really have an investment strategy. You buy whatever “hot investment” your buddy tells you about while golfing. Or you sporadically contribute to your retirement accounts. In order to retire with enough money in savings, you need (1) a defined investment plan with frequent, planned contributions and then (2) you need to stick to your plan only making occasional improvements or thought out modifications.
  2. Symptoms may appear to be innocent – So you like to play with part of your investments. I know individuals that find an adrenaline rush in short term investments. Have you ever calculated the amount of money you are losing to transaction fees and taxes? Have you seen the studies that show that frequent investment changes lead to lower returns? Or maybe you don’t play the market but you don’t think too much of skipping contributions to purchase something that you really don’t need. Or maybe you just don’t see a convincing reason to have a strategy. Don’t fall into these traps. Responsible adults make plans.
  3. The persistent and pervasive effects of ADHD symptoms can insidiously and severely interfere with one’s ability – I’m not sure if I can say that any plainer. Though, let me give you an example. Let’s say that you decide to contribute $500 a month to your retirement accounts. However, you skip your contribution every December (have to buy all those presents). At the end of 30 years (invested at 12%), you will have $1,609,695 in the bank. If you had not skipped those contributions, then you would have $1,747,482 in the bank. A difference of $137,786 even though you only contributed $15,000 less! See my point? Having an ADHD investment strategy will insidiously and severely interfere with your ability to reach your goals!

Stop right now and think about your investing style? Do you need to put your investments on Ritalin?

Let’s read a bedtime story from Aesop.

tortoiseandhareThere once was a speedy hare who bragged about how fast he could run. Tired of hearing him boast, Slow and Steady, the tortoise, challenged him to a race. All the animals in the forest gathered to watch. Hare ran down the road for a while and then paused to rest. He looked back at Slow and Steady and cried out, “How do you expect to win this race when you are walking along at your slow, slow pace?” Hare stretched himself out alongside the road and fell asleep, thinking, “There is plenty of time to relax.”

Slow and Steady walked and walked. He never, ever stopped until he came to the finish line. The animals who were watching cheered so loudly for Tortoise, they woke up Hare. Hare stretched and yawned and began to run again, but it was too late. Tortoise was over the line. The moral of the story is that “Slow and Steady won the race!”

So what does this have to do with your investment strategy? Well, Aesop is prescribing financial Ritalin. Again from Wikipedia, Ritalin “works by increasing the activity of the central nervous system. It produces such effects as increasing or maintaining alertness, combating fatigue, and improving attention. (emphasis added)” Outlined below is what I think Aesop would have us do with our investments.

  1. Central nervous system – The tortoise was able to win the race because he maintained one objective in sight and had an unfailing winner’s attitude. We also need to go straight to the core. Write down what you expect your life to be like when you retire. Describe your relationships, financial status, living conditions, location, etc. That list is your one objective and you must have an unfailing winner’s attitude. The old adage, “Keep your eye on the ball,” will have more impact on your financial resolve than most any other approach.
  2. Increasing or maintaining alertness – The hare decided that he wearied from his efforts and could therefore take a nap. You can’t take a financial nap! Keeping to your budget every month moves you one step closer to financial freedom. Making monthly contributions to your investment accounts moves you one step closer to retirement. In the words of Winston Churchill, “Never, never, never give up!”
  3. Combating fatigue – Don’t try to run. Everything has its time and place. Establish a plan that outlines when you intend to retire, how much you need to retire, how much you need to invest monthly, and which investment vehicles and types will help you reach your goals. Then slowly but surely follow your plan. Just keep walking, don’t try to run and do everything at once. You just can’t do everything right now and don’t beat yourself up for it.
  4. Improving attention – In many accounts of Aesop’s tale, the hare focuses on the fame and attention of the crowd. Conversely, the tortoise ignored the crowd and stuck to his plan. Don’t be sidetracked by the latest trends, need for huge returns, infomercials, pop star financial gurus, or anything else for that matter. Once you have a plan, stick to it.

Conclusion

Does your investment strategy need to be on Ritalin? Well, ask yourself, “Do I have a set contribution amount and schedule? Do I have a defined plan? Do I invest in hot investments? Do I day trade? Am I focused on the short term? Am I tackling too many financial goals at once that are confusing me?” Depending on how you answer those questions, you may need to start taking financial Ritalin by (1) focusing on your reasons for smart investing, (2) adhering to your plan, (3) taking one month at a time, and (4) ignoring the crowd.

P.S. I recognize the irony of me criticizing the hare and my blog is called RabbitFunds. Maybe I should have named it TortoiseFunds.


Tags: , , | Filed under Investing, Featured


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  • DR

    What a great article! Folks need to read this before they start asking about where to invest their money. Sometimes we get so hung up about finding the “right” investment that we forget that we are often our own worst enemy.

    • Thank you for your comment. I often find myself getting too emotionally involved in a given investment choice, timing, and all that other stuff and forget what my objective is – save for retirement.

  • DR

    What a great article! Folks need to read this before they start asking about where to invest their money. Sometimes we get so hung up about finding the “right” investment that we forget that we are often our own worst enemy.

    • Thank you for your comment. I often find myself getting too emotionally involved in a given investment choice, timing, and all that other stuff and forget what my objective is – save for retirement.

  • That was a remarkable comparison of the $15000 contributed to the large difference in end of cycle value, $137000 point taken!

    John DeFlumeri Jr.
    .-= John DeFlumeri Jr´s last blog .."Having Zero Percent Interest Today!" =-.

  • That was a remarkable comparison of the $15000 contributed to the large difference in end of cycle value, $137000 point taken!

    John DeFlumeri Jr.
    .-= John DeFlumeri Jr´s last blog .."Having Zero Percent Interest Today!" =-.

  • This article is a very interesting and informative one. The story example points to what a lot of us do in our lives. Assuming that we are already a head of the game and so we can rest. Thank you for reminding us that it is not the fast pace but the slow and steady that always win in the end.

  • This article is a very interesting and informative one. The story example points to what a lot of us do in our lives. Assuming that we are already a head of the game and so we can rest. Thank you for reminding us that it is not the fast pace but the slow and steady that always win in the end.

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