JEW Whitepaper 2010

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BARRIERS TO FINANCIAL SECURITY: IMPORTANT LESSONS Vo l. 1, Issue 1

Introduction

HEN YOU CONSIDER THE CURRENT ECONOMY, THE

last thing you are probably experiencing is irrational

exuberance. Federal Reserve Chairman Alan Greenspan was the

first to use this phrase in the mid-1990s. Only a few years later,

Amazon.com, once merely a retail book

company started in a garage, was trading at

$91 a share with a history of negative

earnings (MarketWatch, 2002). In other

words, people were willing to invest in a

company by purchasing stock that had and

would continue to lose money. If you

contrast this level of performance with that

of the average stock in the S&P 500, you

can see how those Amazon investors were

gambling with their money in response to

irrational exuberance. When Greenspan

coined the phrase, the stock market was

booming, so few people were likely to

heed what we now recognize was a

warning. Shortly after he made the

comment, world markets slumped.

During global economic crises, we read

alarming headlines. Consider the

following:

Recession Starts Taking a Toll:Will it lead to another crash?Worries are building that todays sagging

economy may be on the brink of

collapse.

U.S. News and World ReportThe Death of Equities

7 million stockholders have defected

from the stock market [this decade],

leaving equities more than ever.

Business Week

Running Short of Cash The United States and its allies

scrambled to head off a global financial

disaster. Finance ministers from theUnited States, Britain, France, Japan, and

West Germany met last week near

Frankfurt to find a way to avert a global

economic collapse.

Newsweek

Investor behavior does matter, and it arguably poses thegreatest risk to successful long-term investment experiences.


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by James E. Wilson, CFP

These were not pulled from todays headlines. They

come from November 1974, August 1979, and

December 1982 when investors were experiencing great

fear in the midst of bear markets. Fortunately, the

financial world did not come to an end at any point, not

in 1974, 1979, nor 1982. And though national andinternational efforts certainly played a role in the

investors returns, what may have played the most

significant role were individual investors abilities to

make logical decisions in the face of financial fear.

Investor behavior does matter, and it arguably poses the

greatest risk to successful long-term investment

experiences. Furthermore, the outcomes of investor

behavior are even more dangerous to the financial

security of people transitioning into or living in

retirement. This article is the first in a series aboutinvestor behavior and psychology, historical perspectives,

the importance of diversification, and possible solutions

to the challenges investors face.

2

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For the complete article series

or for more information about

the wealth management

services offered by J.E. Wilson

Advisors, please visit

www.jewilson.com.

Copyright 2010

All rights reserved.

Please feel free to pass on this

article for personal use.

However, no part of this

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Source: Qualitative Analysis of Investor Behavior, DALBAR, Inc, 2008

Why is Investor Behavior So Important?

ERHAPS THE MOST IMPORTANT INGREDIENTS TO long-

term financial security are the decision-making abilities and

behavior of the investor. DALBAR, Inc., a company that provides

standards, research, and ratings for those in the financial

industries, published a report in 2008

that shows the effect of investor behavior

on financial investments. According to

that study, the S&P 500 earned anannualized return of 11.81% during the

20 years ending in December 2007,

which was a period of strong bullish

markets, while the average equity

investor only earned 4.48%. Despite the

opportunities, in other words, the average

investor earned only 38% of the available

return as a result of making poor

decisions throughout the twenty year

period. To better understand thepractical implications of these numbers,

consider the following: assume an

investor had put $100,000 into an S&P

500 mutual fund in 1988 and earned its

average return of 11% between then and2007. Even after the bursting of the

2000 - 2002 Tech Bubble, the value ofthat investment would have grown to

$806,231. Hampered by flawed decision-

making abilities, however, the average

investor actually achieved a 4.48% return

during the same period. That hypothetical

investment of $100,000 would only have

grown to $240,249. The behavior of our

hypothetical average investor ended upcosting him a difference of over

$560,000.

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This is a loss of 69% of the available return of $806,231.

Unfortunately, most investors fall prey to a thought

process that prevents them from always making logical

decisions instead of decisions based more on emotionalresponses. The consequences may mean the difference

between retiring with financial security, peace, and

confidence and the alternative of retiring in what would

feel like relative poverty.

This article is the second in a series of lessons about the

barriers investors face as they work to achieve financial

security. The first article introduced the series, and the

next article will outline how investors are often their own

worst enemies.

2

Next Issue: Your Portfolios Worst Enemy

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Your Portfolios Worst Enemy

HIS YOUNG CENTURY HAS ALREADY FELT THE POPS and

drops of two investment bubbles one in 2002 and the

other in late 2008 and early 2009. Some investors may have

mostly escaped the impact of one, or perhaps both of them, but

behavioral finance, a relatively new

academic field, teaches us that investors

can still be vulnerable to the momentum

created by fear and greed, even if they arenot hit by each downturn in the market.

In order for investors to continue to be

safe from this momentum, they have to

understand how their behavior impacts

portfolio performance. In their efforts to

achieve long-term security, they may find

it helpful to recognize that during the

extraordinary expansion of the housing

bubble and the most recent sell-off in thestock market, many responded

emotionally and with at least some

disconnect in logical reasoning. At an

extreme level, this disconnect can lead to

a suspension of the traditional benefits of

business acumen and fundamental and

technical analysis. To help investors bring

the challenge of

Emotionally driven behavior into

perspective, future articles will attempt to

explain some of the challenges presented

by psychological forces that impede ourfinancial success, and they will cover the

following aspects of investing:

A historical journey to betterunderstand economic cycles;

Psychological tendencies and thechallenge of overcoming these

tendencies to become good

investors;

How our financial survival dependson our ability to identify these

challenges;

Hard and fast solutions.

Investors should understand how their own behaviorimpacts portfolio performance.

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This article is the third in a series about the barriers

investors face as they work to achieve financial

security. Previous articles introduced the series and

the importance of investor behavior. The next article,

included with this one, will provide a historicalperspective for investors.

Next Issue: A Historical Perspective

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Historical Perspective

VEN THOUGH EACH BEAR MARKET SEEMS UNIQUE,investors can gain some perspective if they review the

similarities of bear markets over the last fifty years a period

during which we have faced ten particularly challenging intervals

in market conditions, including the one

we are now experiencing. Approximately

every five years, the market enters a

period of correction that is a naturalprocess of the risks and rewards of

capitalism, and each time, we have

recovered from the slump in the cycle.

To better understand these patterns from

a historical perspective, consider three of

the most recent bear markets:

January 11, 1973 to October 3, 1974

The causes of the economic fright

experienced by Americans in the 1970s

include the Vietnam War, Watergate, an

oil embargo, a double digit

unemployment rate, and a 16.8%

increase in the cost of living. Over the

course of 23 months, the market lost

45% of its value, and many investors

eventually turned to the safety of CDs

and bonds. Such extreme conditions hadnot been experienced in the United

States since the Great Depression.

A 1974 Time magazine cover stating

Recessions Greetings reflected the fear

of the nation, and the cover storys title

prophesied Gloomy Holidays and

Worse Ahead.

The article begins, Not for many years

has a Christmas season begun with somany tidings of spreading discomfort and

lack of joy about the U.S. economy.

Already wracked by a devastating double-

digit inflation, the nation is now also

plunging deeper into a recession that

seems sure to be the longest and could

be the most severe since World War II.

Despite Times grim predictions,

economists now agree that December1974 actually marked a turning point in

the U.S. market: the S&P 500 soared

37.2% and 23.9% in 1975 and 1976

respectively.

August 26, 1987 to December 4, 1987

This bear market was as extreme as it

was short. On a day known as Black

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BARRIERS TO FINANCIAL SECURITY: IMPORTANT LESSONS Vo l. 1, Issue 4Monday, the crash of markets around the

world on October 19, 1987 also sent the

Dow Jones Industrial Average

plummeting 22.61%, which is still the

largest one-day percentage decline in

history. (In contrast, the stock market

crash of 1929 included only a 12.82%

decline on its Black Monday.) As in 1974,

the plummet of the Dow panicked many

investors who desperately looked for

financial safety elsewhere.

Again, Time magazine provided another

cover story depicting Americans dismay.

One story presented an hour-by-hour

account of events, and another argued

that the U.S. . . . could not go on forever

spending more than it would tax itself to

pay for, buying more overseas than it

could earn from foreign sales, and

borrowing more abroad than it could

easily repay. There had to be a day of

reckoning, and it could unhinge the

whole world economy. The disapprovaland pessimism of this seemingly

timeless statement gave investors little

hope for the immediate future. However,

almost half of the Black Monday losses

were recovered in the days following the

sell-off, and less than 3 months later, the

S&P 500 finished the year up 2.3%.

Overall, the 1980s ended with a

compound return of the S&P 500 of

17.6%.

March 24, 2000 to October 19, 2002

While many people remember the crash

of the stock market following the

September 11 terrorist attacks, this multi-

event decline actually began with the

earlier bursting of the technology bubble

in 2000. By October 2002, at the end of

an exhausting 28 month period, the S&P

500 had lost 49.2%, and a young

generation that had previously feltindestructible suddenly felt very

vulnerable. The September 14, 2001

Time magazine cover depicts the World

Trade Centers Twin Towers in the final

moments before their collapse.

One of the many signs that our country

had come to a complete halt was the

closure of the New York Stock Exchange

for 4 days after the attacks. Once the

markets reopened, the Dow JonesIndustrial fell more than 17% over the

course of a week.

In 2001, the United States and its

economy was vulnerable to outside

forces and to the loss of its strong

technology sector because of the


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exposure of hidden greed in corporate America. 2002

was defined as the year corporate titans WorldCom and

Enron collapsed and the year that $2 million birthday

parties funded by the corporate dollars of Tyco ended.

As dark as the outlook was following the collapse of thetechnology bubble and the devastation of September 11,

the markets eventually recovered: the S&P 500

appreciated 14.3% in value between early 2003 and late

2007.

Despite oil embargos, double-digit inflation, the burst of

the 1990s technology bubble, and September 11, the

past 35 years have produced a whopping appreciation of

3,725% in the S&P 500. Investors cannot invest directly

in the S&P 500, but if they could have invested $100,000

in the early 1970s, their investments would potentially

have appreciated to over $3.7 million during those 35

years, assuming that our hypothetical investor had not

fallen victim to the greed and emotionally-driven

behavior that plagues the average investor. Though a

natural response is to panic when facing a challenging

bear market, we are less likely to make faulty decisions if

we can keep such market fluctuations in perspective.

This article is the fourth in a series of lessons about the


security. Previous articles introduced the series and

outlined the ways investors behavior impacts their

decisions. The next article will explore the psychological

tendencies of investors and the challenge of overcoming

such tendencies as we explore the emotional and

intellectual responses a number of investors experience

as part of the investment process.

Next Issue: Our Money and Our Brains

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10/20


Our Money and Our Brains

O FEEL EXCITED WHEN OUR PORTFOLIOS INCREASE in

value and to experience fear when they decrease in value is

perfectly normal and acceptable. However, these emotions

become problematic once we start making decisions based on

emotional entanglements that limit our

ability to reason. To prevent ourselvesfrom making such decisions, we first have

to recognize our capacity to make poor

financial decisions based on emotions in

order to then recognize the emotions that

drive them. In response, we can then

take a more defensive stance that could

potentially limit the risk of damaging our

long-term financial security.

First, identify the enemy. We are our own worst enemies when it comes to

managing our finances. When we

understand how we tend to respond in

certain circumstances, we can develop a

plan to defend our finances from our

emotional responses the next time we

have similar experiences.

Second, recognize the challenges. You

are likely very familiar with the excitementof financial gain and the fear of financial

loss; however, you probably are not

aware of how your brains wiring

influences those responses. Investing

affects us not only emotionally and

psychologically but physiologically as well.

Neuroeconomics, the study of

neuroscience, economics, and

psychology, shows that any thoughts or

decisions about financial profit use thesame part of our brains that is hardwired

to pursue pleasure. In contrast, the

experience of financial loss is processed

by the part of our brain that triggers a full

reaction to pain or danger and causes

fight or flight. Your brain is so sensitive in

such situations that it even responds

differently if you are planning for short-

term monetary rewards than if you are

planning for long-term ones (Technology

Review, May 2005, Huang). In other

words, your responses to investment

plans and outcomes are very complex.

Once you recognize these responses in

your own behavior patterns, you will have

a better chance of achieving financial

security. Recognizing them will also help

you keep your emotions in check the nexttime we face a bear market, which is a

part of every five year cycle. Jason Zweig,

a columnist for the Wall Street Journal

and editor of the revised edition of

Benjamin Grahams The Intelligent

Investor (2003), expands on this mental

response with an analogy: There is not

much difference in the brain between

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having a rattlesnake slither across your

living room carpet and having some stock

you own go down by 40% or 50%.

Recognizing that you may not have much

of a chance battling a rattlesnakebarehanded, you might resort to a flight

response because you merely hope to get

out alive. Not surprisingly, you may feel

similarly in response to a disastrous drop

in the value of your investments.

Additional psychological forces include

personal biases, emotions, and past

experiences, all of which can influence

even experienced investors. Somepsychological forces are quite obvious

while others are very subtle.

Nevertheless, there are psychological

pitfalls you can be aware of and

straightforward advice you can use to

help mitigate their impact. A few of these

include a fear of regret, myopic risk

aversion, overconfidence, and the herd

mentality.

Fear of RegretInvestors who are affected by fears of

regret put off financial decisions because

they hope to get even more information

and feel even more confident before

having to make decisions. Consequently,

these investors sometimes hold on to

losing stocks for too long or sell winning

stocks too quickly. They hold on to losingstocks rather than accept a loss for two

reasons: they hope the investments will

eventually make gains, and they feel as

though selling them confirms that they

had made a mistake by buying them in

the first place. Those with winning stocks

sell too quickly because they want to do

so before the stocks start to lose value

they hope to quit while they are ahead.

If you tend to worry that you will regret

similar investment decisions, listen toDeena Katz, a chairman for Evensky and

Katz Wealth Management: My mom

always said, if youre going to do it, dont

worry; if youre going to worry, dont do

it. Youve already made the commitment

to be where you are invested . . . Youre

there. And unless you need to get out,

youre committed (Money, May 2008).

Myopic Risk AversionMyopic risk aversion certainly sounds like

something you would hear in an eye

doctors office, and it actually does relate

to a type of vision. People exhibiting

myopic risk aversion cannot focus on

long-term gains because they are too

fixated on short-term losses. Such a

focus makes sense psychologically, but it

could be an exceptionally dangerouspitfall for investors right now. Even those

who are usually confident about their

long-term investment goals may become

anxious about recent fluctuations in the

market and might end up losing money

unnecessarily because they can only

focus nearsightedly on the immediate

future. To avoid this pitfall Robert Arnott,

the founder and chairman of ResearchAffiliates (a developer of investment

products) suggests that rather than ask

yourself what you can do to make money

in the next three months you should ask

yourself, What would I want my portfolio

to look like over the next 30 years?

(Money, May 2008).


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OverconfidenceOverconfidence is somewhat the

opposite of myopic risk aversion. Recent

research indicates that many investors,

especially men, overestimate their own

abilities as well as the accuracy of the

information they gather prior to making

financial decisions. As a result,

overconfident investors tend to overtrade,

which usually leads to lower returns. An

article in the February 2007 issue of Inc.

explains that overconfidence is one of

the worst failings an investor can have.

Despite the temptation to guess thefuture or try to control what will happen

(both of which are forms of

overconfidence), investors have to admit

that neither is possible to do, no matter

how confident they may feel in their

abilities.

Herd MentalityAs Niccolo Machiavelli explained,

[People] nearly always follow the tracks

made by others. Such behavior causes

us to go along with the collective wisdom

and tastes of the larger masses in a

variety of situations. Clothing fashions,

community circles, automobile selection,

and even investing habits reflect that

humans are social creatures who are very

likely to follow the herd. When it

comes to investing, social environmentsand the media heavily influence people

into jumping blindly on the investment

bandwagon without employing sound

reasoning and research. Therefore,

unfortunately, investors will unwittingly

follow the herd even if the herds

direction is to the detriment of the

investors personal and financial goals

and even if doing so goes against their

individual reasoning abilities. The Madoff

Scandal illustrates this tendency perfectly.

Many people, who had long beensuccessful investors, forgot about the

importance of research, prudence, and

diversification in large part because they

followed peers who were investing with

Bernard Madoff. Recognizing the role

societal influences played, David Zarolli

reported in a December 2008 story for

NPRs All Things Considered that it

was prestigious to invest with him. In

fact, people even joined his country clubin Florida merely to meet him and get a

personal invitation to invest with him. In

addition to a prestige factor, behavioral

finance experts explore other key reasons

we are willing to follow the herd. The

Market Analysis, Research, and Education

group, a unit of Fidelity Managements

research company, explains that an

investor may follow the herd because he

or she feels an intuitive sense of

conformity, whereby aligning oneself with

the consensus of a large group going in

the same direction is more comfortable

than making an alternative, less-popular

choice. If we follow the direction of a

larger group of investors, we can act

based on the assumption that many

others must have access to superior

knowledge. And how could so manyothers be wrong? Conversely, we tend to

believe that the groups that we are part

of are naturally more likely to be right.

(Otherwise, we would not experience the

sense of affinity that defines those groups

to begin with.)


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Including the original Ponzi Scheme,

there are quite a few historical examples

when a number of individuals have fallen

prey to the herd mentality. One, Tulip

Mania, caused wealthy Dutch investors tospend obscene amounts of money on

tulip bulbs or on shares of bulbs. Some

even went so far as to trade houses so

they could invest in one or two tulip

bulbs! Such examples are evidence of

the irrational behavior humans are

capable of exhibiting, and we seem to be

especially vulnerable when we are

following others.

An investment trend in the late 1990s

also demonstrates a similar but

complicated example of herd mentality.

During the emergence of the New

Economy, Warren Buffet was ridiculed

for his arcane investment theory because

others believed that the New Economy

marked a period when globalization and

the acceleration of developments in

information technology began to changeeconomic trends. The mainstream media

extolled the possibilities offered by this

New Economy. As early as June 27,

1994, John Huey of Fortunewrote, The

advent of the new economy is

unequivocably [sic] good news for the

U.S., which holds a wide lead over the

rest of the world in developing, applying

and now exporting

technology.

Whenreferring to the New Economy, a

September 27, 1999 Time magazine

article titled Get Rich.com asked, If

you're an entrepreneur, why waste your

time in the old world, worrying about

manufacturing things and dealing with

unions and OSHA inspections, when you

can put your company online in three

months? If only people had listened

more to Warren Buffet and less to the

medias promotion of the New Economy.

One way to better appreciate the

investment trend in the late 1990s is to

study the relationship between net sales

of equity mutual funds. During the first

quarter of 2000, as seen at Point 1 in the

graph on the next page, the stock market

was coming off of five straight years of

double digit gains, and many of those

gains were led by technology stocks.

Between 1995 and 1999, the S&P 500advanced 251% while the tech-heavy

Nasdaq advanced 457%. In January

2000, at the peak of this multi-year rally,

a record number of media headlines

alluded to a bull market. Then, as it

turned out, the first quarter of 2000

ended up being the peak of the market:

over the next three years, the Nasdaq

plummeted 67%, which meant

devastating losses for those investors who

had concentrated heavily on technology

stocks. Those who had followed the herd

and entered the market during the later

stretches of the metaphorical stampede

likely suffered the greatest losses because

they had joined the herd at the riskiest

time.

Joining the herd as it ventures into newterritory and takes new risks can be just

as costly as joining it too late because

those who follow the herd to supposed

safety allow themselves to be led out of

the stock market at the wrong times, too.

In the final quarter of 2002, for example,

after nearly three consecutive calendar


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years of downturns in the stock market,

the number of headlines that suggested

the possibility of a continuing bear market

rose significantly. In response, investors

became increasingly fearful and anxiousbefore finally reaching the point of

capitulation. Between June and October

2002 (Point 2), the S&P 500 declined

16% and the Nasdaq declined 18% in

just five months. Investors pulled a

monthly average of 13 billion out of

equity mutual funds compared to the

average monthly inflow of 19 billion that

had continued during the previous five

months.

As the graph below shows, people were

buying when it would have been a better

time to sell (Points 1 and 3) and were

selling when it would have been better to

buy (Point 2). It is worth noting that

some investors did act individually and

may not have focused only on long-term

investments. Regardless, both types of

investors lost money because of poor

decisions and bad timing.

Just as these investors retreated from

equities during the second half of 2002,

many also shifted their money into

money market funds because of their

relative safety. In November 2002, a

record of 136 billion in net sales flowed

into these money market funds

suggesting that many investors were

turning away from stocks near the bottomof a three-year bear market. In fact, by

the end of 2002, the level of ownership

in money market funds reached an all-

time high of nearly 35% of all

outstanding United States mutual fund

assets. At roughly the same time, the S&P


15/20


500 began a sharp comeback: it rose 29% in 2003,

which helped jumpstart a five-year bull market rally. For

those who had recently decided to follow the herd by

concentrating their portfolios into cash-like investments,

the move may have been very costly.

If you have ever been misguided because you followed

the herd, do not be too hard on yourself. Stephen

Greenspan, the author of the book Annals of Gullibility,

accounted in a recent Wall Street Journal article how

even he, someone knowledgeable about what can

happen as a result of trust and/or ignorance, lost some

of the savings he had accumulated from his book sales

to Bernard Madoff. Greenspan explains in the article

how some risks are more hidden and, thus, trickier torecognize than others (2009). Investors of all

experience levels need to always be cognizant of the

aspects of investing that influence their financial

decisions.

This article is the fifth in a series of lessons about the


security. Previous articles introduced the series, explored

the importance of investor behavior in financial planning

and provided an overview of the significant fluctuationsin the market over the last 35 years. The next article will

reinforce the importance and value of diversification.


Next Issue: Diversification

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Diversification

OST PEOPLE UNDERSTAND THE BASIC CONCEPT

behind diversification: do not put all of your eggs into

one basket. However, even people who are

sophisticated investors can fall into investment traps. For

example, many people have suffered

losses because they placed a large

percentage of their investment capital in

their employers

stock only to lose muchof it during the recent downturn. Even

though the employees may have

understood that they were taking too

much of a risk in doing so, they did not

do anything to change their situations.

Instead, they justified holding the position

they had established because of the large

capital gains tax they would have to pay

upon selling the stock, or they imagined

that the stock was just on the verge oftaking off. In such instances, investors are

too close to a particular stock, and they

develop a false sense of comfort and

overconfidence. They may rationalize that

everyone with whom they work has

invested in the company, and how could

so many people be wrong? Similarly,

they rationalize the importance of their

investment in the company

s stockbecause they are professionally invested

in the company and feel a certain sense

of loyalty. Over the past year alone, many

of these investors have felt the pain of

such imprudent investment practices.

In much the same way, other investors

believe they have diversified their

portfolios effectively because they own a

number of different stocks. What they

may not realize, however, is that they are

in for an emotional rollercoaster ride if

these investments all belong to the same

industry group or asset class and

therefore share similar risk factors. For

instance, investors in the late 1990s and

early years of this decade learned thatdiversification among a variety of high

tech stock companies was really not

diversification at all. When a number of

prominent technology stocks, including

Cisco, Dell, and IBM, experienced billion

dollar sell-offs between Friday, March 10

and Monday, March 13, 2000, the

resulting chain reaction hit the entire tech

industry.

Included with this article are charts that

will help investors understand how

diversification dramatically impacts a

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portfolio. (It is important to remember, however, that

one cannot directly invest in the S&P 500. This chart

uses it as an index for illustration purposes only). So,

imagine someone whose hypothetical portfolio consisted

of a 100% investment in the S&P 500 (Portfolio 1).Between 1998 and 2007, he would have achieved a

4.38% annualized compound return and for every $1.00

invested, he would have ended up with $1.47. However,

if he had merely invested 40% in a 2-Year Global Fixed

Income Fund with the remaining 60% still in the S&P

500 (Portfolio 2), his annualized compound return

increases to 4.72% and each dollar is now worth $1.51.

Portfolio 5 shows additional diversification including

investments in U.S. small and large value companies as

well as in real estate. The annualized compound returnof Portfolio 5 jumps to 8.9% while the growth of $1

reaches $2.15. Adding international stocks to Portfolio

10 even better demonstrates the potential of

diversification because it achieves more than double the

annualized compound return of Portfolio 1 (10.08%),

and our investors $1 has now reached a value of $2.37.

Explained this way, the benefits of diversifying are

obvious; however, many people fail to take advantage of

the potential of diversification.

Next Issue: Hard and Fast Solutions

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Hard and Fast Solutions

E WILL DISCUSS SOLUTIONS MORE EXTENSIVELY in afuture volume of articles, but they are worth

summarizing here as well.

Investor Behavior & the Buy-Sell Cycle:Investors frequently engage in a buy-sell

cycle that can be destructive to their

portfolios as long as they are not aware of

their behavior or able to modify it. Quite

simply, this cycle begins with thepurchase of stock that an investor

believes will be particularly lucrative.

Greed kicks in and all is well until the

stock begins to lose value. As soon as

this happens, the investor experiences

fear, regret, and, eventually, panic if the

stocks value continues to decline. The

investor sells the stock just before new

information comes out that will send its value soaring. Recognizing and

understanding this potential behavior will

help investors avoid it.

Cash Flow Models: As investors assesswhere they are financially and where they

would like to be, they will find cash flow

models to be incredibly helpful tools.

Whether trying to focus on the immediate

future or trying to plan for retirement,

investors who utilize cash flow models

can avoid making rash, costly mistakes.

An informed investment advisor, and

even online tools, can help you developan accurate cash flow model.

Managing Investment Costs: A valuedadvisor can manage clients investments

objectively and can assist clients in

making research-based decisions, which

is important since investors can only

control those factors of which they are

aware. Similarly, such an advisor can also

help clients limit the cost of investing,which in turn increases the amount of the

investment return that clients keep in

their pockets.

Managing Risk and Reducing Volatility:Investors will manage risk and reduce

volatility more effectively if they have an

efficiently designed portfolio. For every

level of risk, the portfolio should take into

account the optimal combination of

investments that will give the highest rate

of return.

To do so, investors can utilize a variety of

resources to stay informed and may also

benefit from working with a valued

advisor.

W


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Conclusion: Now that you have some historical context,consider where we are today. During the first quarter of

2009, investors moved 285 billion in new net capital into

money market funds and withdrew a net 31 billion out

of equity funds. Do these changes suggest herdbehavior? Perhaps. However, what long-term investors

need to recognize is that if they radically alter their well-

diversified portfolios, they also need to be prepared to

assume a higher tolerance for risk. For example,

investors who may have significantly lightened their

exposure to risk by selling stocks in late 2008 and early

2009 might not have moved back into the market to

participate in the 38% rally that took place between mid-

March and mid-June of 2009. (On March 9, the S&P 500

was at 676.53, and by June 8 it was up to 939.14.) Though it begins to sound like a broken record,

maintaining a diversified portfolio with exposure to

multiple asset classes throughout a variety of market

cycles really is the strategy that has provided investors

with the least volatility in their returns. And these returns

also end up being the most consistent with investors

expectations.Investors face a number of challenges if they plan to

have successful investment experiences over the years.Of primary concern are the psychological impediments

that make it difficult for us to make good decisions

consistently. Investors also face the certainty of market

volatility, as evidenced by historical trends. Therefore,

they should utilize the resources necessary to manage

investment costs and to process current academic

research on corporate stock pricing, portfolio

construction and management.

Additionally, take the time to remember the impact your

emotions can have on your decision-making abilities

when you are making financial decisions. Consider

carefully not only the decisions you are facing, but also

why you are contemplating them in the first place. Just

being aware of the emotional complexities of making

financial decisions will help you achieve financial

security.

2431 Devine Street

Columbia, SC 29205

888.799.9203




services offered by J.E. WilsonAdvisors, please visit

www.jewilson.com.

Copyright 2010



















fees.

JEW Whitepaper 2010

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