The Handy Investing Answer Book. Paul A Tucci

information on using dollar cost averaging to acquire individual shares.

      What is another popular approach to investing?

      Another popular investment strategy for long-term investors is an approach called buy and hold in which the investor selects an investment, buys it, and holds it for a defined period of time, or until the return goal is met.

      What is an “asset allocation strategy”?

      Many investors adopt an asset allocation strategy in which you buy and invest in a mix of investments believed to achieve the highest return for whatever level of risk with which you are most comfortable. The main logic behind asset allocation strategy is that each category of investment, if properly selected, may perform differently than the others, given different economic conditions. Typically, as stocks or equity investments rise, bond investments may not perform as well. When institutional investors begin to load up on bonds, equity markets may not do as well. With asset allocation, you try to balance your portfolio in an attempt to take advantage of the ebb and flow of various economic and market conditions.

THE INVESTOR MINDSET

      Why does investing require a specific mindset, so that I may be prepared for the long road ahead of me?

      According to experts at Morningstar, the mutual fund analytical research company, investing requires a certain mindset in order for you to reach your long-term goals. It suggests that you try not to overreact to the various ups and downs of market cycles. According to Morningstar, when the news is spreading about a possible increase or decline in various markets with which our investments may be correlated, when the talk on the street is all about the financial markets, this is precisely the wrong time to sell or buy equity investments. Morningstar further suggests that you stay on track to hit your long-term goals, and try to develop the discipline to keep to your long-term financial investing performance goals.

      Why am I so important when it comes to investing success?

      Morningstar further reports that we tend to give an inordinate amount of attention to our investments themselves: what they are, what their returns have been, how well the company is doing. We seem to forget that the buying and selling of these investments depends strictly on our own behavior and emotional state at the time we buy and sell. If you extrapolate this sentiment to millions of investors, you can begin to see how each investor’s individual attitudes and behaviors may shape and form the markets in which you invest, as well as your own performance within these markets.

      What did experts at BlackRock—the world’s largest global asset management company, serving both large institutional investors and individual investors—find in their landmark 2013 study of investor attitudes?

      BlackRock, along with the private research firm Cicero, surveyed approximately 17,600 investors from 12 countries to try to gauge the pulse of the investment community. From this initial survey, BlackRock polled 4,000 investors and 500 financial professionals to analyze the U.S. investment community. Their survey concluded several themes, including: investors’ concern about their financial futures; more reluctance to invest and wish to preserve cash; a knowledge gap when it comes to evaluating opportunities to generate income; tightness on household income; and widespread fears about meeting retirement goals.

      After the stock market turmoil of 2008 to 2009, what did one of the largest mutual fund companies in the world, Vanguard, find in its survey of over 3,000 U.S investors, age 21 to 79?

      In a short period of time, from May-June 2009, experts at Vanguard surveyed U.S. investors, finding that three-quarters of all American households with $5,000 or more to invest, invest a portion in equities. Overall wealth and educational level attainment are related to a household’s participation in investing, as is the age of the investor. Investors who are at or near retirement age have less exposure and are therefore less likely to hold equities than are younger investors. The survey also found that even during the correction in 2008 to 2009, 60% of investors stayed the course without making major changes to their investments; 21% of investors reduced their exposure to equities; 5% sold all their equity holdings; and 17% saw the correction as an opportunity to increase their investments in equities. Some reasons for this dynamic may include how near investors were to reaching retirement age during this period of turmoil, their individual mortgage financial position at the time, and whether their jobs were secure.

      Of Americans who had money in equities during the stock market correction of 2008–09, 60% kept their money where it was, 21% reduced their exposure to equities, 17% increased their investment, and 5% 22 sold all their equities.

      What other insights does the Vanguard study show about investor attitudes?

      The Vanguard study makes some interesting conclusions from the results of its survey, including that investors who are more dependent on the work of financial advisers and those who invest only in tax-deferred retirement plans are less likely to panic. Fully three-quarters of survey respondents were strongly or somewhat aware that large market declines are possible. Half of all respondents felt the risks inherent to investing were worth taking in order to realize long-term gains. Another 50% of respondents felt that during this period of time the stock markets were riskier than in past years. Many respondents also felt their retirement was somewhat impaired by the “crash”, and their responses were tied to similar factors, including how near they were to retirement, how secure they felt in their current job or career path, and their housing/mortgage situation.

      After a market correction, what attitudes of individual investors seem to be apparent?

      The Vanguard survey found that individual investors, when faced with a notable market correction, seem to be confused about what to do next. If your savings decline, your logical and natural impulse is to reduce your spending so that you can build up your savings. At the same time, you may also see the correction as an opportunity to buy by adding money to your long-term investing accounts. But experts at Vanguard saw that, psychologically, many individual investors have a difficult time doing this, since the emotions and sentiment associated with a significant decline may cause many investors to leave the market. Many respondents felt they would merely work more or delay retirement, if they were several years from actually retiring.

      What mindset helps me become financially successful?

      You should begin to think that you live in an abundant world, a place where earning money is unlimited, smart work is rewarded, and financial goals are always attained. Think of how you feel, for example, when you do not have to worry about making a mortgage or rent payment, or what it feels like to create a budget and stick to it each month. It is very important to believe that you can control your finances and create wealth. No matter your background, whether you have struggled to make ends meet or came from a relatively more affluent family, or somewhere in between, you should have a clear picture in your mind of where you want to be in terms of your personal finances.

How do I know if I am not in control of my finances?

      Everyone is in control of his finances, to a certain degree. We all choose every day whether or not to purchase something. If you were to rent an apartment, or buy a car, you decide based upon how much income you have, and whether it is affordable or not. A person who cannot tell the difference between an apartment that is too expensive, compared with one that is within his budget, would be more out of control with regard to spending. Someone who spends more of his income than he makes would be less in control. A person who has learned to consistently make the right spending decisions over time—someone who manages to have a large net worth on a relatively meager income, but understands and practices personal finance each day—is very much in control of his finances.

      If I just make more money, would I still have to worry about my personal finances?

      Yes. Just having a high income does not ensure your financial security. Millions of Americans make much more than average, and yet are still one paycheck away from disaster, because they spend nearly all they make, and have no short-term or long-term financial