What I Learned About Money from Million Dollar Baby
In Clint Eastwoods award-winning movie,
Million Dollar Baby, we see a positive, respectable,
hard-working young woman physically destroyed when
her dirty-dealing opponent lands a sucker punch after
the bell.
It occurs to me that the same thing
can happen with investments. The admirable fighter
inside you tries to make your financial dreams come
true. Thats the inner voice that tells you to work
hard and invest smart. Your opponent is the part of
you ruled by your emotions. Those emotions look for
every opportunity to land a sucker punch and bring
you down.
When I first met Bill, for example,
he was worth $10,000,000, yet he was miserable. Because
hed grown up during the depression, he was convinced
that he was always one step away from being broke,
hungry and homeless. Keep in mind that Bill was taking
only $150,000 a year from his $10 million nest egg.
If you do the math, youll see that his withdrawal
rate was barely 1.5%. So Bill really didnt have to
worry about money but he worried anyway, and he was
ruled by his fear and greed.
Because Bill was convinced that he was
going to run out of money, he continued to make high-risk
investments in the hopes of having more. He often
lost a great deal of money with these chancy ventures,
and this behavior made his fear a self-fulfilling
prophecy. As his losses grew, his emotional need to
make up for those losses grew, too. He took ever-greater
risks and continued to dig himself into a miserable
hole. It was a classic emotional smack-down.
Others dance the opposite direction.
People who suffer great investment losses understandably
become gun-shy. They are afraid of getting pounded
again, so they swear off investing foreverand miss
out on securing their financial future.
Are your emotions beating up your investments?
Do you take risky chances for no good reason? Or is
your anxiety making you afraid to come out of your
corner fighting? Let me tell you something. In the
arena of investments, your emotions are always in
the back room working the speed bag just waiting for
the chance to floor you. You need an edge if you want
to stay in the ring.
How would you like to have the financial
equivalent of Muhammad Ali as your trainer? Here are
a few tips that can give you that kind of an edge.
First, recognize that youll never totally
eliminate emotions from your financial decisions.
You cant knock them out. Second, know that you can
neutralize them.
How? Remember the trainers advice: Always
protect yourself.
One way to keep your guard up is to
use stop-losses on all your investments. If youre
not familiar with a stop-loss, its a simple tool you
use to reduce risk. Lets say you buy a stock at $50,
and you are convinced the stock is going to $80. Put
a stop of $45 on the position. If the stock goes all
the way, the stop doesnt hurt you. But if youre wrong,
and the stock hits the mat, the stop-loss becomes
very important.
Once the stock drops to a price of $45
or less, the position is sold. What happens if the
stock later renews its strength and climbs back to
$80? Too bad. You sold at $45, and you no longer hold
the position. This is the downside to using stop-loss
orders.
What happens if the stock continues
its downward spiral and falls to $15? You dont care
because you sold the position at $45. Could this happen?
It happens every day. Just ask people who bought tech
stocks in the early part of 2000.
You can effectively use stop-loss orders
to limit your downside risk on all your stock and
mutual fund investments. If you do this, youll be
able to go the 10 rounds without getting knocked silly
by your emotions.
Neal Frankle is the author of Why
Smart People Lose a Fortune: 5 Steps to Restoring
Your Wealth and Sanity. He helps affluent clients
establish and implement a safety-net strategy to protect
their wealth. He also helps other professionals, such
as CPAs, to do the same thing for their clients. To
contact him, send e-mail to Neal@Wealt
hResourcesGroup.com.
Neal Frankle
(818) 621-2556 (mobile)
(818) 716-3100 (office)
neal@wealt
hresourcesgroup.com
