Racine Journal Times, WorkLife Section, July 20, 2008

The question beneath the question

It’s official. The stock market is now in bear territory and, as usual, the question on the minds of most investors and market commentators is: When will the stock market hit bottom?

That’s a good question, and one that will invoke much discussion. The reality for most of us, though, is that the answer doesn’t really matter. Why? There are more relevant questions at a deeper level which need to be asked before pondering questions about the day-to-day fluctuations of the market.

Why am I so overexposed?

Investors who feel great pain when the stock market falls during major declines shouldn’t be asking “When will the stock market hit bottom?” The deeper question they should be asking is “Why am I so (over) exposed to the stock market when I don’t have the stomach to handle a 20-30 percent-plus decline?”

By digging down to the real, meaningful question, you’re no longer a victim of circumstances which are always and certain to be outside of your control. None of us have control over whether the market goes up or down, but we do have control over how we prepare for and react to its mood swings.

Why do so many investors ignore this maxim? My observations suggest that they either haven’t learned enough about the history of stock market cycles or they have contracted investment amnesia.

After studying the history of stock markets from around the world, one will quickly discover that market declines are common and should, therefore, be expected. If you’ve been investing long enough, you’ve probably experienced a few market declines. I wouldn’t be surprised if you either don’t remember how painful bear markets can be or, because you’re in a different stage in your life, this bear market feels a lot more painful.

Investment amnesia

I’ve had some fascinating discussions with people of all stripes when the subject, say at a party, turns to investments. I especially enjoy the stories about the “killing” that confident Joe Market made on that one stock or options strategy or fill-in-the-blank whatever. Investment amnesia almost always has Joe in its grips.

One fellow enjoyed bragging about how he made a lot of money in the stock market back in the ‘70s. I quickly reminded him that the 1970s was one of the most difficult periods to make money on stocks unless he was shorting (profiting from stock declines) most of the time.

I can’t be certain, but I suspect that he contracted investment amnesia at some point and became disillusioned about his investment prowess, for true investment skill is evident by examining the performance of one’s total portfolio (not just the investments that fare well) during a full market cycle (bull and bear) and relative to a reasonable benchmark.

What is a reasonable benchmark? For most, it isn’t beating the stock market. I don’t know why so many folks are obsessed with beating the market. I hear things like, “That fund is good (bad) because it outperformed (underperformed) the stock market.” Often, the fund manager isn’t even trying to outperform the stock market, so his performance is mischaracterized and judged inaccurately by those caught by such obsession.

In other words, you have to first know what the manager is trying to accomplish and what restrictions, if any, may be placed on him by the fund’s investment objective and mandate before making judgment on whether he did well or not, given the environment he was subject to, during good times and bad.

Ego check

Why would anyone want to be disillusioned, especially when it comes to something as important as money? That’s a question I’ve yet to fully answer, but I suspect it has something to do with human ego.

Our egos trip us up constantly. In his quest for female companionship, Macho Dude drives a shiny sports car because he assumes that his outward display of monetary abundance will compensate for his lack of kindness and respect toward the object of his desire.

The powers that be at XYZ Inc. make poor decisions time and again because their egos won’t let them look in the mirror to see their own folly.

Jane Modern Woman wants to make everyone happy, so she consistently burns herself out because saying “No” is harder than admitting that she can’t be everywhere and do everything and take care of everyone.

Our egos, like most things, aren’t inherently bad, but when they become the driving force of who we are and the decisions we make, we become imbalanced, disconnected and ultimately discontent.

Honest assessment

As in most times of turmoil, the economic events of the last 12 months have exposed those driven mainly by their egos. We, as observers of the events playing out on Wall Street, can use their example to ask of ourselves another deep question: “Am I letting my ego get in the way of my health, happiness and prosperity?”

If you’re honest with yourself, you’ll know the real answer to that question. Honesty is crucial because your ego will fight and defend itself by helping you rationalize your behavior. Your ego, as strong as it may be, is no match for authentic desire.

As Aristotle’s said, “There is no action without desire, for it is desire that causes us to act.” My son must have understood that at the tender age of 3. In his sing-song way, his consistent response whenever asked, “Why are you doing that?” by the “mature” adults around him was “’Cause I want to!”

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

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