Fear And Indecision

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About: ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
by: Investment Pancake
Summary

Oh great. Just what you need: more "helpers" to help complicate your financial affairs.

Unhealthy investor psychology comes in two basic varieties: fear and indecision.

You don't need a money psychiatrist to help you get in touch with your emotions. What you need is The Doctor Pancake Treatment.

"How a Mix of Psychotherapy and Financial Advice Could Solve Your Money Issues Once And For All."

Wow. With a title like that, I just had to read this latest (very infomercial-esque) Financial Psychiatry article on Marketwatch.com. Financial psychiatry--I can see how this could become a new hot topic. After all, you and I both know that emotional symptoms such as indiscriminate panic selling and paralyzing indecision have been linked to severe cases of money loss. So how do we solve our money issues "Once And For All"? It now appears we have two choices. One is a therapeutic approach is consult a financial psychiatrist and talk through all the complex reasons why you succumb to fear, or avoid making financial decisions. This is a box-of-tissues-on-the-coffee-table kind of approach that involves acknowledging, exploring, accepting and giving voice to your emotional problems with money. It requires time and, of course, plenty of fees. Yet another layer on the teetering cake of money helpers.

But on the darker side of spectrum, there's a less time consuming (and far cheaper) approach. Unfortunately, this second approach requires a visit to the dingy back alley office of none other than Doctor Pancake. His mere presence frightens small children and domestic animals. It's only natural that you mistrust the way he chortles and mutters to himself as he sharpens an array of scalpels and rusty serrated implements under the single buzzing fluorescent light bulb that barely illuminates his darkened office. Nervous patients discreetly edge their way toward the exit as he snaps on his latex gloves with an unnatural flourish and cries out: "Ont now, ve beginz ze treatment!!!! Mwah ha ha hah hahhhhhh!"

Ah, well, what the good doctor may lack bedside manner, he at least makes up for with ruthless efficiency. You see, he has zero interest in helping you get in touch with your financial emotions. He simply extracts them and sends you home without a lollipop.

Let's start by curing you of fear and the urge to panic sell. Now, this won't hurt a bit.

Imagine that you own a portfolio with 100 shares of XYZ stock trading at $50 a share that pays you $1 per share in dividends. Altogether, your portfolio is trading at $5,000 and you collect $100 in dividends per year, which means you can afford to buy two more shares of XYZ at current prices by reinvesting dividends. Once you do, your portfolio will yield $102 in dividends, which means a 2% dividend growth rate. Suppose the price of your portfolio grows at 2% per year, which the same rate as your dividends grow. In 30 years, you should have $13,194 in your account. Insert sound of polite golf clapping.

But the abrupt squeal of tires, twisting metal and shattering glass soon follows. Oh, no! XYZ stock just dropped by 50%! Your portfolio is now only worth $2,500! You want to throw up. You want to sell now, before it gets worse and you lose even more money. But then you notice that your portfolio still pays you $100 in dividends. That hasn't changed. What has changed, thanks to the price collapse of XYZ stock, is that you can now afford four more shares of XYZ stock when you reinvest your $100 worth of dividends. After you do that, your portfolio income will surge to $104 in dividends, representing 4% dividend growth. Your $2,500 portfolio and $104 dividends growing at 4% a year should equal $13,941.

It is at this point in the procedure that the scales fall from your eyes. You suddenly realize that didn't lose $2,500 when XYZ stock crashed. You will earn $747 over the next 30 years. You aren't scared of making money, are you? Obviously not! Think like a long-term dividend compounder and you'll never fear falling stock prices again. Panic selling? Not possible. You're cured.

Now let's talk about indecision, procrastination, and the sense that you better not do anything because you don't even know where to start. To cure patients suffering from such ailments, the good doctor must ask an introductory question. What do expert "helpers" do if they want you to hire them and pay them money? Invariably, they must convince you that the task at hand far too complicated for you to do without the expert's help. The problem is that once you feel that an undertaking is too complicated for you, then, obviously, you are going to procrastinate and feel like you don't know where to start. And you are bombarded on a daily basis with the message that investing is risky and complicated, and that you need help.

What you need to do is to accept the simple and indelible truth, which is that managing money is inherently simple, not otherwise. For there is precisely one thing, and one thing alone, that you must do, and you must avoid the distractions of doing anything besides this one thing. Spend less than you earn and invest the rest. As I swing my pocket watch back and forth and back and forth before your eyes, you are getting sleepy. Very sleepy. Now repeat after me: Spend less than you earn and invest the rest.

But it is hard to believe that managing money is easy when you look out across that unfathomable ocean of information swirling and churning across the vast horizon of the internet. Surely that information exists because it's required (or at least helpful) reading? Doctor Pancake has some news for you. You've been hallucinating. Oh, at least some of the information out there is real enough, but the delusion you suffer from is that any of it matters to your investment returns. But not to worry. Doctor Pancake has just the very thing to make those make-believe flying pink elephants disappear forever and never bother you again.

"Ont now," snap, snap go the latex gloves, "Ve beginz ze treatment!"

I'm going to show you some pictures and I want you to tell me what you see. Just kidding. What I actually want you to do is to place your index finger on the lower left hand side of this chart where it says "1994."

Next, say the words "I'd like to invest here". Go ahead! I'm waiting. Good. Now point to the end of the chart in the upper right hand corner and say the words "I'd like to end up there." You don't need to, and, therefore, should not, do anything else in between to get from where you placed your finger here to where you placed your finger there.

Like I said, quick and painless.

You blink and wonder what just happened. The last thing Doctor Pancake wants you to do is to ask yourself two simple questions. First, how much do you know about everything that happened to each of the companies comprising the S&P500 from 1994 to 2019? Take your time, reflect, and really think hard about your answer. Second, ask yourself whether any of that knowledge (or lack of it) would have made any impact whatsoever on the returns you would have earned from 1994 to 2019? Obviously not! Now Doctor Pancake now wants to know why would it be any different if you invested in a diversified portfolio today and held it for the next 25 years?

You are starting to realize that for a long-term investor with a diversified portfolio, the value of any information about any of the companies you own is negligible at best. You can ignore it. Do you need helpers and experts? Well, if it would be a waste of your time to digest every bit of available investment information out there, could it possibly be a waste of your money to hire anyone to do that task for you? You might as well hire someone to feed and water your imaginary flying pink elephants.

Now that you realize that you already know everything you need, you are cured of indecision and financial paralysis. Just put your finger on the chart, start here, wait 25 years, and end up there without doing anything in between now and then. Would that the rest of life could be so simple.

If it were me, emerging from the dark, cramped offices of the good Doctor Pancake, what would I do next? Let's use me as a hypothetical case study.

First off, I would ask myself what I want to get out of my investments. In my case (which is not the same as your case), the answer is that I want my portfolio to reliably pay my bills no matter what's going on in the market, no matter what's going on with my job, and no matter what's going on with any of my individual investments. Having a predictable stream of steadily growing dividends would be an easier way to pay my bills than trying to rely on wildly fluctuating capital gains, so I'd probably gravitate toward a dividend growth fund like the ProShares S&P500 Dividend Aristocrats ETF (NOBL). This ETF holds the S&P 500 companies that have paid dividends for at least 25 years, and I'm reassured by a solid dividend track record like that. What I don't like about this ETF is that it charges a 0.35% annual fee, and according to Morningstar.com, NOBL churns 20% of its portfolio each year. I don't like selling or doing things, so I don't like investing in funds that sell assets and do things. Were it me, I'd probably cut out the middleman (in this case, the fund sponsor), buy and then permanently hold exactly the same stocks that comprise NOBL's current portfolio, which I can do with zero management fees and zero turnover. To get that list, I simply go to the Proshares NOBL Daily Holdings:

Would I study each company before buying it? I wouldn't bother doing that if I bought shares of NOBL, so why would I do it if I bought the underlying portfolio for NOBL? Besides, I know ahead of time that whatever information I gather today is guaranteed to become obsolete over the 20 plus years that I plan to hold this portfolio. Doctor Pancake's treatment using the S&P500 chart taught me that if information is worthless over the long-term, it's worthless today, too, so I might as well simplify my life and ignore it.

The last thing I'd do is to stick with a simple investment plan: spend less than I earn and invest the rest into my diversified portfolio of companies, hold the stocks for a very long time, and watch my portfolio income grow (while keeping in mind that my portfolio income will grow and compound faster whenever stock prices are low). I'd make sure to do nothing besides that.

So in the end, it turns out that I'm not much of a fan of the Marketwatch article. Mixing emotions into your financial affairs is like sprinkling live cockroaches into your lunch box. They just don't belong there.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not investment advice, psychiatric advice, or medical advice. Doctor Pancake is not real. Nor are flying pink elephants. He is not an investment advisor and cannot, will not, and does not, offer any investment advice. This article is written for entertainment value only and can relied upon for no other conceivable reason whatsoever.