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Today I want to talk a bit about emotions. New readers, please click here to start from the beginning.
Last week, we conducted a poll of our fellow Revolutionaries to see what kind of personalities our readers were as identified through the Myers-Briggs personality test site 16personalities.com. What we found surprised us.
First of all, the top 5 personality types were:
- Architect
- Logistician
- Logician
- Executive
- Commander
These 5 personality types add up to a combined 32% in the general population. Yet on this blog, they made up a whopping 66%! These types are vastly over-represented on our weird little blog, and the FIRE community by extension.
These personality types (of which FIRECracker and myself are) all have their individual strengths and weaknesses, but one thing that unites these 5 types is that they tend to make decisions logically and unemotionally. This isn’t to say that we’re all unemotional robots. We still feel emotions, but if we need to make an important decision and our logic (i.e. the “Head”) disagrees with our feelings (i.e. the “Heart”), our Head tends to override our heart and that’s how our decisions get made.
But what this revealed that was surprising is that a full 34% of you have a very different personality type than us. Personality types like Mediator, Protagonist, Protector, Consul, etc. These personality types are, again, unique and special in their own individual way but one thing that unites them is that your decision making factors in more of your emotions than ours do. When the Head and the Heart disagree, sometimes the Heart gets to decide.
One of the things we have to be careful of as bloggers and writers, is not to only speak to one side of the room. People tend to surround themselves with people that think like them. When I was working as a software engineer, every day I was surrounded with people like me. Engineers who spend all their time with their noses buried in a spreadsheet. “Show me your data” was a phrase I heard constantly in meetings and conversations in the hall.
And the finance blogging community is a lot like that. Many of us are also very data-driven logic-based people. Hell, every single finance blogger I know personally is an engineer (or works in a very similar field like mathematics). And sometimes it’s easy to forget that there are many of you who don’t spend all day buried in their spreadsheets.
So let’s talk a little about emotions and why they’re important in investing.
Emotions and Investing
Now, emotions are just like everything else. They are neither intrinsically good nor intrinsically bad. But in certain contexts, emotions can help you a lot, while in other emotions screw you over. Choosing to marry someone, for example, is an excellent time to rely on your emotions. Do you love that person or not? If so, get married. If you suck all the emotion out of that decision and instead rely purely on logic, it’s not going to work out well. A friend of mine got proposed to via a PowerPoint presentation. In it, the guy listed out a 12-bullet-point plan on why they should get married, including an extended pros-and-cons table. Because the pros outnumbered the cons by a 2-to-1 margin, he reasoned, then therefore getting married was the only logical choice.
She said NO, and on follow up she clarified that into FUCK NO.
Investing, however, is a different story.
The Emotions of Fear and Greed
In investing, the two major emotions that come into play are Fear and Greed. Fear is what causes people to panic-sell because they believe a stock will plummet to zero, and Greed is what causes people to buy something they think will go up to infinity. Wall Street knows that people are susceptible to this, and as a result uses the media to manipulate people into doing what they want by playing on their emotions.
Here’s how it usually goes. Some Wall Street trader picks up a position holding a stock, usually a cheap, thinly traded company. They then leak “inside information” (which they just made up) to the media, or post crap in stock market forums, chatrooms, or social media. This triggers both Greed (because they think that there’s easy money to be made) and Fear (of missing out), so the victims then flood into the stock and push its price up. And then when its gone up enough, the original trader sells their positions at massively overvalued levels, the price crashes back to where it was before, and everyone else loses a ton of money while the trader runs off cackling. This is known as a “Pump-and-Dump” scam and is basically what the main character did in the movie Wolf of Wall Street.
The opposite also works. Someone can take a short position (betting that the stock will go down) and leak negative information, causing the stock to go down as people flee in a panic because of Fear. This is known as a Short-and-Distort. And it also works with houses, as real estate agents convince people that they’d better “Buy Now or Buy Never” because housing always goes up. This is known as “Toronto.”
So that’s why we’re running this Investment Workshop the way that we do. You make the important decisions (Asset Allocation, ETF selection, buy schedules) when you’re not emotionally triggered, and we stick with our original decisions no matter what’s happening day-to-day. Because day-to-day, there’s plenty to be scared of. I mean, in 3 days Trump officially becomes president, and even though every instinct I have is to run to cash and hide under my bed, if I had actually done that I would have missed most of my investment gains for 2016.
So having emotions is fine. But we don’t want to trade with them.
And on that note, because today is a Buy Day, we will now proceed with our regularly scheduled purchase.
Canadian Portfolio
We start, as always, with our current portfolio snapshot including our new cash.
| Asset | Ticker | Unit Price | Units | Market Value | Allocation | Target Allocation |
|---|---|---|---|---|---|---|
| Canadian Bonds | VAB | $25.38 | 24 | $609.12 | 30.40% | 40% |
| Canadian Index | VCN | $31.15 | 9 | $280.35 | 13.99% | 20% |
| US Index | VUN | $41.53 | 7 | $290.71 | 14.51% | 20% |
| EAFE Index | XEF | $26.51 | 9 | $238.59 | 11.91% | 16% |
| Emerging Markets | XEC | $22.59 | 3 | $67.77 | 3.38% | 4% |
| Cash | – | $1.00 | 517.04 | $517.04 | 25.81% | 0% |
We then use calculate how many units of each we need to bring us back on target.
| Asset | Ticker | Target Allocation | Unit Price | Current Market Value | Target Market Value | Current Units | Target Units | Difference |
|---|---|---|---|---|---|---|---|---|
| Canadian Bonds | VAB | 40% | $25.38 | $609.12 | $801.43 | 24 | 31.6 | 7.6 |
| Canadian Index | VCN | 20% | $31.15 | $280.35 | $400.72 | 9 | 12.9 | 3.9 |
| US Index | VUN | 20% | $41.53 | $290.71 | $400.72 | 7 | 9.6 | 2.6 |
| EAFE Index | XEF | 16% | $26.51 | $238.59 | $320.57 | 9 | 12.1 | 3.1 |
| Emerging Markets | XEC | 4% | $22.59 | $67.77 | $80.14 | 3 | 3.5 | 0.5 |
| Cash | – | 0% | $1.00 | $517.04 | $0.00 | 517.04 | 0.0 | -517.0 |
And finally we figure out our actual number of units to buy/sell, making sure we don’t go over our available cash and trigger any margin.
| Asset | Ticker | Unit Price | Action | Units | Proceeds |
|---|---|---|---|---|---|
| Canadian Bonds | VAB | $25.38 | BUY | 8 | $203.04 |
| Canadian Index | VCN | $31.15 | BUY | 4 | $124.60 |
| US Index | VUN | $41.53 | BUY | 2 | $83.06 |
| EAFE Index | XEF | $26.51 | BUY | 3 | $79.53 |
| Emerging Markets | XEC | $22.59 | BUY | 1 | $22.59 |
| Total | $512.82 |
American Portfolio
And for our American portfolio, we do the same. Here’s our portfolio’s current state, including new cash:
| Asset | Ticker | Unit Price | Units | Market Value | Allocation | Target Allocation |
|---|---|---|---|---|---|---|
| Bonds | BND | $81.16 | 7 | $568.12 | 28.15% | 40% |
| US Index | VTI | $116.73 | 4 | $466.92 | 23.14% | 30% |
| International Index | VEU | $45.59 | 10 | $455.90 | 22.59% | 30% |
| Cash | – | $1.00 | 527.29 | $527.29 | 26.13% | 0% |
From here, we figure out what changes need to be made to get us back to target…
| Asset | Ticker | Target Allocation | Unit Price | Current Market Value | Target Market Value | Current Units | Target Units | Difference |
|---|---|---|---|---|---|---|---|---|
| Bonds | BND | 40% | $81.16 | $568.12 | $807.29 | 7 | 9.9 | 2.9 |
| US Index | VTI | 30% | $116.73 | $466.92 | $605.47 | 4 | 5.2 | 1.2 |
| International Index | VEU | 30% | $45.59 | $455.90 | $605.47 | 10 | 13.3 | 3.3 |
| Cash | – | 0% | $1.00 | $527.29 | $0.00 | 527.29 | 0.0 | -527.3 |
And finally, we round our changes because we can’t buy fractional shares, being careful not to go over our available cash.
| Asset | Ticker | Unit Price | Action | Units | Proceeds |
|---|---|---|---|---|---|
| Bonds | BND | $81.16 | BUY | 3 | $243.48 |
| US Index | VTI | $116.73 | BUY | 1 | $116.73 |
| International Index | VEU | $45.59 | BUY | 3 | $136.77 |
| Total | $496.98 |
And through it all, we don’t look at the news, we don’t try to outguess the market, and we don’t use any emotion (even if we may feel them) as we execute our investment strategy.
Continue onto the next article.
WORKSHOP TOOLS
How much does it cost to participate in the Investment Workshop? NOTHING. Because that's how we roll. All we ask is that you sign-up using the following affiliate links to keep it free forever:
For Canadians:
For Americans:
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Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.
Back in 2008, I watched as the value of the S&P500 was cut in half. After months of watching my portfolio shrink by thousands of dollars each day, the pain was too much. I traded out of several stock positions, and immediately felt relieved. A few weeks later, the market was making a recovery and the pain of realizing I was an idiot for following my emotions was ten times worse.
This was a painful but important lesson for me. After missing the first part of the recovery I plowed my cash back into stocks. I was lucky to catch the rest of the bull market and our investments carried us to financial independence allowing us to quit our jobs.
I don’t invest with my emotions anymore. Great post!
This is exactly the big fear I have for WHEN the next crash comes. Like I know it’s going to happen one day. Maybe it might not be for a while, but it’ll happen. And I keep telling myself I won’t freak out. But even though I like to think I’m pretty smart, I still get worried I’ll freak out.
I was in college during the 2008 crash, so I was pretty well insulated from the recession since I didn’t have any money invested.
I’ve read about how you guys made it through unscathed, so I always use that as a reminder to myself for when the next crash comes. Just sit tight!
Yup! And that’s when the dividends and fixed income comes in. Even if the capital value drops, we can ignore it without having to sell anything. Just live off the dividends & fix income and head for SE Asia. Global arbitrage rocks–brings your SWR down to 2% or less! Also the weather is WAY better too.
I don’t think you’d have as much fixed income coming in as you like with a 60/40 portfolio such as the ones listed above for US & Canada?
I believe the portfolio your advisor has crafted produces much more fixed income. Even if the equity/bond allocations are the same (60/40). This is due to REITS, preferred shares, and corporate bonds.
A portfolio holding VAB, and the global equity ETFs as listed above will produce much less. A $500,000 portfolio will pump out around $12000? Something like 2% Although this portfolio will likely grow a faster rate over a longer period of time.
For many it’s not worth going into the extra involvement for those few percentage points of fixed income until the size of the portfolio is much larger. Stick with the ETFs listed above, reinvest the dividends. Rinse, repeat..
Thoughts?
Correct. Higher yielding fixed income investments are great for the added yield, but you are trading off the volatility-reducing effects of a simple bond index. High yield bonds, for instance, swing more like equities rather than bonds.
As people get closer to retirement, these assets can come in handy (personally, I’ve shifted more towards higher-yielding stuff like this myself to cover my living expenses) but for most people who are in the accumulation phase (which is who this workshop targets), it’s better to stick with a simple bond index so the bonds can do what they’re designed to do: reduce volatility.
Thanks for sharing your experience, Mr. Crazy Kicks! We were trying to buy a house before we stumbled on FIRE, so we exited and sat in cash for too long after 2008. Ah well. I guess mistakes are how you learn.
I have been hoping (and praying nightly) for a big crash for a while now.
It seems like the markets would never ever go down again. Sigh.
Hope springs eternal in the human breast.
It’ll happen eventually, but neither you, me, nor any talking head on TV will be able to predict exactly when. I’ve long since given up trying.
Is there any particular reason you bother with bonds? I’ve never seen the attraction to them. I can understand the earlier decades when they were delivering higher yields but these days they seem very unappealing. At least to me anyway.
Bonds are not typically held for return or yield, they are held because they are not correlated with the movement of equities. A little bit of bonds in a portfolio will do a very good job of damping volatility when it comes.
Feel free to stick with 100% equity, but a 25% bond allocation will greatly help when shit hits the fan..
I believe this relates partially to what is being said here.
http://bigthink.com/insights-of-genius/rethinking-the-endowment-effect-how-ownership-effects-our-valuations
It’s funny because as a Defender, I make decisions based on emotion–oops! I can still be swayed by numbers, but if my gut feeling is that something is off, I won’t do it. It’s never steered me wrong, so there’s something to being an emotional, math-hating creature. 🙂
But yeah, I’m not sure if emotion has much of a place in investing.
Totally get it. Being risk-averse is not a bad thing. Believe or not, FIRECracker is fairly risk-averse. She only swung towards the whole FI idea when the real estate market started to “feel” scary with people selling each other million dollar crack shacks and thinking they just did a great thing. Then I, being a Commander type, swung in with numbers and a spreadsheet showing how becoming FI is actually safer than following everyone else, and the rest is history.
Bonds have capital gains and losses, unlike GICs. When stocks do well, bonds will lose their value (but you can still hold them to maturity). When stocks do poorly, bonds gain in value, and bonds can be re-sold.
I’ve made emotional mistakes in the past, and I’ve learned from them. Always evaluate your reasoning for making or ending an investment.
If there’s even the slightest hint of emotion involved, don’t do it. Just don’t do it unless the cold-hard numbers tell you it’s the right move.
Spreadsheets are your friend. They don’t have emotions.
Emotion has absolutely no place for investing. In fact, I’d go as far as saying emotional control is the MOST important characteristic a person can have when investing, largely because without it you WILL sell and buy at precisely the wrong time.
Also, a 60/40 portfolio (in many cases) is merely an emotional shield. It’s just a way to not become emotional during stressful time (crashes). If you are a very emotionally stable person you should probably go much more risky than a 60/40 portfolio, even 100% stocks makes sense for many people, as long as they have emotional control.
If you are an emotional person, absolutely protect yourself with bonds and other stable assets. If not, they’re just holding you back from big long-term gains.
Eh, sorta, with the caveat that when you have to depend on that portfolio you’re going to need the yield the fixed income portion will give you.
Vast majority of people don’t need the income stream from their investments, ESPECIALLY people in the accumulation phase of their life, which is what this portfolio is set up for.
Really the only people that need a steady income stream are those that are already retired.
As JLCollins said below, if you’ve hardwired it into your brain that you will be investing forever, you should be able to ride out market crashes much easier than most. The fear really comes from needing that money during a market downtown.
If you haven’t experienced a major market decline, it is hard to imagine how ugly it feels.
When the S&P 500 hit its low in 2009, nobody knew that was the low. In fact every, and I mean every, smart money person I knew expected it to go far, far lower. The consensus was a further decline of 2/3rds.
If you had started with 1.2 million, by March ’09 you were down to 600,000 and the predictions were that could easily be cut to 200,000 before the dust settled.
It is not enough to say, sure I can tough out a 50% decline. You have to understand not only will you have to tough it out, you’ll be doing so with no idea where the bottom lies.
The time to think about this is now, when you can look at it calmly. If you wait until you are in the middle of it, making the right choice is much harder.
I’ve hardwired my brain. My holding period for VTSAX is forever.
It’s really the only way to do it. If you can stomach that scenario once, you can likely do it again.
It can be hard the first time and I look to find solace in comments like this when the time eventually comes.. The larger the portfolio the more uncomfortable it can be.
You’ve been invested years longer than I, and the experience may be anecdotal but it helps.
Interesting article, but you guys left one important thing out, cost of setting up initial portfolio and maintaing it.
From experience I can say that,
CDN banks charge arm, leg and first born when buying odd lot.
Also trades cost is different that depends on frequency of trading and how much is in a trading account. Some banks apply maintenance fee for self directed accounts, etc…
http://www.dilbert.com/strip/1992-06-20?utm_source=dilbert.com/share-email&utm_medium=email&utm_campaign=brand-loyalty
“CDN Banks charge an arm, leg and first born…”
That’s exactly why we’re using Questrade instead of a high fee CND bank. No maintenance fees, free to buy ETFs, and minimal cost to sell. And considering how this workshop is for accumulation phase, we will be doing mostly buys, only sells for rebalancing, which generally happens only once a year. Total MERs on the ETFs are a tiny 0.14% compared to 2%+ from banks. Highly recommend you read the entire workshop.
Being the non-data-driven/ spreadsheet loving consul brain that I am, I love reading the posts and comments from the dark side (er, the less emotional types). Definitely keeps my own emotionality in check and over time I am slowly integrating the tricks of the logic-based trade.
Glad to hear it. Emotions are just like everything else. In some areas it’s good to let them loose, in others you want to harness it. Investing is definitely the latter one.
Sooo I can’t seem to find where it doing the rebalancing calculations was covered and I can’t figure it out myself. I’ve tried adding and dividing the units and dividing and adding the market value numbers… I’ll feel very dumb if its simple math(which I’m sure it is) but I’m just getting nowhere. Thanks for all your help!!
**The calculation to get my target allocation
Oh, target allocation is decided when you’re designing your portfolio. Try reading the series from the beginning.
https://www.millennial-revolution.com/investworkshop/
Or to skip to the part that answers your question: https://www.millennial-revolution.com/invest/workshop-invest/investment-workshop-3-picking-etfs/
I understand the part about target allocation, and I have read from the beginning but for example on this same page under ‘Canadian Portfolio’ you 1. start “with our current portfolio snapshot including our new cash” Then 2. “we then use calculate how many units of each we need to bring us back on target.” and then 3. “and finally we figure out our actual number of units to buy/sell, making sure we don’t go over our available cash and trigger any margin.”
I don’t understand the calculation you make from 1. to 2. to figure out how many units you buy for next buy in.
I understand the part about target allocation, and I have read from the beginning but for example on this same page under ‘Canadian Portfolio’ you 1. start “with our current portfolio snapshot including our new cash” Then 2. “we then use calculate how many units of each we need to bring us back on target.” and then 3. “and finally we figure out our actual number of units to buy/sell, making sure we don’t go over our available cash and trigger any margin.”
I don’t understand the calculation you make from 1. to 2. to figure out how many units you buy for next buy in.
I have been following along your Investment Workshop. I like your comprehensive approach and detailed breakdown of calculations.
I would like to know what your response would be to this article:
http://www.forbes.com/sites/charlessizemore/2016/06/14/the-6040-portfolio-is-dead-and-its-not-coming-back/2/#4d26c9e42505
“Consider taking a more active approach to investing.”
BWAHAHAHAHAHA this guys’ an idiot. Do not listen to him.
Not only is the underlying statement idiotic, but every supporting statement stinks of incompetence. “Try value investing. Or dividend investing. Or an alternative investing technique. Will it work? I don’t know. No-one does.”
They let these people write financial columns?!?
And this is why most people are poor.
Hello, my first comment here while my miracle baby sleeps! I wonder why you chose vun versus vfv to invest in? I am using the rest of my maternity money and selling my premarital condo to extend mommy time and planning for ultimate escape from those that in the words of a pastor I spoke with ‘know not Joseph’. Hope to invest a chunk of money in September after condo sale. I am also invested in xin and xiu but no bonds. Thanks for your generous support of team baby!
I just want to hear the story of the poor lady who was proposed to via Powerpoint! that has got to be the most UNromantic way….dude was probably a comp sci or engineering major, am I right? hahaaha
Yup. He’s an engineer. Surprise surprise. She didn’t marry him and instead married someone else WAY better. Moral of the story. Don’t propose with PowerPoint.
Hey FIRECracker and Wanderer,
I have been following your investment portfolio workshop and it’s awesome. Honestly, you guys have made the whole process so easy. I used to think that investing is complicated but you guys made all the concepts pretty simple and explained it very well. But i am one paranoid person. So I came with few scenarios in not so ideal world. I love to know your opinion on it.
Let’s say I have around $25k in my TFSA AND RRSP. I am contributing $1000 in my investment portfolio every month. So here’s my paranoia.
Scenario 1) things are going south at work. The next thing I know I am fired :(. Now before I find a new job my investments are at halt. What should i do with my portfolio for that time being until I find a new job which could takes atleast 6 months.
Scenario 2) my car breaks down its the transmission. The next thing I know I need to buy a new car which could cost around $10-15k. Withdrawing from my TFSA would be a big hit. What should i do SELL SELL SELL?
These scenario are likely and things do go down sometimes. I just wanna have PLAN B lol.
The point of the workshop is to teach you how to build a low cost indexed ETF based portfolio to fund your retirement. If you have a short term cash crunch, stop investing and instead, divert that money into building up a cash cushion ( we recommend 6 months of living expenses). It makes no sense to invest and have to sell at a loss when an unexpected emergency arises–that’s not the point of investing.
So build up that cash cushion first, then invest.
I completely agree with having the cash cushion for atleast 6 months. We do have that much cash cushion that we could survive for 6 months or so.
But even in the expected situation when we are using the cash cushion what should we do with our investment portfolio as there is no way we could still contribute $1000/month while I am unemployed and using my cash cushion. Do we just leave the portfolio as is until I find another job ?
Yes, don’t eat into your cash cushion by investing until you secure a source of income with a new job.
First of all, Thank you so much for your workshop, Your workshop is really helpful because I know nothing about investing and Your website had really pushed me into starting, I am in the US and I have started trading 60/40. Today I tried to buy some ETF shares(after the market close), I saw three different prices, For Ex: VEU Bid: 50.03 and Ask: 53.05, Last 50.32, there is a huge difference if I do the buy in large and Will I save some if I do the buy after the market is Open?
Yeah the prices go a little haywire when markets are closed. I always wait until markets are open (and there’s nothing too crazy going on the news) to make my buys.
Thank you! I can see the difference now.
I am late for that post but emotions are not bad at all per say as you said it so well. It is important to acknowledge and categorize the emotions we are feeling and then make a smart decision about them. I just wanted to add my 50 cents! lol
Thanks for that blog, it is very informative!!