At the workshop, Levinson recounted how, as the youngest of four kids in a dysfunctional family, he was sexually abused and neglected as a child. The only fond memories he has of his mother (who was also a hoarder) were trips to the local Goodwill. “I remember my mother taking me there when I was a child, giving me a couple of dollars and feeling like a kid at Disneyland,” Levinson told me. “At home, when I was lonely, I would just go downstairs to the basement and there I’d be surrounded by my friend, clutter. It was the only place I felt safe, loved and accepted.” (We’ve changed the names of Levinson and all other clients of the Nashville clinic mentioned in this story to protect their privacy.)

Hoarding occurs when we stockpile objects or money in order to feel safe and relieve anxiety. It’s an example of an otherwise positive behaviour — saving — taken to the extreme. Some hoard money, while others have a compulsion to hoard objects such as toilet paper, shoes or old tin cans. It’s the accumulation of the stockpile — not the buying or spending — that provides the hoarder with a sense of security. Objects become stand-ins for what’s missing in their lives and these objects develop strong emotional meaning. There may be a genetic component involved, but most hoarders tend to have a history of childhood deprivation, abandonment or betrayal.

Changing hoarding behaviour is surprisingly difficult. Detaching themselves from their possessions can make hoarders feel wasteful, guilty and anxiety-ridden. Levinson sees the objects he hoards as a kind of investment. “My beanie babies, my gum wrappers … they’re like stocks and bonds to me,” he says. But two years ago, while cleaning out his deceased sister’s house full of junk, Levinson had an epiphany. “I realized, ‘Oh God, this is what I’m going to leave my wife and sons with when I die.’ ”

When Levinson finally cleaned out one of his four small barns earlier this year, his wife Lisa wept. Then a couple of months ago, for the first time in 45 years, he went into a Goodwill store for two whole hours and didn’t buy a thing. “I had a friend come in with me and witness the event,” says Levinson. “I wasn’t sure I could do it, but when I did, I felt like I was on the road to recovery.”

Overcoming hoarding
The main treatment for severe hoarding is psychotherapy designed to help the hoarder learn why he hoards. Often a therapist or professional organizer will have to help the hoarder de-clutter his home. The key to long-term success is to have the hoarder play an active role in physically getting rid of his stuff. It’s the only way for long-term changes to occur.

If the hoarding problem is milder, there are some ways to mitigate the behaviour without therapy. One method is to agree to a rule that says if a box with stored possessions hasn’t been opened within a set period of time, it’s simply thrown out — without ever opening it. If you have pack-rat tendencies you may also find it’s easier to give things away to charity instead of tossing them in the trash.

If money is the object being hoarded — either literally, as in stuffed in the mattress, or squirreled away in bank accounts — the treatment is similar. This type of hoarding also arises from deep insecurity and fear about the future. In these cases, the key is to convince yourself that you have enough, that you are secure. A financial adviser can help by running the numbers and demonstrating that you can meet your short- and long-term financial goals with ease, so it’s okay to enjoy some of your money today.

Coming soon: Compulsive spending

Ramona Reed is standing on the street corner just outside a local thrift store, waiting to give her money away. She’s watched several people leave the shop with bags full of clothes and trinkets, but she hasn’t yet found what she’s looking for. Then she spots them — a young single mom with three small kids. Reed, a pretty petite blonde with sparkling blue eyes and ruby lips, approaches them and strikes up a conversation. She learns that they live in the poorest part of town and can barely make their mortgage payments. They have no car, no stove, no fridge — they simply can’t afford it.

Reed tells them her story — that she originally came from a poor family with 10 children, but now she’s married to a wealthy man and she wants to help others. She buys them a used car for $2,000 and a fridge and stove for $800 more. She has a lot of money, she tells them, and doesn’t need it all. She wants to help. “Money burns a hole in my pocket and I feel compelled to spend it or give it away to others,” says Reed, 53. “It makes me feel like I’m not a screw-up — I’m good for something after all.”

Ray Harper, Reed’s husband of six years, feels differently. (We’ve changed their names to protect their privacy.) He’s threatening to divorce Reed if she doesn’t change her ways. Harper comes from a wealthy family and is a successful businessman in the tech industry. He gives his wife a $6,000-a-month allowance, intending the money to be spent on entertaining his friends and family, or buying art and decorative pieces for their high-end townhouse. When he found out that Reed was spending the money on perfect strangers, he got angry. He told her he couldn’t live with someone who wasn’t trustworthy. He wrote her a cheque for $50,000, put all her clothes and personal belongings in storage and told her to go away — and stay away — until she’d gotten herself “fixed.” “I’m determined to save my marriage,” says Reed. “I’ll do anything to change my ways so that I can be wise with money.”

Reed is one of several people I met last fall at a workshop for people with severe money disorders in Nashville, Tenn., called Onsite. You can think of it as a kind of money rehab clinic. During five days of group therapy the participants examine a slew of unhealthy, self-destructive behaviours. The workshop was eye-opening. I learned that although full-fledged debilitating money disorders such as hoarding, workaholism and compulsive shopping aren’t the norm (it’s estimated that only 5% of adults have one), such disorders often have their roots in common emotions and thought patterns.

In any of us, destructive unconscious thoughts and feelings can hinder our ability to make sound financial decisions. “The truth is, you’re only as sick as your secrets and people with money disorders keep a lot of secrets,” says Ted Klontz, a psychologist and life coach who, along with his son Brad (also a psychologist), runs the Onsite program. The Klontzs are also the authors of Mind Over Money, and Wired for Wealth, two ground-breaking books in the field of financial psychology. “When people come for help around money, it goes so much deeper than what is in their bank accounts,” says the elder Klontz. “It’s a window into unresolved family histories and generational patterns. It’s often unresolved traumatic childhood events that end up triggering money disorders.”

The Nashville workshop’s aim is to uncover those secrets and reveal how they encourage bad money habits. Such ingrained beliefs, or “money scripts” as the Klontzs call them, are powerful ideas that we form around money — what it is and what it can do for us. Typically, we form these beliefs in childhood and they drive all of our financial behaviours. A money script could be that ‘Money will make things better,’ which is associated with hoarding and workaholism, or ‘There will never be enough money,’ which is associated with underspending and miserliness.

We can show signs of more than one money disorder, in varying degrees, in varying situations, and at varying times in our lives. But the underlying scripts rarely change — at least not without conscious effort and hard work. If you want some insight into what may secretly motivate the ways you handle money, or you think someone you know may have a money disorder, read on for an in-depth look at the seven most common disorders. I’ll show you how to spot them, and just as importantly, what you can do to overcome the hidden disorders that may be holding you back from achieving the financial success you dream of.

The seven deadly money disorders:

Hoarding: When junk becomes treasure
Compulsive spending: Shop till you drop
Underspending: Living poor to die rich
Financial incompatibility: Secrets that destroy couples
Financial enabling: A make-believe money world
Workaholism: Selling your soul to the company
Financial incest: Abuse without physical scars

In theory reward cards are great. You do shopping for stuff you’re gonna buy anyway and by using the right rewards card you can get anything from money back to free vacations. What’s not to like? Like Dire Straits said, “Money for nothin’.”

Maybe not.

If you’re dumb enough to be carrying a balance on one of those reward cards, you are more than paying for your “free” stuff with the high interest you’re forking over every month. Most reward cards charge interest in the 20%+ range. Carry a $5,000 balance and you’re looking at about $1,000 a year in interest.

Maybe you’re not carrying a balance. You pay your balance off in full and on time every single month. Score one for you. But did you know that the fact that you have a rewards card could mean you’re spending more money than you would without one?

According to a study done by the Federal Reserve Bank of Chicago and reported in The Wall Street Journal, “The initiation of a 1% cash rewards program yielded, on average, a $25 reward each month — and an increase in spending by $68 a month and in credit-card debt of $115 a month…”

And then there are the folks who fork over good money to participate in a rewards program with restrictions on what they can do with their “points.” When I was considering a cash-back card recently, I weighed. the cost of the card against the annual fee and the cap on the rewards. Really? you want to charge me AND cap my savings? Hmm … and decided it just wasn’t worth the aggravation.

Reward cards make sense only if you’re not carrying a balance – EVER – and the benefits far outweigh any fees you may have to pay. And only if you are rigorous about not buying more to earn more points. If you’re not sure your card’s working for YOU, cancel it.

]]> http://www.moneysense.ca/2011/06/30/how-rewards-cards-can-cost-you-money/feed/ 11 http://www.moneysense.ca/2011/06/30/the-stock-picker%e2%80%99s-quest-for-alpha/ http://www.moneysense.ca/2011/06/30/the-stock-picker%e2%80%99s-quest-for-alpha/#comments Thu, 30 Jun 2011 11:30:32 +0000 Canadian Couch Potato http://canadiancouchpotato.com/?p=3235

Among academics, the active-versus-passive debate often centres on mutual funds. But among DIY investors—who readily concede that mutual funds with high fees are unlikely to outperform an index strategy—the discussion usually focuses on stock picking. Many people who shun mutual funds believe that building their own portfolios of individual stocks offers a high likelihood of market-beating returns.

At a recent symposium in Toronto hosted by Dimensional Fund Advisors, I listened to financial author Larry Swedroe discuss this idea and others in his book The Quest for Alpha. Swedroe also spoke the night before to a group in Ottawa that included several bloggers. Some were put off by Swedroe’s assertion that investors should not be picking individual stocks.

It’s impossible to make sweeping conclusions about the performance of retail investors who pick stocks, because the data are hard to get, at least compared with what’s available in mutual fund databases. Any researcher can look up the performance of funds, but how can we possibly know how successful individuals are?

Here’s what we know

In fact, there have been a number of studies by researchers who had access to account data from brokerage firms, and some of these are discussed in The Quest for Alpha. The most influential work has been done by Brad Barber and Terrance Odean in California, who have been at it since the 1990s. You can read Swedroe’s book for a summary of the research, or track down the individual papers, but the findings are about what you would expect. Investors routinely underperform risk-adjusted benchmarks, and the less they trade the better they do. Perhaps this quote from Odean sums up the research best: “The point seems to be that individual investors for the most part shouldn’t be trying to pick stocks. They did worse than if they had been throwing darts.”

Swedroe also raises another important issue: most individual investors, whatever strategy they happen to use, don’t know how to measure their performance. There is plenty of anecdotal evidence for this—just read my previous post about yield on cost, or go to any investment show and ask people if they’re beating the market: all of them will say yes. But anecdotes are not evidence, so Swedroe again goes to the research.

In a 2007 study, Markus Glaser and Martin Weber got access to online brokerage accounts and then asked the investors a series of questions about their own performance. Swedroe summarizes the findings both in the book and on his blog, and they are alarming. Echoing Barber and Odean’s work, the study found rampant overconfidence and consistent underperformance among investors who dramatically overestimated their returns. Four out of every five investors who had negative returns were unaware they had even lost money.

Tarring with the same brush

The research is clear that the overall performance of individual investors is worse than that of high-priced mutual funds. You might conclude from these studies that stock picking is an entirely futile exercise. But I would argue that’s too ham-fisted. What the studies show is that investors who trade too frequently get clobbered. There is no doubt that experienced, educated investors will perform much better than the average person in these studies—indeed, Glaser and Weber state this explicitly in their paper.

In my last post, I argued that disciplined, patient and courageous investors (to use Tom Bradley’s words) can do just fine if they stick to low-cost, well-run active mutual funds. Surely the same is true for stock pickers with those same traits. If they diversify properly, keep turnover extremely low, stay invested during the rough times, and control their emotions, they’re unlikely to go too far wrong—even if they don’t end up beating the market.

I’ve been surprised to hear how many investors use some combination of indexing and stock picking, and who seem to be making it work. If you find a purely passive strategy impossible because you can’t make peace with the idea of buying the whole market, then a side order of stock picking probably makes sense. If the comfort of holding individual stocks is what makes you adhere to your investment plan, then there is enormous value in that.

I’d still like stock pickers to read Swedroe’s book, so I’ll send a free copy to the reader who leaves the most interesting comment below. Rather than simply pulling a name from a hat, this is one contest I’m going to actively manage.

The Toronto-based start-up is looking to compete with financial aggregator Mint.com, but with two distinct differences. Spenz is targeted at a younger generation, and is designed primarily to help you figure out where your money went.

To that end, it offers a user-friendly app and web site that tracks your spending. Users can touch or click on different categories based on their spending patterns — like coffee or gas — and then enter in the amount they spent.

One cool feature is “You vs. Them” where Spenz will show you how spending compares to other people in your demographic.

A major difference between Spenz and its competitors is that you don’t have to enter any personal or banking information, thereby reducing security concerns.

Enter the internet, which has allowed broadcasters to break free from using cable and satellite providers’ infrastructure to broadcast their content.

My daughter and all her friends are already getting their TV shows when they want them on their laptops. Want to watch on your big-screen TV at home? No problem. Get yourself a high-speed internet connection, a DDMI cable and a HTPC (a home-theatre PC) which cost about the same as three months’ worth of premium cable … so every month after you’re in the money.

The downsides are few but you need to be aware of them. Constantly streaming video will tax your internet bandwidth limits so if you have a download cap, you have to be careful how much TV you watch. Maybe not such a bad thing, eh? Sometimes streaming can be slow, the picture may freeze or be grainy. You can pause the show to let it buffer or do a quick page refresh.

Another downside, which can be overcome easily if you’ve a mind to, is that content is spread out – there’s no on-screen menu – so you have to figure out who will let you watch which show where. Once you have, you’re off to the races.

If you want to watch U.S. networks, you’ll have to do an end-around because signals can’t be broadcast into Canada. What you’ll need is a free internet proxy like HotspotShield that assigns you a U.S. IP address to give you access to American programming.

With premium cable costing $100 to $140 a month, finding ways to cut your costs could put $1,000 a year back into your pocket for savings.

]]> http://www.moneysense.ca/2011/06/29/save-on-cable-satellite/feed/ 3 http://www.moneysense.ca/2011/06/29/the-tricks-that-hindsight-plays-on-us/ http://www.moneysense.ca/2011/06/29/the-tricks-that-hindsight-plays-on-us/#comments Wed, 29 Jun 2011 04:40:27 +0000 Canadian Capitalist http://www.canadiancapitalist.com/?p=4483 The tricks that hindsight plays on us is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

In a recent post on MoneyVille.ca titled “I let an $11,500 stock profit get away“, The Star’s Peggy Mackenzie relates the story of how she invested $550 in what is today Gennum Corporation. Her initial investment has grown to $6,300 over close to three decades — a respectable rate of return — and that’s even before accounting for the modest dividend (the company has paid a quarterly dividend since 1994).

But Ms. Mackenzie isn’t happy with her returns. She regrets that she didn’t sell the stock in 1999 resulting in a “paper loss from the peak of nearly $11,500″. And she isn’t alone. One hears variations of it all the time. Recently, a friend complained that he has “lost” 10 percent since April and he should have sold because he knew that the troubles in Greece are bad news for the markets. And I’ve caught myself boasting about how much I’ve lost by not cashing in employee stock options in the late 1990s.

Investors should stop beating themselves up so much and realize that hindsight is playing tricks on their minds and what appears obvious today was only one of many potential outcomes in the past. For example, Ms. Mackenzie might have potentially sold Gennum far earlier than when it hit its peak and missed out on most of the gains she is currently sitting on. Or Gennum might have gone the way of Pets.com leaving Ms. Mackenzie with a much more regret. We only have one past but the future could unfold in any number of ways.

Are there other behavioural biases can you spot in Ms. Mackenzie’s post?

Related Reading:

• This and That: Money Mistakes and more…
• Why this bear market isn’t as bad as you imagine
• The 2005 Reportcard
• The Danger in Chasing Yield
• The Atlantic Cover Story on Financial Survival

The tricks that hindsight plays on us is brought to you by Canadian Capitalist — Helping you to invest & prosper.

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It seems Canadians are feeling pessimistic about the economy on most measures including job security and financial progress.

When asked how they thought the Canadian economy would fare over the next six months, 29.2% said they thought it would be better off, down from 30.3% in March. To further the gloomy sentiment, 23.6% said it would be worse while only 19.1% said so in March.