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How to identify and build your investor identity

Dr. Frank Murtha of Marketpsych, a consulting firm.

TEXT OF INTERVIEW

Tess Vigeland: And now for my Oprah question of the day: When you think about money, how does it make you feel? Happy and content? Nervous and anxious? Well, of course, the amount of money you have plays a big part in that answer. But it's also about who you are as a person, especially when it comes to investing.

Dr. Frank Murtha here to put us on the couch. He's with the consulting firm Marketpsych, and is one of the co-authors of a new book of the same name. Welcome back to the show.

Frank Murtha: Thanks very much Tess. It's a pleasure to be here.

Vigeland: One of the first things that you talk about in the book, of course, is emotion and how there are very few things that are emotional as money. And because of that, it's important to establish your money identity. What do you mean by that?

Murtha: Well, it's probably instructive to take a good look at what the market is, in order to understand why it's so important to have an identify. The market is really nothing more than the aggregate psychology, and that means emotions, in most part, of the participants of the market. And it manifests itself in behavioral decisions, particularly in group decisions. In a very real way, if you take a look at what I just said and break it down, that is peer pressure.

Vigeland: So you're saying Wall Street is like high school.

Murtha: Oh my goodness, it's so much like high school it's scary. The smart money on Wall Street, the ones that set the trends, they're like the cool kids. So, they start these trends. And then people see the cool kids doing it, so they join in. The problem is usually the cool kids know when to get out and the rest of us -- and I include myself -- are still there when it's uncool and that's why we're there after the peak.

Vigeland: That's why we're dorks?

Murtha: I prefer the term "geek," but a dork if you must. You know, the way we overcomp the market peer pressure is to develop a stronger sense of who we are. It's the same reason, if you look back on your life, you are, in all likelihood, a much better decision maker today than you were when you were 17 years old.

Vigeland: Well, let's talk about how you figure out what your investor identity is.

Murtha: Introspection.

Vigeland: Put yourself on the couch.

Murtha: Yeah, something like that. There's a lot of different elements to what amounts to our investing identity. The most underrated and the most underappreciated are the underlying assumptions we have about why we're investing our money.

Vigeland: Meaning what?

Murtha: Well, I think if you boil it down, most people probably invest their money from the perspective of "I'm doing this in order to someday get rich." And there's some usefulness in that. But it's much more useful to think of it in terms of "what do I want my life too look like? What is most important to me and how can I invest to meet those goals?" rather than just simply amass a lot more of this amorphous concept of money.

Vigeland: But, not matter what your motivation is -- whether it's because you want to get rich or because you simply want to have enough money that you can retire someday or you can send your kid to college -- you are still out to make money.

Murtha: Very true. I still would say that it is very useful to think of money as being a means to an end, but never the end in it of itself.

Vigeland: But what does that shift do for you as an investor? How does it make you smarter?

Murtha: I'm not sure if it actually makes you smarter, but it definitely makes it a lot easier to rise above the noise of the market -- that peer pressure, if you will -- by saying, "You know what? I'm not going to get caught up in the fear or the greed. I'm going to focus on where I am long-term." And it avoids a lot of the traps that it sets us up for, because we're focusing on something that's really a means to an end not an end in it of itself.

Vigeland: And that really gets us to one of the key things that we always talk about on the show, and that you talk about in the book, which is figuring out how much risk you're willing to take. But you say in the book that the normal test for risk assessment is basically worthless. What is that normal test and why is worthless?

Murtha: Do I use the word "worthless"? I don't want to come quite up to that. I would say that it is a very overrated concept and it's often misapplied. A lot of folks listening to this have probably taken some sort of risk-preference, risk-tolerance questionnaire. There's often a bias that runs through them, which seems to say to the person filling it out, "What is the maximum amount of pain that you can deal with?"

Vigeland and Murtha laugh

Murtha: Which is, I suppose, a fair question.

Vigeland: How much cattle prodding can you tolerate?

Murtha: Say when it hurts. I say this in the book -- and I'm not the first person to come up with this analogy -- but it's like the dentist analogy: Imagine if you went to a dentist and the dentist said, "We want to use the least amount of Novocaine possible, alright? So you tell me what you think the most pain you can take is and we'll go from there."

Vigeland: Then help us out with a better way, because as you said, if you're trying to predict the future, you can't. So what are you supposed to do with that?

Murtha: Well, you know, I'd like to start by saying that I think that when you work with another individual, it helps tremendously. I place a lot of stock in the work that professional financial advisers do. You don't actually have to work with one. You can work with any individual who can be a sounding board. Take a look at how you have reacted to scary circumstances in the past. There are lessons to be learned if one is willing to take a look at how they reacted, what their mind set was and what they could do differently next time.

Vigeland: Frank Murtha is the co-author with Richard Petersen of "Marketpsych: How to Manage Fear and Build Your Investor Identity." Thanks so much for chatting with us today.

Murtha: It's my pleasure.

Vigeland: You can find more about the book "Marketpsych" in our new section, the Big Book.

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