Exercise: Investment Fear-Factor Scale

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1 Suze ORMA N TH E UL T I M A T E PR O T ECTION PO R T F OLIO Exercise: Investment Fear-Factor Scale Fear is one of the biggest obstacles preventing many of us from taking action with our money. The way to conquer fear is to face it directly and take rational action. The Fear-Factor Scale is one tool for reining in fear when working with your money. From now on, when you re debating whether to take any important action with your money (such as investing in the stock market or selling investments) and you re confused about what to do, I want you to use this scale. Here s how it works. By taking a rational look at what you have (or would like to have) and testing it against your emotional and intellectual responses, you can make the decisions that are right for you. Please note, however, that this exercise is to be used after you ve done your other investment homework and completed the Keep, Sell, or Hold exercise on pages of the Investment guidebook or use the Keep, Sell, or Hold calculator on the CD-ROM. Once you ve determined the good investments in your portfolio, you ll want to test your emotional and psychological responses to holding or selling. So let s get started by filling in the following chart, Current Investments and Assets. List every single investment that you currently have in the spaces provided. Don t forget to list your other assets, including all tangibles of value.

2 I NVESTM E NT R ECO R DS CURRENT INVESTMENTS AND ASSETS Name of Investment After you ve listed all your investments and assets, ask yourself this question: On a scale of to with as the most positive and as the least positive how do I feel about each investment I currently own? Use the following descriptions to decide where on the scale you are with respect to each investment or asset, and then circle the appropriate numbers on the chart. = I feel absolutely comfortable, and I have no problem whatsoever with this investment. = I usually feel fine about this investment, but at times I m a little unsure. = I m not sure how I feel, and I m confused about what to do with this investment.

3 S UZE ORMA N TH E UL T I M A T E PR O T ECTION PO R T F OLIO = Most of the time I m uncomfortable with this investment, although from time to time I m okay with it. = This investment scares me to death: I can t stand opening my investment statements, I wake up at night thinking about it, and it worries me to the point of distraction. Take a moment to look over your answers. Your responses will show you what you d really like to do with your investments, from an emotional standpoint. Now you can use the following table as a key to help you decide what action you might take based on your gut feeling. If You Circled The Action You Should Take for This Investment Is: Keep the entire investment. Sell percent of the investment. Sell 0 percent of the investment. Sell 7 percent of the investment. Sell the entire investment. Now let s try the same exercise with potential investments. If you re using this scale to determine whether you should sell or buy an investment, remember: You can ease into an investment over time. One big mistake people often make with their money is that they become all-or-nothing investors they tend to buy everything all at once or sell everything all at once. I want you to know that you don t have to do everything at once. Make a short list of the investments you d consider making if you had $0,000 to invest.

4 I NVESTM E NT R ECO R DS POTENTIAL INVESTMENTS Name of Investment Once you ve listed your potential buys, ask yourself the following question: On a scale of to with as the most positive and as the least positive how do I feel about investing the entire $0,000 in each potential investment I ve listed? Use the following descriptions to decide where on the to scale you belong for each investment. Circle the appropriate number for each in the chart you just filled out. = I feel great. I would be happy to make this investment. = I have a very slight hesitation about this investment, but mainly I feel great about it. = I m really confused. I m not sure whether I want to make this investment or not.

5 S UZE ORMA N TH E UL T I M A T E PR O T ECTION PO R T F OLIO = I have a slight desire to make this investment, but overall I feel reluctant. = The thought of making this investment scares me to death, even if I m afraid to miss out on a great investment opportunity. Take a look at the rating you gave each possible investment. Now review the following table to see what your ratings mean in terms the actions you d be comfortable making with respect to your potential investments.

6 I NVESTM E NT R ECO R DS If You Circled You d Be Comfortable with the Following Action Put all $0,000 toward this purchase (assuming it s a wise investment and the correct time in the market). Hold back percent of the money you were going to invest and then make this purchase. (Assuming that the purchase is a wise investment and it s a good time for the market, you d use $7,00 for the purchase and put the remaining $,00 in a money-market fund. Then continue to see how this investment makes you feel.) Hold back 0 percent of the money you were going to invest and then make this purchase. (Assuming that the purchase is a wise investment and it s a good time for the market, you d use $,000 for the purchase and put the remaining $,000 in a money-market fund. Then continue to see how this investment makes you feel.) Hold back 7 percent of the money you were going to invest and then make this purchase. (Assuming that the purchase is a wise investment and it s a good time for the market, you d use $,00 for the purchase and put the remaining $7,00 in a money-market fund. Then continue to see how this investment makes you feel.) Do nothing at all. You don t feel safe with this investment.

7 S UZE ORMA N TH E UL T I M A T E PR O T ECTION PO R T F OLIO The Fear-Factor Scale can be used as a simple touchstone for how you really feel about the investments that you currently own or those you re considering making. If you can t get into an investment at the price you feel comfortable with, then you shouldn t be buying it at this time. And always, by all means, get the facts about any potential investments from a reputable source before making any financial decisions. I m not suggesting that you use this scale to replace professional advice. But once you know that an investment has the backing of your financial adviser or respected analyst, you can use it to help you evaluate your level of comfort with their advice.