The physical signs are impossible to conceal: sweating and increased palpitations at every market blip or earnings announcement, an uncontrollable twitch in your "trading finger," that involuntary trance-like draw to the sound of Maria Bartiromo's voice, and -- the most telling sign of all -- below-market returns.
Sound familiar? Then you may be a stockaholic.
Grab a cup of coffee and pull up a chair. We're all on a first-name basis here, and help is on the way.
Addiction -- the overwhelming emotional desire (even physical compulsion) for something -- is a word usually reserved for activities that can cause harm. For stockaholics, that includes things like timing the market, day-trading your daughter's lunch money, churning and burning, and following The Wall Street Journal's stock-picking chimp -- all of which are detrimental to a shareholder's bottom line and peace of mind.
Unfortunately for stockaholics, there's no patch, pill, peppery gum, or FDA-approved personal electrocution device to help wean you from the siren song of active trading. The best way to overcome the drug of choice is to replace the addiction with a "higher power." Might we suggest "Foolishness"?
Actually, we don't have to. Index Fund Advisors Inc. (IFA), a fee-only financial planning house that focuses on index investing, does right by us on its website. The company developed a 12-step program to help stockaholics overcome their compulsions. With 12-step programs designed to treat more than 30 addictions, including gambling, booze, sex, and Starbucks, it's about time someone addressed the debilitating and addictive effects of active trading. (We've long had our own 13-step program offering guidance for wayward investors.)
Each of IFA's 12 steps tackles a facet of trading addiction, relying heavily on academic research from heavy hitters like Burton Malkiel and William Sharpe as ammunition against the dangers of conventional market wisdom. Pretty Foolish, eh?
Incidentally, the original "Big Book" -- Alcoholics Anonymous -- was written in 1938, which was the same year that Alfred Cowles unveiled what we know today as the Standard and Poor's 500 Stock Index. Not coincidentally, investing comfortably and confidently in index funds is IFA's prescription for stockaholics. (If you're short on time, try our 60-second version of the antidote.)
For those ready to remedy their portfolio-destructive behavior, here's a tissue. It's time to turn off CNBC, delete the streaming ticker from your desktop, and take your broker (yes, all four of your brokers) off speed dial -- or at least trade him in for the discount variety. You, my friend, are coming clean.
Here's a brief review of IFA's 12 steps.
Step 1: Admit you are an active investor. The road to recovery begins with recognition. A series of five questions helps stockaholics recognize the telltale signs of addiction.
Step 2: Separate fact from fiction. Market strategists, technical analysts, media gurus, and market predictors don't hold a candle to the unbiased, rigorous, empirical research offered up by Nobel Laureates and other academics. Their findings help sufferers see the market in a new light.
Step 3: Don't get wooed by star stock pickers. The two greatest forces in a stock picker's success are luck and chance. Not very heartening, eh? Recognizing that, individuals are less likely to bet their long-term savings on the whims of the stock picker du jour. Though followers of our own David and Tom Gardner's Motley Fool Stock Advisor aren't complaining about the duo's 35% annual return (compared to the S&P's 5.05% in the same period). We hate to tempt you, but why not check out The Motley Fool Stock Advisor Mid-Year Action Plan -- for free! -- right now.
Step 4: Ignore your market-timing alarm clock. Do you find yourself trying to figure out when the best time is to be in the market? Try this bitter pill: Examine the time-picking gurus and their records. Not pretty. Not pretty at all.
Step 5: Don't leave your fate in the hands of a money manager. As we Fools frequently point out, the vast majority of professional money mangers underperform the market's average return. Manager picking is similar to trying to time the market -- it just doesn't work.
Step 6: Look for substance, not style. The mutual fund you own might claim it's a large-cap stock fund. Funny how the designation remains the same when the manager moves 30% of your holdings into small biotech startups. To avoid "style drift," as IFA calls it, the best option is a "pure style" index fund.
Step 7: Watch out for silent -- but deadly -- partners. It's not just you and a few thousand other co-investors buying into a mutual fund. You've got "silent partners" in the form of fees, expenses, taxes, and inflation -- all of which take their cut well before you get yours. Luckily, you have control over most of these uninvited guests.
Step 8: Understand the real risks of investments. Danger is everywhere. And you probably don't even know it. Understanding risk, return, and time -- or "risk management" -- is the key to damping down bad investment decisions.
Step 9: Use history as your guide. In the short term, anything can (and will) happen in the stock market. But the market peaks and valleys smooth out over longer time horizons. Shift your thinking from short to long term to stifle any knee-jerk trading urges.
Step 10: Know thyself, investor. Your capacity for risk taking is determined by your investment IQ, net worth, income, savings rate, and your time horizon. Getting a handle on these will make you a stronger investor -- and help you sleep well at night.
Step 11: Don't choose diversity over quality. Asset allocation is often misused as a hedge against risk. But what good is diversity if you own a bunch of stinkers? Don't blindly buy a stock or mutual fund for "diversity." Every investment requires your full research.
Step 12: Invest and relax. The road for the recovering or reformed active investor ends with the realization that passive index investing is the best way to build wealth over the long term, according to IFA. Gone are the anguish and panic of active investing. In its place, peace of mind and above-average returns.
As you wind your way through the 12 steps to overcoming trading addiction, know that sweet serenity of market-beating returns awaits. Should you find yourself reacting to old triggers -- say, a casual discussion about the market at your company picnic or a visit from your neighbor's dog, "Nasdaq" -- draw on the strength of a long-term outlook and the comfort of the stock market's historic returns. And remember that our arms remain wide open to you, 24-7. At Fool.com, all Fools are welcome.
Dayana Yochim is still looking for a local support group for adult survivors of parents. She shares her investments -- which, not surprisingly, include an index fund -- here, as required by the Fool's disclosure policy. This commentary originally ran on June 13, 2002.