Charlotte Financial Planning & Advice

Blog

Rebalancing is Important

An investment portfolio must be periodically rebalanced back to its original targets to maintain the intended risk level and asset allocations (i.e., mix of stocks and bonds).

Drifting Through Time
Say you started out with a portfolio of 50% stocks and 50% bonds at age 21. Stocks go up 2 out of 3 years on average. By the time you’re 50 your portfolio mix could drift to 90% stocks and 10% bonds. That’s quite out of balance!

In rebalancing, we would sell the “excess” of stocks and use the proceeds to purchase bonds. In doing so, we ensure that we sell investments at a relatively high prices and buy investments at a low price.

Effects of Rebalancing
In a balanced portfolio of stocks and bonds, you will typically be selling stocks and buying bonds when you rebalance. You will be removing excess volatility from the outsized stock allocation and going back to your initial combination of stocks and bonds.

Quarterly or Annually — Which is better?
In a taxable account, there is a tax benefit for waiting more than a year to rebalance. In a non-taxable account, quarterly rebalancing can have some advantages. You probably don’t want to rebalance on shorter time periods because you need to give your strong-performing investments time to run and avoid the potential costs of excess transactions.

Easy Rebalancing
Is it possible to set up automatic rebalancing? One way is to work with a professional money manager like NorthStar. We do this for our clients. Big firms like Vanguard usually don’t have an automatic option, but they say they will spend 15 to 30 minutes on the phone with customers to help walk through the process and get rebalanced.

Great Expectations

Expectations are very important. If you know what to expect, you shouldn’t be surprised. And if you’re not surprised, you won’t panic.

Coaching clients on what to expect and how (not) to respond to extraneous events is our defining role as a trusted advisor.

We invest in stocks because of their superior returns. Those historically higher returns are a reward for tolerating volatility (i.e., the “volatility premium”). But what does stock volatility look like in the real world? What pattern of price variability should we expect?

Well, here it is in its most elegant of graphical forms (click image for a bigger view).

Here’s how to read this chart:

The intra-year decline versus the annual return of the S&P 500 are plotted vertically with years running horizontally from 1980 through year-to-date 2017.
The annual return (grey bars) show the calendar year price increase. For example, in 1980 stocks climbed 26% for the year.
The intra-year decline (red dots) is the largest market drop from peak to trough during that year. For example, in 1980 we experienced a 17% drawdown.
Putting these together, in 1980 the stock market dipped 17% before closing up 26% by the end of the year.

It’s not hard to see that short, intra-year declines are the norm.

In fact, the average intra-year drop is 14.1%. But despite these temporary declines, the annual returns are positive in 28 of 37 years (76% of the time). During the charted time period 1980 to 2016 the average annual return was 8.5% This pattern is persistent. If you look back to 1946, the average drawdown is a remarkably close 13.8%, and the price return was positive 50 of the 71 years (70% of the time).

History shows the declines are temporary, the advance is permanent.

Think about how the average person responds to these intra-year declines. The financial media is screaming about the crisis du jour which is consistently characterized as the end of the world (“I’ve lived through some terrible things in my life, some of which have actually happened.” — Mark Twain ). Data shows the average investor, without the support of a caring, empathetic coach/advisor, consistently sells at the worst of times – i.e., during one of these perfectly normal and temporary pullbacks.

Volatility does not equal a financial loss unless you sell.

In our humble opinion, possessing an informed expectation, one that allows you to ignore short-term gyrations to capture long-term gains, is a Great Expectation.

Sir Isaac Newton: Monumental Scientist, Terrible Investor

Most people recognize Sir Isaac Newton as one of the most influential scientists of all time, but did you know he was a horrible investor?

Newton’s experience with the South Sea Company vividly demonstrates the financial perils of chasing hot markets, getting caught up in investment bubbles, and not maintaining a diversified portfolio.

In the early 18th century the South Sea Company was established and given a monopoly on trade in the South Seas in return for assuming England’s war debt. Investors liked the idea of that monopoly and the company’s stock began to take off.

Newton hear the siren call of the South Sea Company, invested his cash in early 1720 and managed to turn a nice profit. But then the stock kept soaring after he had gotten out. So Newton jumped back into the stock with a lot more money than his original investment.

Newton subsequently lost 20,000 pounds, almost all of his life savings! From this terrible outcome, Newton supposedly decreed, “I can calculate the movement of the stars, but not the madness of men.”

No warning on Earth can save people determined to grow suddenly rich.
— Lord Overstone

Source: Sovereign Man

Insights from Longevity Village

There’s a village in China where centenarians are ten times more common than in the United States. Bapan, China is called “Longevity Village” thanks to this density of 90+ and 100+ year old residents. Most of these older villagers are living long and healthy lives. Aging very slowly, there is essentially no signs of obesity, cancer, heart disease, or dementia.

Dr. John Day has written a book on Longevity Village that shares insights for living a long and healthy life. The villagers of Bapan have diet that is free of added sugars and processed foods. They get plenty of exercise with many 90 and 100 year olds still working in their gardens.

But four attitudinal elements are key as well:

Smile more (baseball players who smile in their playing card photographs live 7 years longer on average than those that don’t smile)
Rethink stress (70% of doctor visits in the US are stress-related)
Don’t forget to play (exercising in itself is not playing)
Look forward to aging (people who embrace the aging process live 8 years longer than those that don’t)

Source: WSJ

The Pitfalls of Investing

Pitfall? Get it? I couldn’t resist.

Ben Carlson has a great piece on how avoiding the crippling mistakes of investing will greatly improve your results.

Here is Carlson’s list of the biggest mistakes to avoid:

Making investment decisions based on your political views.
Confusing your risk profile and time horizon with someone else’s.
Consistently trying to time the market.
Losing site of your long term financial goals.
Paying high fees on investments.
Having high trading activity.
Letting fear and greed take over at the extremes in market sentiment.
Having the majority of your investments tied up in one asset (company stock, your house, etc.).
Basing your decisions on what you heard on CNBC or Fox Business News.
Following every tick in the market and constantly checking the value of your portfolio.
Making too many short term moves with long term capital.
Basing your investments on the most recent performance.
Not saving enough.

For the ultimate backstop, Jason Zweig of the Wall Street Journal has a piece of advice most investors would be wise to follow:

Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.

Be safe out there!

Hedgerows of Retirement

“We were rehearsed endlessly for attacking beach defenses but not one day was given to the terrain behind the beaches, which was no less difficult and deadly.”
— D-Day Battalion Commander

Coincident with the 73rd anniversary of the Normandy Invasion, Tony Isola wrote a great article highlighting the unexpected challenges the Allied forces encountered after they crossed the beaches. The farm lands of Normandy were carved up and fenced off by a dense network of difficult-to-penetrate hedgerows. Allied Forces were incredibly trained and prepared for the beach landings, but hardly a thought was given to the next stage of the battle.

As Tony points out, investors have their own hedgerow fortifications to surmount. There is great focus and effort put forth around saving for retirement, but what about the next stage of life? Questions and decision points include:

How long do I need to work so my money won’t run out?
What would be considered a “safe” withdrawal percentage from my funds?
When should I take Social Security; and what strategy should I use?
Do I need long-term care insurance?
Now that I am retired, should I invest my money differently?
How much will Medicare cost and what programs should I enroll in?
Can I afford to give cash to family members; and if I can, how much?
Have I updated all my beneficiaries and picked the right people to take over my finances to make the best decisions regarding my health if I cannot?
What am I going to do all day if my retirement is fully funded?
Should I take a cash balance or turn my funds into an annuity from my workplace retirement plan?
Do I own too much of my company’s stock?
Will my plan still work if we have another “Great Recession?”
When should I start taking money from my tax-deferred accounts; and how will this affect my taxes?

Answering these with confidence, constructing a solid plan based on these answers, and executing that plan with discipline are the real reasons why people who have accumulated wealth work with a trusted advisor.

Source: TM

Code Red! 8 Ways to Permanently Wipe Out Your Retirement Savings

Dana Anspach at MarketWatch wrote about 8 financially devastating mistakes (aka “Code Reds”) that must be avoided:

1. Believe in a stock
The company you work for is doing well. You understand the potential of the business. You should own a lot of company stock. After all, it shows your level of commitment, right?
WRONG! CODE RED!
You can lock in lifestyle by taking risk off the table. If trusted advisers are telling you to reduce risk, listen. You can’t take your “belief” in your company stock to the bank. Owning a lot of company stock doesn’t demonstrate a commitment to your company; it demonstrates a lack of commitment to your own personal financial planning.

2. Get reeled into real estate
Rental real estate is a good way to build wealth with someone else’s money, isn’t it? I mean, that’s what the infomercials say.
WRONG! CODE RED!
Investing in real estate is a profession in and of itself. With real estate prices on the rise again, don’t get reeled in with the lure of easy passive income. It isn’t as easy as it looks.

3. Follow a Tip
An opportunity to double your money is an investment opportunity worth pursuing. It could change your life, right?
WRONG! CODE RED!
Tips are great for your waiter or waitress. But where you family’s future is concerned, avoid the tips, and stick with a disciplined and diversified approach.

4. Change lanes — every year
Smart investors watch the market and frequently move money into the latest high performing investment, right?
WRONG! CODE RED!
You’ve probably noticed if you constantly changes lanes on a backed up highway, always trying to inch ahead, you usually end up farther behind. Driving this way isn’t effective; investing this way isn’t effective either. Pick a disciplined strategy and stick to it. Jumping from investment to investment is only going to slow you down.

5. Play the currency cards
Experts can deliver higher returns, right? Find someone who knows how to trade, and you’ll be set.
WRONG! CODE RED!
If experts could generate such high returns, why would they need your business? Don’t play the currency cards, the expert cards, or fall for any kind of outlandish promises. I’ve yet to see one of these programs work the way it was marketed.

6. Follow your ego
Better investments are available to those with more money, right? If you get the opportunity to participate in something exclusive, it is likely to deliver better returns.
WRONG! CODE RED!
If someone appeals to your ego, walk away. When it comes to investing, the only thing I’ve seen egos do is help someone lose money.

7. Follow their ego
You can trust prestigious people in your community. That’s why you should do business with them, right?
WRONG! CODE RED!
Checks and balances are good in government and in investing. One way to make sure checks and balances are in place is to work with an investment adviser that uses a third party custodian. The third party custodian sends account statements directly to you. The investment adviser can make changes in your account, but the transactions are reported to you directly by the custodian, who isn’t and should not be affiliated with the investment adviser.

8. Leverage up
Borrowing at low interest rates and investing in high growth assets is an excellent way to accumulate wealth, isn’t it?
WRONG! CODE RED!
Think twice before borrowing to invest. It causes ruin more often than it causes riches.

Visit MarketWatch to read Anspach’s full article.

Class of 2017: Financial Advice That will CHANGE YOUR LIFE

The following is a brief excerpt from the commencement address by Dr. Chris Mullis to the graduating class of Providence Day School on May 31, 2013. The full text of Dr. Mullis’ speech, that includes career advice, financial guidance, and a few pearls of wisdom, can be found here.

At my investment advisory firm, we developed complex computer algorithms and use them to manage our clients’ investment portfolios. But the basic steps you need to take to manage your own money well are deceptively simple. First, live within your means and avoid being caught up in rapid lifestyle inflation. You will not live like your parents when you first start out. Second, save and invest your money wisely. Let me elaborate on this point.

Wealth accumulation depends on three factors: how much you save, the rate at which your money grows, and how long you save. That last factor, time, is very, very important. There’s an urban legend that Albert Einstein once said that compounding interest is the most powerful force in the Universe. That quote is likely misattributed but the message is spot on. If you save $5,000 a year for 40 years and earn 8% annually, you will eventually have $1.3M. But if you delay starting for merely 5 years, your results after 35 years will be only $860k. That 5-year delay preserved $25k of short-term capital but ultimately cost you >$400k in the long run. Time is the most powerful lever in the machinery of investing. Nothing else comes close to it.

So what do you need to do? Start saving and investing right out of high school regardless of how hard you think it hurts or how unpleasant the tradeoffs. Even if you set aside only 5% of your paycheck starting out, do it to get into the habit of saving. Delaying getting serious about investing until my 30s was a significant financial mistake on my part. No one ever sat me down and explained how important it is to start investing early. Now that we’ve had this little talk, you’ll never be able to say that no one told you.

Charity Navigator — The Smart Way to Give

Giving to our community to help make this world a better place is very important, but how do you know if you’re contributing to a reputable organization that will make the best use of your donation?

Charity Navigator (charitynavitagor.org) features a rating system of 1 to 4 stars for dozens of charitable organizations. This non-profit provides key guidance on where it’s best to give and how these charities utilize the money that you give them.

A four-star charity has the following characteristics:

it excels at its financial health
spends most of its money on its charitable programs (not administration or fundraising)
completes an annual financial audit
guarantees donors it won’t sell their names to outside parties (i.e., it protects its donors privacy and respects their time)

The best way to donate is to give directly to the charity through their website.

The worst is donating to “cold calls” from a telemarketing firm. The middleman typically keeps 80% to 90% of your contribution and shamefully little actually reaches those in need. Also, avoid appeals delivered via social media because you don’t know who is behind them.

Sources:
Charity Navigator
NPR

Not Googling a New Financial Advisor, Seriously?

It’s hard to believe, but there are people who sign on with a new financial advisor without bothering to do even the bare minimum due diligence. Consider the sad story of fraudster Janamjot Singh Sodhi who ran a Ponzi scheme promising high rates of return in a relatively short period of time.

Sodhi solicited and received funds from investors starting in 2005 and through the fall of 2011 despite the fact that

The New York Stock Exchange permanently debarred him in January 2006, and
The California Department of Corporation ordered Sodhi to cease and desist from dispensing investment advice in California.

Potential investors and soon-to-be victims could have easily learned about these serious redflags had they bothered to simply google “Janamjot Singh Sodhi”. Sodhi did not use an alias so the information and fraud was in plain sight.

“Forget about hiring an attorney or paying for a background check. If you just typed his name into Google you could find out that before he solicited you he was barred by the NYSE and threatened by the state of California. … People spend more time buying a used car for $2,000 than giving $10,000 or $1 million to someone they never met or checked out to invest.” This from Bill Singer, a lawyer who specializes in investor fraud.

Sodhi was sentenced to four years and nine months in jail and required to pay back the $2.4 million he stole from investors.

Source: CNBC

12 3 4 Next ›Last »