Behind the Curtain: Pro vs. Amateur Advisors

For most people, it is very difficult to discern a truly good advisor from a lackluster hack — a professional versus an amateur.  To help you recognize the difference, we want to highlight a deeply insightful article penned by Josh Brown, aka The Reformed Broker.  Here is Josh’s wisdom reformatted and mildly edited for easy consumption:

Professionals take this opportunity to manage client expectations, pointing out that 2017’s returns were above average (by about triple) and unlikely to represent an average annual return going forward. Amateurs use the returns of last year to raise more money. “I made you 18% in 2017, let’s talk about the assets you’re still holding away from me. And maybe some referrals.”
Professionals maintain allocations through the start of January, with perhaps some rebalancing. Amateurs turn over positions, incurring commissions and possibly taxes, and start to talk about the “playbook” for the New Year.
Professionals point to the holdings that didn’t keep up with US and global stocks as a teachable moment and a reminder that for diversification to work, not everything can be going up at the same time. Amateurs look for replacements for the holdings that are “disappointing” the clients, switch out managers based on last year’s performance and cut down exposure to asset classes that aren’t “working.”
Professionals review client financial plans and have uncomfortable but essential conversations with households that are falling short of their stated goals. Amateurs traffic in “Five Hot Stocks for 2018” and send out three-year return charts for funds they want to add to portfolios.
Professionals talk to clients who are far outpacing their goals about enjoying life more now. Amateurs talk to clients about adding new hedging strategies and more alternatives.
Professionals admit they don’t know what the new year will bring, and focus instead on the durability of what they’re doing. Amateurs have year-end price targets and can’t-miss sector bets.
Professionals will keep clients focused on the important stuff and get the job done in 2018, come what may. Amateurs will direct client attention to all the wrong metrics and inevitably fall short, which means more prospecting come 2019 to replace disenchanted and under-served clients.

Donate Wisely

Whether you’re contemplating a last-minute donation for 2017 or planning a major move to define 2018, we advise you to donate wisely.  The awesome decision tree below from Bloomberg assembles the advice from philanthropic advisers, nonprofits, and volunteer experts to help narrow down the best method of giving for you.  Download a PDF if you’re having trouble reading it below.

You Are Your #1 Threat

disciplineThe chart above from Dimensional Fund Advisors is an excellent demonstration of the resilience of the market.  Each event marked on the timeline was accompanied by thousands of articles and TV reports discussing at great length how bad things were going to get and what you supposedly needed to do.  Despite all that noise, the market just keeps powering up over the long term.

Individual investors (that’s you!) constitute the number one threat to their own portfolio.  How’s that?  In the face of market stress and volatility, they usual reaction is some combination of the following :

  • Fleeing into the arms of a charlatan who purports to having predicted it
  • Buying into Black Swan funds and protective products that cap all future upside and cost a fortune
  • Obsessing over hedges after the fact
  • Selling out with big (permanent) losses and sitting in cash
  • Freezing 401(k) contributions or having retirement cash allocated to money market funds
  • Excessive trading
  • Planting a flag and being unwilling to publicly change our minds in the face of new evidence
  • Throwing money at bizarre alternatives like coins, bars, bricks and bullion which have no proven ability to fund a retirement
  • Conflating political views with investment expectations

According to adivsor Josh Brown, “every one of these things is extremely detrimental to our financial health. In some cases, the damage could be irreversible. Nothing kills the long-term returns of a portfolio like throwing away the playbook in the heat of a market crisis.”

Source: TRB

 

Simple, Bedrock Rules on Personal Finance

rulesWhen financial columnist Brett Arends penned his final piece for the Wall Street Journal, it was absolutely foundational!

Ignore economic and financial forecasts. Their purpose is to keep forecasters employed. Most professional economists were blindsided in 2008 by the biggest financial collapse in 70 years—and by the stock market’s recovery.

Ignore “expert” stock picks. The stocks that Wall Street experts like most generally fare no better than those they like least—or stocks picked at random.

Keep it simple. Complicated financial strategies and investments are mostly designed to enrich managers and salesmen.

Buy individual stocks only as a gamble. Never buy fashionable investments.

Put most of your long-term portfolio into equities. While equities are volatile, they generally produce the best long-term returns—typically about 4% to 5% a year above inflation. But remember to hang on when they plummet.

Invest globally, not just in the U.S. Foreign stock markets, in the aggregate, are no riskier than U.S. markets and offer terrific diversification.

Buy Treasurys, too: In addition to stocks, own some long-term Treasury bonds and some Treasury inflation-protected securities. These are likely to hold their value, or even go up, when stocks crash.

Save early, save often. Time and patience are the investor’s best friends.

Use those free shelters. Contribute as much as possible to your company’s 401(k) plan or equivalent (such as 403(b) or 457), and at least enough to get the company match. If you can, contribute to individual retirement accounts for yourself, and a nonworking spouse, as well.

Plan for a long life. A third of your adult life could come after you’re 65. Try to pay off your mortgage, and save at least 10 times your annual salary, by the time you retire. Delay taking Social Security for as long as you can up to the age of 70, to maximize each monthly check.

Beware of buying your employer’s stock. Your job there is probably financial exposure enough.

Protect your nest egg. Don’t drain your retirement savings to pay for your child’s college education. Likewise, don’t empty your 401(k) or IRAs to start a business. You will be taxed and penalized on the withdrawals even if you lose the money.

Teach your children about money. Teach them early and often. No one else will, and they will have to make their own way.

Stock Market’s Merry Performance Over Time

Stacking up the stock market’s annual performance going back nearly 200 years looks rather merry and bright.  Our graphic above updates the seasonal interpretation of the stock market’s history first pointed out by Carter Worth.

Each block of the Christmas tree represents the annual total return of the U.S. stock market.  The S&P 500 is used from the index’s inception in 1928 through the present.  The Dow Jones Industrial Average is used 1896 through 1927.  Finally, aggregate data published by Goetzmann, Ibbotson and Peng covers 1825 through 1895.

Since 1825, the stock market has produced an annual gain 71% of the time, or 137 times, while losing ground just 55 times. A standard distribution chart, which happens to take the shape of a Christmas tree, shows how for most years, the market moves within a range of zero to up 10%.

With only 15 trading days left in 2017, the S&P 500 is up nearly 20% year to date.  So it looks like we’ll be adding a new branch to the right side of our tree!

Happy Holidays from our family to yours.

Best Illustration of Bull & Bear Markets

Here’s the best illustration we’ve ever seen of history’s bull and bear markets.  This chart shows the performance of the S&P 500 Index from 1926 through September 2017. Blue denotes past bull markets’ durations and returns (total and annualized).  Orange denotes the bear markets.  The pink vertical bars delineate recessions.

At a 100,000-ft level, this chart underscores the benefits of investing for the long-term. Two specific takeaways:

  1. There’s a lot more blue than orange meaning stocks tend to spend more time going up in value than going down.
  2. The current bull market might feel long, but by historical standards, the length and strength of this bull is not exceptional

Source: First Trust

Lowest Thanksgiving Dinner Cost in Five Years

This year’s turkey dinner will cost you 75 cents less or -1.5% compared to last year. The average cost of a classic Thanksgiving Dinner for 10 people is $49.12 according to the American Farm Bureau Federation’s survey. The mild decrease in the turkey index is somewhat at odds with the government’s Consumer Price Index for food eaten at home which increased 0.5% over the past year.

The bird soaks up the lion’s share of the budget at 46% of the meal’s cost. The 16-pound turkey came in at $22.38 this year or $1.40 per pound. The price of most ingredients was quite stable compared to last year. Biggest losers: turkey down $0.36 (-1.6%) and rolls down $0.20 (-8.1%).  Biggest gainers: cube stuffing up $0.14 (5.2%), pumpkin pie mix up $0.08 (2.6%), and whipping cream up $0.08 (4.0%).

This is the second consecutive year that the average cost of a turkey dinner decreased and it’s the lowest cost in five years.

Happy Thanksgiving!


Source: AFBF

Investing Priorities

keep-calm-and-set-your-prioritiesThe general rule of thumb for investing priorities is:

  1. Invest in your company 401(k) plan up to the match
  2. Pay off short-term, non-tax-deductible debt (e.g., credit card, car loan)
  3. Establish an emergency fund; 6-12 months of living expenses is a good guidepost
  4. Put the maximum allowable amount in a Roth IRA (if eligible)
  5. Put the maximum allowable amount in your company 401(k)
  6. Invest the remainder in taxable accounts
  7. Pay down tax-deductible debt (e.g., home mortgage)

 

Source: Vanguard

A to Z of Behavioral Bias

guessesAn A to Z list of common behavioral biases with brief descriptions, examples, causes, possible mitigations and suggested further reading courtesy the Psy-Fi Blog. Each of the links below takes you to the relevant post at Psy-Fi, so have fun and think about how they apply to your own investing habits:

 

Source:

 

Top 10 Mistakes Made with Beneficiary Designations

beneficiary form#1 — Not Naming a Beneficiary
By not naming a beneficiary you have most likely guaranteed that the asset will go through probate upon your death.

#2 — Not Designating Contingent Beneficiaries
If your primary beneficiary predeceases or dies at the same time as you, you’re subject to the same consequences as #1

#3 — Failing to Keep Beneficiary Designations Up-to-Date
If you get divorced, it’s essential you immediately review and update all beneficiary designations.

#4 — Naming Minors as Direct Beneficiaries
Trusts are often established to delay the time a survivor receives an asset until they are old enough to make good money decisions.  However, if you designate a minor child as an account’s beneficiary and there’s also a testamentary trust, the designation trumps the trust and the child will receive the assets immediately.

#5 — Naming Special Needs Individuals as Direct Beneficiaries
Naming a “special needs” individual as the direct beneficiary could unintentionally disqualify that individual from receiving his or her valuable governmental benefits.

#6 — Naming Financially Irresponsible Beneficiaries
Often it’s better to create a lifetime “spendthrift trust” to hold the inheritance for the benefit of the individual for his or her lifetime while protecting the assets from creditors.

#7 — Naming Direct Beneficiaries on All Assets Other than Real Estate
Very often real estate will need to go through probate even if there’s a will in place.  This process can take a year or longer during which the estate is responsible for paying for maintenance, taxes, etc.  It’s generally advisable to allow your cash accounts and/or life insurance proceeds to go through probate so the estate will have sufficient funds to support the real estate during probate.

#8 — Naming Multiple Beneficiaries on a Transfer on Death Deed
Avoid doing because all beneficiaries must agree on the realtor, sale price, and maintenance costs until the property is sold.  Getting that type of agreement is very difficult.

#9 — Naming a Child as Co-Owner of a Deposit or Investment Account
Aging parents will sometimes add a trusted adult child as the co-owner of his or her bank account.  Avoid this because it can create complicated issues around gifting, creditor issues,  and final expenses.

#10 — Naming One Child as the Sole Beneficiary of a Life Insurance Policy or Deposit Account
A parent with multiple adult children should avoid doing this because it can create a situation very similar to #9.

Source: AAII

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