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Lessons of History

History provides a huge wealth of wisdom for helping us grow and protect our money. Trader-turned-educator-turned-financial planner Tony Isola provides an awesome analysis of the application of history lessons:

How can investors act as applied historians and use this skill set to create wealth?

There are several minefields that could easily be avoided with some knowledge of the past:

Most market corrections don’t turn into bear markets.

Using leverage to boost investment returns often ends badly.

The president has very little control over the global economy.

Buying new financial products at market peaks is a poor idea.

Bull markets last much longer than bear markets.

Stocks are six times more likely to be up 20% than down the same amount.

Uncertainty is always present and it is not a wise choice to use it as an excuse not to invest.

Stocks will do the best job of protecting future purchasing power over long periods of time.

Investing in the fastest growing world economies will not guarantee higher investment returns.

Most recessions haven’t turned into depressions.

Investment costs, savings rates and time in the market are the biggest components in generating healthy investment returns.

Factor investing won’t work for most people because of their cognitive deficiencies.

There is a large behavior gap between total mutual fund returns and what investors actually receive.

The great majority of mutual fund managers will underperform low-cost index funds because of costs.

Diversification works, just not every year.

Stocks can stay massively over- and undervalued for very long periods of time.

Real returns after inflation are the only returns that matter.

Stocks are in a bull market 85% of the time.

All of the following can be proven with applied historical analysis. This is a much better strategy than relying on your gut, or believing a compelling story, when allocating money.

Source: Teachable Moment

Financial Readiness: As Critical as Fully Charged Batteries

In light of the threat of Hurricane Florence to the Southeast of the U.S. this week, we want to spotlight the following important FTC Consumer Alert:

Home is where most people feel safe and comfortable. But sometimes — say, when a hurricane, flood, tornado, wildfire, or other disaster strikes — it’s safest to pack up and go to another location.

The Federal Trade Commission (FTC), the nation’s consumer protection agency, says that when it comes to preparing for situations like weather emergencies, financial readiness is as important as a flashlight with fully charged batteries. Leaving your home can be stressful, but knowing that your financial documents are up-to-date, in one place, and portable can make a big difference at a tense time.

Here are some tips from the FTC for financial readiness in case of an emergency:

Conduct a household inventory. Make a list of your possessions and document it with photos or a video. This could help if you are filing insurance claims. Keep one copy of your inventory in your home on a shelf in a lockable, fireproof file box; keep another in a safe deposit box or another secure location.
Buy a lockable, fireproof file box. Place important documents in the box; keep the box in a secure, accessible location on a shelf in your home so that you can “grab it and go” if the need arises. Among the contents:
- your household inventory
- a list of emergency contacts, including family members who live outside your area
- copies of current prescriptions
- health insurance cards or information
- policy numbers for auto, flood, renter’s, or homeowner’s insurance, and a list of telephone numbers of your insurance companies
- copies of other important financial and family records — or notes about where they are — including deeds, titles, wills, birth and marriage certificates, passports, and relevant employee benefit and retirement documents. Except for wills, keep originals in a safe deposit box or some other location. If you have a will, ask your attorney to keep the
  original document.
- a list of phone numbers or email addresses of your creditors, financial institutions, landlords, and utility companies (sewer, water, gas, electric, telephone, cable)
- a list of bank, loan, credit card, mortgage, lease, debit and ATM, and investment account numbers
- Social Security cards
- backups of financial data you keep on your computer
- an extra set of keys for your house and car
- the key to your safe deposit box
- a small amount of cash or traveler’s checks. ATMs or financial institutions may be closed.
Consider renting a safe deposit box for storage of important documents.Original documents to store in a safe deposit box might include:
- deeds, titles, and other ownership records for your home, autos, RVs, or boats
- credit, lease, and other financial and payment agreements
- birth certificates, naturalization papers, and Social Security cards
- marriage license/divorce papers and child custody papers
- passports and military papers (if you need these regularly, you could place the originals in your fireproof box and a copy in your safe deposit box)
- appraisals of expensive jewelry and heirlooms
- certificates for stocks, bonds, and other investments and retirement accounts
- trust agreements
- living wills, powers of attorney, and health care powers of attorney
- insurance policies
- home improvement records
- household inventory documentation
- a copy of your will
Choose an out-of-town contact. Ask an out-of-town friend or relative to be the point of contact for your family, and make sure everyone in your family has the information. After some emergencies, it can be easier to make a long distance call than a local one.
Update all your information. Review the contents of your household inventory, your fireproof box, safe deposit box, and the information for your out-of-town contact at least once a year.

Source: Federal Trade Commission

Happy Money: The Science of Smarter Spending

If you think money can’t buy happiness, you’re not spending it right. Two rising stars in behavioral science explain how money can buy happiness—if you follow five core principles of smarter spending:

1. Buy Experiences
2. Make it a Treat
3. Buy Time
4. Pay Now, Consume Later
5. Invest in Others

“Buy Experiences” essentially means to spend money on memorable experiences instead of expensive toys, because you are able to relate to those experiences on an emotional level for much longer than with objects.

“Make It A Treat” focuses on the concept of over-consumption creating a weakening of the enjoyment factor. If you have something every day, even if it’s something you love, it becomes routine rather than fully enjoyable.

“Buy Time”: The idea that you make life decisions that allow you to have more free time. Suggestions include outsourcing unnecessary tasks.

“Pay Now, Consume Later” is a fascinating concept. In society today, we’re more apt to do the reverse, thanks to credit cards. Essentially, it’s sort of like half the fun of a road trip is getting there. When consummation is delayed, from something as simple as eating candy to attending an event, the enjoyment is increased. When something’s already paid for, if enough time passes, it seems “free” when it’s actually consumed.

“Invest In Others” hits on how donating or spending money on others feels better than buying things for yourself.

Happy Money (by Elizabeth Dunn and Michael Norton) offers a tour of new research on the science of spending. Most people recognize that they need professional advice on how to earn, save, and invest their money. When it comes to spending that money, most people just follow their intuitions. But scientific research shows that those intuitions are often wrong.

Happy Money explains why you can get more happiness for your money by following five principles, from choosing experiences over stuff to spending money on others. And the five principles can be used not only by individuals, but by companies seeking to create happier employees and provide “happier products” to their customers.

By the end of this book, readers will ask themselves one simple question whenever they reach for their wallets: Am I getting the biggest happiness bang for my buck?

What You Should Focus On

We all want to live a great life. The path to achieve that life relies, in part, on knowing what to focus on and what to ignore. Focusing on the things you can’t control is a waste: a waste of time, energy, and often, money. Here’s a list of things that matter, things you can control, and the things you should focus on.

Things that matter:

Health
Human progress
Long-term market returns

Things that you can control:

How you treat people
Feeling good about yourself
Making smart financial decisions

What you should focus on:

Living a happy, productive life
Surrounding yourself with good people
Not letting a long-term plan be derailed by the current market environment

Source: Carl Richards, Michael Batick

Two Deadly Assumptions

We live in a world that is replete with financial scams. Here are two classic and deadly assumptions that can rapidly separate you from your money.

Deadly Assumption #1 — The guy belongs to my church / temple / country club / ethnic group, of course he’ll look out for me.

Maybe he will, but is affinity a good enough reason to trust a financial advisor? Quarterback Mark Sanchez found out the hard way that this sort of thinking can easily lead one into the arms of a predator…

From ThinkAdvisor:

Former New York Jets quarterback Mark Sanchez and other professional athletes said they were cheated out of millions of dollars in a Ponzi-like scheme orchestrated by an investment advisor who appealed to their Christian faith.

Sanchez and Major League Baseball pitchers Jake Peavy and Roy Oswalt were defrauded out of about $30 million, according to a recently unsealed U.S. Securities and Exchange Commission lawsuit in Dallas federal court. The athletes all used the same broker, Ash Narayan, formerly of RGT Capital Management. The advisor gained their trust through religion and their interest in charitable works, the SEC said.

Deadly Assumption #2 — This advisor works for a big, prestigious firm and the product is very sophisticated, I deserve this special access.

Structured products are a minefield for the wirehouse wealth management client because the firms’ “producers” are highly incentivized to sell them. Anything being pushed on the brokerage sales force by the home office is, by definition, perilous for the client. Because if it were so good, then no commission would be necessary – the product would be found by savvy investors and there would be no need for extra compensation. But structured products are unnecessary for most investors, although profitable for the firms that create them, hence the degree to which they’re sold to people.

As proof of this, you almost never hear of a fiduciary advisor recommending this stuff. It’s not even in the lexicon for a client-centric practice or an unconflicted advisor.

Source: TRB

The Best Advisors Will Tell You “NO”

As a fiduciary we’re obligated to put our clients’ interests first. This essential mandate can on occasion run into direct conflict with what a client wants. There are circumstances where an advisor knows that what the client is requesting defies common sense and is at odds with his or her long-term interest.

What kind of things are we talking about? Here’s a short list courtesy Barry Ritholtz:

• Taking on more risk than is prudent.

• Buying the hot new thing.

• Participating in an expensive, underperforming private investment (e.g., hedge funds, venture capital).

• Using excess leverage.

• Following the advice of pundits or talking heads.

• Overtrading.

• Pursuing the latest media fixation.

• Speculating in commodities.

• Allowing emotions to steer investments.

• Buying low-quality, high-yield “junk” fixed income paper.

• Buying non-liquid investments (private equity, gated private investments).

• Market timing.

• Buying IPOs.

• Cherry-picking portfolio allocations.

Our gently communicated but firm response to all of these is “NO.” All the academic research in the world suggests these are a bad bet. As Barry says, “if you want to make an expensive gamble, enjoy a lovely vacation to Monte Carlo, but please leave your retirement plans out of it.”

That’s our stance on this issue and we take it from a position of deep care and protection for our clients. But what’s your opinion? Should advisors do what a client wants, even when the advisor knows it is not in the client’s best interests?

P.S. In case you’re wondering…here’s what a big “YES” is in our book:
We invest through a broadly diversified set of indexes via a robust asset allocation model. It is global, inexpensive and primarily passive. It is statistically what is most likely to generate the highest returns for the least amount of risk over the long-term.

10 Signs You Own the Right Portfolio

The following elegant observation comes courtesy of Jonathan Clements.

You’re so well diversified that you always own at least one disappointing investment.
Your livelihood isn’t riding on both your paycheck and your employer’s stock.
If the stock market’s performance over the next five years was miserable, you wouldn’t be.
You can remember the last time you rebalanced.
You have no clue how your investments will perform, but a great handle on how much they’ll cost you.
You don’t have any hot stocks to boast about.
For every dollar you’ve salted away, you have an eventual use in mind—and the dollars are invested accordingly.
Jim Cramer? Who’s that?
A year from now, you plan to own the same investments.
You never say to yourself, “Wow, I didn’t expect that.”

Source: JC

10 Cognitive Biases That Affect Your Investment & Everyday Decisions

Research suggests that we make up to 35,000 decisions every single day. Emotions, experiences, and environment can strongly influence our decision making process. Enjoy the cartoons below and learn more about common cognitive biases that impact your everyday life and your investing behavior.

Bandwagon Effect: Believing or doing something because people around you believe or do it

Availability Heuristic: Overestimating the importance of information that is easiest to recall

Dunning-Kruger Effect: Unskilled individuals overestimating their  abilities and experts underestimating theirs

Framing Effect: Drawing different conclusions from the  same information presented differently

Confirmation Bias: Seeking and prioritizing information  that confirms your existing beliefs

Curse of Knowledge: Struggling to see a problem from the perspective of someone with less knowledge than you

Reactance: The desire to do the opposite of what is requested or  advised, due to a perceived threat to freedom of choice

The Sunk Cost Fallacy: Refusing to abandon something unrewarding because you’ve already invested in it

Hindsight Bias: Believing that you could have predicted an event after it has occurred

Anchoring Effect: Excessively focusing on the first piece of  information you receive when making a decision

Source: Towergate

Advice for New (and soon-to-be) Retirees

A few years ago the consulting firm PricewaterhouseCoopers conducted a survey to reveal what new retirees need to understand to make their retirement more meaningful and to ease this major life transition. The following are powerful insights for those moving toward retirement from those just ahead of you.

Initial Thoughts
Most of the new retirees strongly recommended keeping active, whether in volunteer work, hobbies, travel, reading, or new business ventures. Words of wisdom included:

Use your talents and realize this is a “new beginning” and not an end.
Set goals two to three years in advance. Good planning is helpful … focus on financial and emotional issues.
You should develop a routine (daily) and not just allow things to happen or not happen—you really are on your own—work, family, etc.
Learn to relax without feeling guilty about it! Stay busy, mentally and physically. Remember, it’s never too late to learn new things and improve old things.
Make a priority list of the things you’ve always wanted to do but didn’t have the time to do. Start doing the highest-priority items immediately.
Consider retirement a process rather than an event.
Don’t worry about how you will fill your day. If you are reasonably active physically, have outside interests and are willing to be involved in your community affairs … you will wonder where the time flies. But nail down the finances.

Your Significant Other
A frequently overlooked but important aspect of retirement is the new or different relationship with one’s spouse. A new retiree may need to be careful not to intrude or tread on a spouse’s independent lifestyle. Spouses offered the following comments:

Retirement is great but not for lunch.
Remember we have lives that are already full, and don’t expect to be waited on all the time.
Spouses have their own life in community activities. Make sure you don’t make them feel guilty when they continue their own lives.
Be prepared for a lot of togetherness. [One wife described it as half the money, twice the husband.]
Continue to pursue and respect other interests; take care of your health.
Sit down and review life’s priorities. Develop a jointly agreed-upon plan, together with benchmarks concerning the high-priority items. Allow plenty of time to relax together.

Expectations
Most retirees were surprised at how easy it was to fall into a new routine. Common sentiments included:

Instead of being bored and frustrated I found a new sense of freedom. For the first time in years I was my own boss and totally accountable for my state of mind.
The first six months [were] lonely and depressing that your successors never ask for your advice … followed by bliss!
How hard I thought it would be and how easy it really is.
[I was surprised that] my handicap did not drop by 10 strokes.
[You will be surprised by] how much you will miss the relationships and connections that you leave behind at work.

What They Would Do Differently
Lastly, new retirees were asked what they would have done differently before retiring. Most respondents said they would begin retirement planning, including financial and tax planning, at an earlier stage. Here are some insightful comments on this topic:

Put as much of the financial/administrative side of life on automatic pilot as soon as possible. Simplify and try to get out of the middle of all the minutiae.
We traveled extensively the first year. I would spread it out, but highly recommend travel.
Develop a greater understanding of the income tax considerations in the year of retirement.
I would have said appropriate farewells (good-byes) to all colleagues.
Would have done advance planning (for post-retirement activities) one to two years before actually retiring.

Source: PwC

America — How are you saving?

Vanguard just released their annual report on the state of retirement savings in America: How America Saves 2018

There’s a ton of great info in the report, but we want to highlight some good news…and some bad news.

First, let’s start with the positives:

Participation rates: More people are enrolled in defined-contribution plans;

Portfolio composition: This has improved, as plans have moved away from random fund selection and toward either target-date funds or balanced funds;

Automatic enrollment: Up 300 percent since 2003;

Automatic annual deferral-rate increases: Two-thirds of participants do this;

Account balances: Most have increased substantially.

And, now the bad news:

Total savings: It’s still not enough, and it suggests a large swath of the public either doesn’t save enough or can’t save. You can blame some of it on lack of wage gains during the past few decades. The huge increase in the cost of health care, housing and education certainly doesn’t help. Nor does our profligate, consumption-driven lifestyle. But no matter the reason, the conclusion is inescapable: many Americans are not financially prepared to retire. Perhaps that’s why so many of them are working well into their 80s.

More nudges are needed: Savings for many people are not keeping pace with their pay increases. There is a tendency to set and forget 401(k) contributions, and not revisit the issue ever again. The solution is to have automatic increases for retirement-savings contributions as pay increases.

Target-date funds: These funds automatically adjust the balance of stocks and bonds over time, shifting more heavily toward bonds as the participant gets closer to retirement. The problem is that given increasing modern lifespans, these funds may end up being too conservative in the final decade or two of work for many participants.

To have and to have not: To paraphrase Hemingway, the rich are different: they not only have more money, they also have more retirement savings. The advantages of being wealthy are manifest versus middle- and lower-income savers. Although most of the investment industry targets the wealthy, the underfunded retirement plans of the rest of America continue to be a serious issue.

Spend some time reading through Vanguard’s report to not only help you get the best from your retirement-savings plan, but also help America do better with its future retirement.

Source: Vanguard

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