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Managing Your Portfolio: One Father’s Advice

  • April 20, 2018/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Best Practices, Personal Finance

Writing letter to a friend.Arthur Zeikel, president of Merrill Lynch Asset Management, sent his daughter a letter teaching her some investing basics.

Enjoy!

———

Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined financial goal by balancing one’s risk-tolerance level with the desire to enhance capital wealth. Good investment management practices are complex and time consuming, requiring discipline, patience, and consistency of application. Too many investors fail to follow some simple, time-tested tenets that improve the odds of achieving success and, at the same time, reduce the anxiety naturally associated with an uncertain undertaking.

I hope the following advice will help:

A fool and his money are soon parted. Investment capital becomes a perishable commodity if not handled properly. Be serious. Pay attention to your financial affairs. Take an active, intensive interest. If you don’t, why should anyone else?

There is no free lunch. Risk and return are interrelated. Set reasonable objectives using history as a guide. All returns relate to inflation. Better to be safe than sorry. Never up, never in. Most investors underestimate the stress of a high-risk portfolio on the way down.

Don’t put all your eggs in one basket. Diversify. Asset allocation determines the rate of return. Stocks beat bonds over time.

Never overreach for yield. Remember, leverage works both ways. More money has been lost searching for yield than at the point of a gun (Ray DeVoe).

Spend interest, never principal, If at all possible, take out less than comes in. Then a portfolio grows in value and lasts forever. The other way around, it can be diminished quite rapidly.

You cannot eat relative performance. Measure results on a total return, portfolio basis against your own objectives, not someone else’s.

Don’t be afraid to take a loss. Mistakes are part of the game. The cost price of a security is a matter of historical insignificance, of interest only to the IRS. Averaging down, which is different from dollar cost averaging, means the first decision was a mistake. It is a technique used to avoid admitting a mistake or to recover a loss against the odds. When in doubt, get out. The first loss is not only the best, but is also usually the smallest.

Watch out for fads. Hula hoops and bowling alleys (among others) didn’t last. There are no permanent shortages (or oversupplies). Every trend creates its own countervailing force. Expect the unexpected.

Act. Make decisions. No amount of information can remove all uncertainty. Have confidence in your moves. Better to be approximately right than precisely wrong.

Take the long view. Don’t panic under short-term transitory developments. Stick to your plan. Prevent emotion from overtaking reason. Market timing generally doesn’t work. Recognize the rhythm of events.

Remember the value of common sense. No system works all of the time. History is a guide, not a template.

This is all you really need to know.

When this article was originally published in 1995, Arthur Zeikel was president of Merrill Lynch Asset Management in New Jersey.

Source: Forbes


20 People You Don’t Want to Invest With

  • April 6, 2018/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Best Practices, Fiduciary, Scams & Schemes

20Identifying what does NOT work is often a great process for narrowing your list of options of what you should do.  In that spirit, here’s Ben Carlson’s list of 20 people you wouldn’t want to invest with:

1. People that are unwilling or unable to admit their limitations.

2. People that are consumed by ideological or political beliefs when making investment decisions.

3. People that are unwilling to say “I don’t know.”

4. People that don’t learn from their mistakes.

5. People that blame external forces for their failures.

6. People that are unable to effectively communicate their process.

7. People that make guarantees about the markets in the future.

8. People that are more interested in selling you a product than creating a beneficial long-lasting client relationship.

9. People that try to invest in the markets as they “should be” instead of how they actually are.

10. People that are more worried about what others are doing instead of focusing on their own process and goals.

11. People that take the markets personally and let their emotions drive their decisions.

12. People that assume “trust me, I got this” is good enough in terms of explaining their strategy.

13. People that believe in conspiracy theories and think the system is out to get them.

14. People that are more worried about sounding intelligent than actually making money.

15. People that obsess over the market’s short-term movements.

16. People that would rather take you golfing than help you solve your problems.

17. People that make you feel like they’re doing you a favor by letting you invest your money with them.

18. People that try to dazzle you with 200 page pitch books.

19. People that are more worried about gathering future clients than taking care of their current ones.

20. People that tell you what you want to hear instead of what you need to hear.

Source: AWOCS


Your Investing Philosophy in Ten Words or Less

  • March 30, 2018/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Investing 101, Seeking Prudent Advice

no-talkingBrevity is power.  If you truly understand something well, you can explain it in simple terms.  Ten individuals share their investing philosophies in 10 words or less:

  1. Barry Ritholtz, Bloomberg: “Keep it simple, do less, and manage your stupidity.” 
  2. Ben Carlson, author of A Wealth of Common Sense: “Less is more. Process over outcomes. Behavior is the key.”
  3. Harold Pollack, University of Chicago: “Save 15-20%. Low-fee Indexes. Pay off plastic. Maximize 401(k).”
  4. Robert Brokamp, Motley Fool: “Diversification reduces risk, increases predictability, and boosts returns.” 
  5. Michael Batnick, Ritholtz Wealth Management: “Avoiding catastrophic mistakes matters more than constructing the ‘perfect portfolio.'”
  6. Cullen Roche, Pragmatic Capitalism: “Low-fee, tax-efficient, index-based global-macro asset allocation.”
  7. Eddy Elfenbein, blogger, Crossing Wall Street: “Be patient and ignore fads. Focus on value. Never panic.”
  8. Seth Jayson, Motley Fool: “Be safe, keep your costs low, and don’t overthink.”
  9. Josh Brown, CNBC, The Reformed Broker: “Roses are red, violets are blue. I don’t know what will happen and neither do you.”
  10. Morgan Housel: “Worry only when you think you have it figured out.”

 

Source: MF

 


Planting a Tree

  • March 16, 2018/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Best Practices, Retirement

Warren Buffett once said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” It’s planting season and your deadline to act is coming up very soon!

If you have an individual retirement account (IRA) or are considering opening an IRA, 2017 contributions to IRAs can still be made up through April 17, 2018.

[Tax day falls on April 17, 2018. Usually, April 15 is the day taxes and IRA contributions are due. But in 2018, that falls on a Sunday. On Monday, the District of Columbia celebrates Emancipation Day. That affects taxes the same way federal holidays do. Therefore, the tax deadline is pushed out to the following Tuesday, April 17.]

Make it a double? If you really want to make the most of the growth potential that retirement accounts offer, you should consider making a double contribution this year: a last-minute one for the 2017 tax year and an additional one for 2018, which you’ll claim on the tax return you file next year. That strategy can add much more to your retirement nest egg than you’d think.

2017/2018 Annual IRA Contribution Limits*

  • Traditional/IRA Rollover: $5,500 ($6,500 if you are 50 years old or older)
  • Roth IRA: $5,500 ($6,500 if you are 50 years old or older)
  • SIMPLE IRA: $12,500 ($15,500 if you are 50 years old or older)
  • SEP IRA: $54,000 (2017); $55,000 (2018)

*Note: The maximum contribution limit is affected by your taxable compensation for the year.

The savings, tax deferral, and earnings opportunities of an IRA make good financial sense. The sooner you make your contributions, the more your money can grow, and the more “shade” you’ll have to enjoy in the future.

If you have any questions about how to make the most of your IRA savings opportunity, please give us a call at 704-350-5028.


How to be a 401(k) Millionaire

  • March 2, 2018/
  • Posted By : admin/
  • 0 comments /
  • Under : 401(k), Behavior, Best Practices

5thingsFidelity Investments, one of the largest retirement account administrators in the U.S., published a study that analyzed the characteristics of their 401(k) account  holders who have amassed more than $1 million but make less than $150,000.

Here are 5 key lessons:

#1 — Start saving early
Beyond the obvious fact that the longer you save, the more you’ll potentially accumulate, contributing steadily over 30 to 40 years is especially beneficial in a tax-advantaged workplace retirement savings plan.

#2 — Contribute a minimum of 10% to 15%
Contributing 10% to 15% might sound like a lot, but that amount is meant to include contributions from your employer—such as your company match or profit sharing.

#3 — Meet your employer match
You’ve probably heard it many times, but it bears repeating that failing to contribute up to the full amount of a company match is like turning down “free” money.

#4 — Consider mutual funds that invest in stocks
Historical data suggests that a diversified portfolio of stocks can deliver higher returns than bonds or other fixed income investments over time.

#5 — Don’t cash out when changing jobs
Taking a distribution from your 401(k) account when you change jobs is hardly ever a good idea. It could trigger significant tax liability and early withdrawal penalties. When you take money out of your 401(k), you lose the opportunity for it to grow.

Source: Fidelity


The Biggest Threat To Your Portfolio

  • February 23, 2018/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior

playbookHow do you react to when the stock market is down or it gets bumpy?  Do any of these sound familiar?

  • 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

Every one of these things is extremely detrimental to our financial health.

Nothing kills the long-term returns of a portfolio like throwing away the playbook in the heat of a market crisis.

Source: TRB


You Are Your #1 Threat

  • December 21, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior

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

 


A to Z of Behavioral Bias

  • November 2, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior

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:

A is for Anchoring
B is for Base Rate Neglect
C is for Confirmation Bias
D is for Disposition Effect
E is for Ego Depletion
F is for Framing
G is for Gambler’s Fallacy
H is for Hindsight Bias
I is for Illusion of Control
J is for January Effect
K is for Kruger-Dunning Effect
L is for Loss Aversion
M is for Mental Accounting
N is for Negativity Bias
O is for Overconfidence
P is for Priming
Q is for Quantification Fallacy
R is for Representative Heuristic
S is for Self-Enhancing Transmission Bias
T is for Texas Sharpshooter Effect
U is for Uncertainty
V is for Von Restorff Effect
W is for Winner’s Curse
X is for Xenophobia
Y is for Yawn Effect
Z is for Zero-Risk Bias

 

Source:
The A to Z of Behavioral Bias (Psy-Fi Blog)

 


Top 10 Mistakes Made with Beneficiary Designations

  • October 26, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Best Practices, Retirement

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


Chasing Past Performance is Expensive

  • October 5, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Best Practices, Mutual Funds, Performance, Seeking Prudent Advice

A rigorous study from Vanguard  demonstrates that chasing the hot mutual fund is an inferior investing strategy compared to good, old-fashioned buy and hold.

Vanguard analyzed a decade of data ending December 31, 2013 across nine asset classes.  In every case the investor would have been significantly better off just sticking with the index.  On average the indexes generated 50% higher returns than the performance-chasing strategy!

Buy and hold may not be perfect, but it can be a lot better than flitting from mutual fund to mutual fund.

 


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