Best Practices Archives - Page 3 of 10 - NorthStar Capital Advisors

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

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

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.

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

Index Card of Personal Finance Essentials

Simplicity is a great foundation and powerful foil to unnecessary complexity. University of Chicago professor Harold Pollack champions this approach to personal finance and dashed out this index card to make his point.

We work with our clients to go above and beyond the common sense, but it’s built upon a strong foundation of essentials similar to Dr. Pollack’s.

Class of 2018: 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.

Financial Free Lunch?

Barry Ritholtz lays bare the myth…

Deep down inside, you already know this: There ain’t no such thing as a free lunch, financially or otherwise.

Of so many free lunches, this is the hard truth:

You are not going to win the lottery.
Hot stock tips are worthless (the only exceptions are those especially costly tips that will get you sent to federal prison).
You are not going to buy an iPad from one of those deal sites for $3.
No, you are not likely to buy in early to the next Apple or Netflix, and if you do, you are unlikely to hold it long enough.
No, you are not going to make $10,000 gambling at fantasy sports.
You (or your kid) are not going to be the next Michael Jordan or Adele.
The odds are radically against you finding the mutual fund manager or stock broker who is going to make you fabulously rich.
Indeed, the odds are against you stock picking, market timing or investing in a venture fund, private equity fund or hedge fund that, over the long haul, is going to outperform a simple index fund.

Source: BR

How to Succeed and have a Long and Happy Life

Legendary banker Richard Jenrette passed away last week at the age of 89. In his desk he left a hand-written note listing his 24 rules to succeed in finance and life. The note titled, “What I Learned (How to Succeed and have a Long and Happy Life),” was shared at his memorial service in Charleston, SC:

Stay in the game. That’s often all you need to do – don’t quit. Stick around! Don’t be a quitter!
Don’t burn bridges (behind you)
Remember – Life has no blessing like a good friend!
You can’t get enough of them
Don’t leave old friends behind – you may need them
Try to be nice and say “thank you” a lot!
Stay informed/KEEP LEARNING!
Study — Stay Educated. Do Your Home Work!! Keep learning!
Cultivate friends of all ages – especially younger
Run Scared — over-prepare
Be proud — no Uriah Heep for you! But not conceited. Know your own worth.
Plan ahead but be prepared to allow when opportunity presents itself.
Turn Problems into Opportunities. Very often it can be done. Problems create opportunities for change — people willing to consider change when there are problems.
Present yourself well. Clean, clean-shaven, dress “classically” to age. Beware style, trends. Look for charm. Good grammar. Don’t swear so much — it’s not cute.
But be open to change — don’t be stuck in mud. Be willing to consider what’s new but don’t blindly follow it. USE YOUR HEAD – COMMON SENSE.
Have some fun – but not all the time!
Be on the side of the Angels. Wear the White Hat.
Have a fall-back position. Heir and the spare. Don’t leave all your money in one place.
Learn a foreign language.
Travel a lot — around the world, if possible.
Don’t criticize someone in front of others.
Don’t forget to praise a job well done (but don’t praise a poor job)
I don’t like to lose — but don’t be a poor loser if you do.
It helps to have someone to love who loves you (not just sex).
Keep your standards high in all you do.
Look for the big picture but don’t forget the small details.

This is good advice for anyone!

Source: Bloomberg

Jason Zweig’s Rules for Investing

Jason Zweig is a leading financial journalist and author. You’ll find his stuff in the Wall Street Journal several days a week. Buried within the appendix of his book, Your Money & Your Brain, is this great list of common sense rules that are commonly ignored.

Jason Zweig’s Rules for Investing

1. Take the Global View: Use a spreadsheet to track your total net worth — not day-to-day price fluctuations.

2. Hope for the best, but expect the worst: Brace for disaster via diversification and learning market history. Expect good investments to do poorly from time to time. Don’t allow temporary under-performance or disaster to cause you to panic.

3. Investigate, then invest: Study companies’ financial statement, mutual funds’ prospectus, and advisors’ background. Do your homework!

4. Never say always: Never put more than 10% of your net worth into any one investment.

5. Know what you don’t know: Don’t believe you know everything. Look across different time periods; ask what might make an investment go down.

6. The past is not prologue: Investors buy low sell high! They don’t buy something merely because it is trending higher.

7. Weigh what they say: Ask any forecaster for their complete track record of predictions. Before deploying a strategy, gather objective evidence of its performance.

8. If it sounds too good to be true, it probably is: High Return + Low Risk + Short Time = Fraud.

9. Costs are killers: Trading costs can equal 1%; Mutual fund fees are another 1-2%; If middlemen take 3-5% of your cash, its a huge drag on returns.

10. Eggs go splat: Never put all your eggs in one basket; diversify across U.S., Foreign stocks, bonds and cash. Never fill your 401(k) with employee company stock.

Managing Your Portfolio: One Father’s Advice

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

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