Investing 101 - Charlotte Financial Planning & Advice

3 cognitive biases that cheat most investors (and how to beat them)

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” — Benjamin Graham

If you’re looking at headlines or feeling the pressure of the downturn, it’s easy to think you’re not in control.

And it’s true—you have limited control over external circumstances (like the pandemic). But you have complete control over yourself and your behavior.

Times like these are when it’s most important to dig deep, root out bad habits, and come out on the other side mentally stronger than before.

We made a short video showing you exactly how you can overcome the hardwired biases that can cheat you, including the huge mental trap that even Warren Buffett has to fight.

(You’ll have to watch the video to find out what it is!)

You can watch it here.

WATCH NOW

So what if the market does go down again?

Over the past several weeks, the stock market has experienced both the fastest crash and the most robust bounce ever seen. Right now, while things are relatively calm, I want to underscore the following points that are profoundly important to your investing success.

When stock prices are going down, the enduring value of the underlying companies is going up. A market decline is therefore always to be experienced as a sale, and the very nature of sales is that they are temporary. The lower prices go, the more value is to be had at those prices. You instinctively know this about virtually everything else in your economic life. If you can’t apply that same correct instinct to the stocks of America’s and the world’s great companies, it’s not probable that you can ever become a successful investor.
Staying fully invested during temporary market declines is the only sure way to capture the entirety of the market’s permanent advance. It is not possible consistently to sell out of falling markets, and later buy back into already advancing markets, thereby capturing the long-term returns of equities. Those returns are your reward for staying calm.
You never try to make long-term investment strategy out of short- to intermediate-term disruptions. We have a plan for getting you to the goal you need to reach, in order to secure a successful retirement. To achieve that goal, you need to invest consistently. And to stay invested, not just when the sun is shining.
Perhaps more today than ever, bonds, CDs and the like are not an alternative. At the moment, the cash dividend of the S&P 500 is close to three times the yield on the 10-year Treasury note. Even if dividends were to halve in the current crisis, and interest rates stayed where they are, stocks would still yield more than the 10-year Treasury. I’ve never seen that before, and when this crisis passes, I don’t ever expect to see it again. Bonds are simply not, in my judgment, a rational alternative to stocks for the long-term investor.
How low the stock market ultimately goes in response to the economy’s cardiac arrest is both unknowable and — to the long-term, goal-focused, planning-driven investor — irrelevant. (Unless, of course, he/she is still in accumulation mode, in which case a renewed decline would be a genuine godsend.)

I hope sharing our enduring principles helps both steady you in the present and focuses you on your long-term success. As always, if you have any questions don’t hesitate to give me a call.

When the world goes as haywire as it’s done lately, you may have occasion to question your investment strategy — and even your overall financial planning. If so, you may wish you could get an objective second opinion you can trust, from a friend. I hope you’ll know me to be that friend.

Wishing great success,
Chris

Chris Mullis, Ph.D.
Founding Partner

Financial Planning.
Wealth Management.
Since 2006

AskNorthStar.com
(704) 350-5028

V, W, L, or Swoosh? (no, it’s not a meme)

Everyone you and I have ever met has been affected by the coronavirus.

My childhood friends in Charlotte, strongman Kristofer Hivju, and the folks I met in Lesotho, Africa.

And it’s Day #18 in the hospital for my father-in-law fighting the disease. He’s now in a federal field hospital and hopefully coming home very soon.

It’s likely that every human on the planet has been affected by COVID-19.

I’m not sure that this kind of event has ever happened before in human history.

Though it’s sad that it took a disease to bring us together, it reminds me of how deeply connected we all are and how much our daily existence depends not just on our community, but on people we’ll never meet in far-flung corners of the world.

That very interconnectedness is what’s making this pandemic so dangerous to us and the economy.

Economists believe we entered a recession in March, and the latest data continues to show the economic damage:¹

Retail sales dropped 8.7%, the biggest drop since the government started tracking the data in 1992.²
Spending on travel, restaurants, and shopping overall is way down (though grocery sales and delivery are up).³
The number of new unemployment claims skyrocketed to 22 million, erasing the job gains since June 2009.⁴

Despite the ugly economic data, stocks just wrapped their best performance in decades.⁵ What gives?

“Irrational exuberance,” to quote Alan Greenspan. Stocks are famous for rallying in the face of bad numbers, and it’s clear that investors are expecting government stimulus to lead to a quick recovery as states emerge from lockdown and business picks up.

Are bullish investors right? Will the economy recover quickly?

It’s impossible to say right now. How long the downturn lasts and how soon the economy recovers depend on answers to some critical questions:

When will widespread testing, tracing, and treatment allow lockdowns to ease? Reopening America too soon and igniting a fresh wave of the pandemic will prolong the pain.
Will employers maintain relationships with their laid-off staff? You can’t just flip a switch and reopen a closed business without skilled workers. The longer the shutdowns continue, the harder it will be for companies to staff up.
How soon will consumer spending return? “Deferred” demand that’s pent up and just waiting for restrictions to ease could cause spending to surge; “destroyed” demand that’s not coming back could cause spending to remain depressed for longer. Here’s a simple example: deferred demand would be rescheduling a canceled vacation. Destroyed demand would be deciding to skip it entirely.

V, W, L, or Swoosh?

The “shape” of the eventual recovery is being hotly debated because it gives us insight into what would need to happen (and how long it could take).⁶

“V-Shaped” Recovery: A short, sharp decline and then a quick rebound is the best-case scenario. In this case, lockdowns lift soon and spending surges, driven by pent-up demand and government stimulus.

“W-Shaped” Recovery: A “double-dip recession” is a worst-case scenario that could happen if the easing of restrictions leads to another wave of infections and lockdowns, or the economic damage causes a second downturn.

“L-Shaped” Recovery: An L represents a sudden plunge and fitful recovery if lockdowns continue through the year and growth is slow to return.

“Swoosh-Shaped” Recovery: A tick or swoosh is a sharp downturn followed by a gradual recovery as lockdowns are eased cautiously across the country.

We can’t predict what the road ahead will hold, but I think it’ll look less like a return to “normal” and more like a way to live with the way COVID-19 has overturned ordinary life.

What do you think? Will your life be back to normal this summer? Will we be riding waves in the warm Atlantic Ocean and romping down the Appalachian Trail relatively soon?

Be well,
Chris

Chris Mullis, Ph.D.
Founding Partner
NorthStar Capital Advisors

Financial Planning.
Wealth Management.
Since 2006

AskNorthStar.com
(704) 350-5028

P.S. Now that stimulus money is going out, the scam artists are slithering out to get their piece. Here’s what you need to know:

Scammers are impersonating the IRS and contacting folks by mail, email, phone, and text to ask for personal information.
The IRS is not contacting taxpayers about stimulus checks. If you receive a call from someone asking for information, hang up. Do not click links in emails or text messages purporting to be from the IRS or the Treasury Department. If someone asks you to pay an upfront fee or to confirm your bank details to receive stimulus money, it’s definitely a scam. Contact your bank or our office at (704) 350-5028 if you’re not sure.
Please share this information with those you love, especially parents, grandparents, and elders who may be at higher risk of being victimized.

¹_{https://www.cnbc.com/2020/04/15/us-retail-sales-march-2020.html}

²_{https://www.msn.com/en-us/money/markets/coronavirus-delivers-record-blow-to-u-s-retail-sales-in-march/ar-BB12FaEi}

³_{https://www.nytimes.com/interactive/2020/04/11/business/economy/coronavirus-us-economy-spending.html}

⁴_{https://finance.yahoo.com/news/coronavirus-covid-weekly-initial-jobless-claims-april-11-192401571.html}

⁵_{https://www.wsj.com/articles/the-stock-market-is-ignoring-the-economy-11587160802}

⁶_{https://www.weforum.org/agenda/2020/04/alphabet-soup-how-will-post-virus-economic-recovery-shape-up/}

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 real financial 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 2019.
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 13.9%. But despite these temporary declines, the annual returns are positive in 29 of 39 years (74% of the time). During the charted time period 1980 to 2018 the average annual return was 8.4% 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 51 of the 73 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.

Asset Management vs. Financial Planning

At a 100,000-ft level, we do two things in our financial advisory practice: Asset Management* and Financial Planning. Although these two functions are distinct, they are very much interrelated. Both are essential components for our client families’ long-term success, but it’s important to understand and appreciate the differences:
(* Asset Management also falls under the monikers of “investment management” or “portfolio management”)

Asset management is about asset allocation, expected returns, risk tolerance and time horizons.
Financial planning is about making wise choices about the use of debt, setting up college savings plans, tax efficiency, estate planning and ensuring your insurance needs are taken care of.

Asset management is about managing investments.
Financial planning is about managing investors.

Asset management is about portfolio construction and risk management.
Financial planning is about comprehensive planning and emotional management.

Asset management is about measuring portfolio performance by comparing results to predetermined index benchmarks.
Financial planning is about measuring your performance against your true benchmark — your goals.

Asset management is about allowing your money to work for you to help you reach your financial goals.
Financial planning is about helping people define their goals, dreams, desires and fears.

Asset management is about creating a process that guides your actions in a wide variety of market environments.
Financial planning is about implementing a plan and making corrections along the way as life or market and economic forces intervene.

Asset management is about creating a portfolio that can survive severe market disruptions.
Financial planning is about creating a financial plan that can survive severe life disruptions.

Asset management deals with financial capital.
Financial planning deals with human capital.

Asset management is about growing and/or preserving your wealth.
Financial planning is about understanding why money is important to you personally.

Asset management is about where to invest a lump sum.
Financial planning is about how and when to invest a lump sum.

Asset management is about asset allocation.
Financial planning is about asset location.

Asset management is about creating policies to guide your actions in the face of economic and market uncertainty.
Financial planning is about helping people make better decisions with their money in the face of uncertainty that is impossible to reduce.

Asset management helps you understand how much you need to earn on your investments to meet your future spending needs.
Financial planning helps you understand how much you need to save meet your future spending needs.

Asset management helps you figure out where to take your money from when you need to spend it.
Financial planning helps you figure out where to spend your money in a way that makes you happy.

Asset management helps you grow your savings to meet future consumption needs.
Financial planning helps you plan and budget for future consumption needs.

Asset management is about creating a long-term process to guide your actions in the markets.
Financial planning is about creating systems that allow you to spend less time worrying about your money.

Asset management is about reducing the anxiety that comes from the volatile nature of the markets.
Financial planning is about reducing the anxiety that comes from making important decisions with your money.

Asset management involves growing your wealth so some day you can become wealthy.
Financial planning involves figuring out what a wealthy life means to you.

To get the most benefit from asset management, you really need comprehensive, well thought-out financial planning.

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 Questions That Will Help Define Your Investment Philosophy

To define your investment philosophy, consider these key questions:

What are your core investment beliefs?
Do you understand your philosophy and why you believe in it?
Do you know the potential risks?
Does it suit your personality and individual circumstances?
Will your philosophy help you follow whatever strategy you implement?
What constraints are necessary for turning your philosophy into a portfolio?
What will you own and why will you own it?
What will cause you to buy or sell?
What will cause you to make changes to your portfolio over time?
What types of investments or strategies will you avoid?

Source: AAII

Your Investing Philosophy in Ten Words or Less

Brevity 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:

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

Source: MF

What You Control

“If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It’s the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you’ll be miserable.” — Dr. Daniel Kahneman (psychologist and Nobel Laureate)

Source: Safalniveshak

Asset Allocation in Thirty Seconds

If you’ve only got 30 seconds to understand asset allocation, spend those precious seconds staring at the table below. The main takeaway: stocks beat Treasury bonds and T-Bills on average. For example, over a 1-year period, stocks outperform 61.3% of the time during the last 210 years. Over a longer 30-year period (typical for retirement portfolios) stocks came out on top 91.2% of the time.

This table is from Jeremy Seigel’s book, Stocks for the Long Run.

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