Investing 101 - Charlotte Financial Planning & Advice

Category: Investing 101

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.

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 trusted 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 2017.
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 14.1%. But despite these temporary declines, the annual returns are positive in 28 of 37 years (76% of the time). During the charted time period 1980 to 2016 the average annual return was 8.5% 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 50 of the 71 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.

529 College Savings Plans — Your 30-Second Primer

529 plans are the best college savings option for most families. Here’s a 30-second primer on how to choose the right one for your family:

529s are funded with after-tax contributions; growth and distributions taken for higher-ed are tax free.
Essentially every state has its own 529 program. You’re free to select whichever state’s plan you like.
If your state gives you a significant tax deduction on contributions (dark green in the map below), it’s worth reviewing your state’s 529 first.
If you don’t get a state tax deduction OR if it’s <5% OR your state offers tax parity (any color except dark green in the map below), go with the best plan available nationally.
Utah’s 529 is NorthStar’s favorite in the nation because of low fees, great investment choices, no contribution minimums, and very easy setup.

Need help making the best 529 choice for your kids’ future?
Give us a call at 704-350-5028 for a free consultation.

“You need to judge us over a full cycle”

The standard argument that active investment managers make when challenged by their clients on why their portfolios underperformed the market is, “you need to judge us over a full cycle.”

Robust results published in today’s Wall Street Journal blow a hole through active managers’ favorite defense. Over the 15 years that ended in December 2016, 82% of all U.S. funds trailed their respective benchmarks. That long time period is more than enough to encompass the active managers’ “full cycle”, boom-bust-boom argument. The findings are noteworthy because it’s the first time 15-year results have become available for this very comprehensive analysis.

The results are even worse when you looks at popular assets classes:

92.2% of U.S. large-cap active funds trailed their respective benchmarks
93.2% of U.S. small-cap active funds trailed their respective benchmarks
95.4% of U.S. mid-cap active funds trailed their respective benchmarks

That elusive 8% of all U.S. fund managers that did beat the market 2002-2016 is a slippery target for investors. Most of them did not persistently outperform throughout those 15 years. So you can’t just take today’s top performers and go with them. Said another way, the likelihood of you finding one of these funds ahead of time is very, very small.

You have a key decision — a choice that will materially impact your future life. How will you choose to invest the bulk of your portfolio? Will you go with the 92% odds in your favor (passive management), or the 8% odds in your favor (active management)?

Source: WSJ – Indexes Beat Stock Pickers Even Over 15 Years