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Great Expectations

  • July 14, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Investing 101, Performance, Seeking Prudent Advice

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.


Sir Isaac Newton: Monumental Scientist, Terrible Investor

  • July 6, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Seeking Prudent Advice

220px-GodfreyKneller-IsaacNewton-1689Most people recognize Sir Isaac Newton as one of the most influential scientists of all time, but did you know he was a horrible investor?

Newton’s experience with the South Sea Company vividly demonstrates the financial perils of chasing hot markets, getting caught up in investment bubbles, and not maintaining a diversified portfolio.

In the early 18th century the South Sea Company was established and given a monopoly on trade in the South Seas in return for assuming England’s war debt.  Investors liked the idea of that monopoly and the company’s stock began to take off.

Newton hear the siren call of the South Sea Company, invested his cash in early 1720 and managed to turn a nice profit.  But then the stock kept soaring after he had gotten out. So Newton jumped back into the stock with a lot more money than his original investment.

Newton subsequently lost 20,000 pounds, almost all of his life savings!  From this terrible outcome, Newton supposedly decreed, “I can calculate the movement of the stars, but not the madness of men.”

No warning on Earth can save people determined to grow suddenly rich.
— Lord Overstone

newton-investsSource: Sovereign Man

 

 


The Pitfalls of Investing

  • June 23, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Seeking Prudent Advice
pitfall

Pitfall? Get it? I couldn’t resist.

Ben Carlson has a great piece on how avoiding the crippling mistakes of investing will greatly improve your results.

Here is Carlson’s list of the biggest mistakes to avoid:

  • Making investment decisions based on your political views.
  • Confusing your risk profile and time horizon with someone else’s.
  • Consistently trying to time the market.
  • Losing site of your long term financial goals.
  • Paying high fees on investments.
  • Having high trading activity.
  • Letting fear and greed take over at the extremes in market sentiment.
  • Having the majority of your investments tied up in one asset (company stock, your house, etc.).
  • Basing your decisions on what you heard on CNBC or Fox Business News.
  • Following every tick in the market and constantly checking the value of your portfolio.
  • Making too many short term moves with long term capital.
  • Basing your investments on the most recent performance.
  • Not saving enough.

For the ultimate backstop, Jason Zweig of the Wall Street Journal has a piece of advice most investors would be wise to follow:

Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.

Be safe out there!


Code Red! 8 Ways to Permanently Wipe Out Your Retirement Savings

  • June 8, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Personal Finance, Retirement, Saving Money, Scams & Schemes, Seeking Prudent Advice

code-redDana Anspach at MarketWatch wrote about 8 financially devastating mistakes (aka “Code Reds”) that must be avoided:

1. Believe in a stock
The company you work for is doing well. You understand the potential of the business. You should own a lot of company stock. After all, it shows your level of commitment, right? 
WRONG! CODE RED!
You can lock in lifestyle by taking risk off the table. If trusted advisers are telling you to reduce risk, listen. You can’t take your “belief” in your company stock to the bank. Owning a lot of company stock doesn’t demonstrate a commitment to your company; it demonstrates a lack of commitment to your own personal financial planning.

2. Get reeled into real estate
Rental real estate is a good way to build wealth with someone else’s money, isn’t it? I mean, that’s what the infomercials say.
WRONG! CODE RED!
Investing in real estate is a profession in and of itself. With real estate prices on the rise again, don’t get reeled in with the lure of easy passive income. It isn’t as easy as it looks.

3. Follow a Tip
An opportunity to double your money is an investment opportunity worth pursuing. It could change your life, right?
WRONG! CODE RED!
Tips are great for your waiter or waitress. But where you family’s future is concerned, avoid the tips, and stick with a disciplined and diversified approach.

4. Change lanes — every year
Smart investors watch the market and frequently move money into the latest high performing investment, right?
WRONG! CODE RED!
You’ve probably noticed if you constantly changes lanes on a backed up highway, always trying to inch ahead, you usually end up farther behind. Driving this way isn’t effective; investing this way isn’t effective either. Pick a disciplined strategy and stick to it. Jumping from investment to investment is only going to slow you down.

5. Play the currency cards
Experts can deliver higher returns, right? Find someone who knows how to trade, and you’ll be set.
WRONG! CODE RED!
If experts could generate such high returns, why would they need your business? Don’t play the currency cards, the expert cards, or fall for any kind of outlandish promises. I’ve yet to see one of these programs work the way it was marketed.

6. Follow your ego
Better investments are available to those with more money, right? If you get the opportunity to participate in something exclusive, it is likely to deliver better returns.
WRONG! CODE RED!
If someone appeals to your ego, walk away. When it comes to investing, the only thing I’ve seen egos do is help someone lose money.

7. Follow their ego
You can trust prestigious people in your community. That’s why you should do business with them, right?
WRONG! CODE RED!
Checks and balances are good in government and in investing. One way to make sure checks and balances are in place is to work with an investment adviser that uses a third party custodian. The third party custodian sends account statements directly to you. The investment adviser can make changes in your account, but the transactions are reported to you directly by the custodian, who isn’t and should not be affiliated with the investment adviser.

8. Leverage up
Borrowing at low interest rates and investing in high growth assets is an excellent way to accumulate wealth, isn’t it?
WRONG! CODE RED!
Think twice before borrowing to invest. It causes ruin more often than it causes riches.

Visit MarketWatch to read Anspach’s full article.


Charity Navigator — The Smart Way to Give

  • May 25, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Charitable Donations, Scams & Schemes, Seeking Prudent Advice

charity-navigatorGiving to our community to help make this world a better place is very important, but how do you know if you’re contributing to a reputable organization that will make the best use of your donation?

Charity Navigator (charitynavitagor.org) features a rating system of 1 to 4 stars for dozens of charitable organizations.  This non-profit provides key guidance on where it’s best to give and how these charities utilize the money that you give them.

A four-star charity has the following characteristics:

  • it excels at its financial health
  • spends most of its money on its charitable programs (not administration or fundraising)
  • completes an annual financial audit
  • guarantees donors it won’t sell their names to outside parties (i.e., it protects its donors privacy and respects their time)

The best way to donate is to give directly to the charity through their website.

The worst is donating to “cold calls” from a telemarketing firm.  The middleman typically keeps 80% to 90% of your contribution and shamefully little actually reaches those in need.  Also, avoid appeals delivered via social media because you don’t know who is behind them.

Sources:
Charity Navigator
NPR


Not Googling a New Financial Advisor, Seriously?

  • May 19, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Scams & Schemes, Seeking Prudent Advice

It’s hard to believe, but there are people who sign on with a new financial advisor without bothering to do even the bare minimum due diligence.  Consider the sad story of fraudster Janamjot Singh Sodhi who ran a Ponzi scheme promising high rates of return in a relatively short period of time.

Sodhi solicited and received funds from investors starting in 2005 and through the fall of 2011 despite the fact that

  1. The New York Stock Exchange permanently debarred him in January 2006, and
  2. The California Department of Corporation ordered Sodhi to cease and desist from dispensing investment advice in California.

Potential investors and soon-to-be victims could have easily learned about these serious redflags had they bothered to simply google “Janamjot Singh Sodhi”.  Sodhi did not use an alias so the information and fraud was in plain sight.

“Forget about hiring an attorney or paying for a background check. If you just typed his name into Google you could find out that before he solicited you he was barred by the NYSE and threatened by the state of California. … People spend more time buying a used car for $2,000 than giving $10,000 or $1 million to someone they never met or checked out to invest.”  This from Bill Singer, a lawyer who specializes in investor fraud.

Sodhi was sentenced to four years and nine months in jail and required to pay back the $2.4 million he stole from investors.

Source: CNBC


Guide to Car Buying and Leasing

  • May 4, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Personal Finance, Seeking Prudent Advice

Our friends at the The Big Picture have published an excellent guide to buying and leasing a car.

Here’s an overview of how to expertly navigate this process while saving time and money.

1) Set Up Your Online Shopping Identify:

Get a Google Voice account (its free) then get a LeeMail account (its free). These are the only numbers/addresses you use until you decide which car you are getting from which dealer.

2) Do your homework: Before you ever step foot on a dealer’s lot, you need to figure out a few things:

a) What kind of transport? Are you looking for a minivan, convertible, truck, coupe, SUV, etc.
b) The range of competitive vehicles for that car type
c) Your actual budget (including your “bottom line” monthly price)
d) Buy or Lease? (see #3)

3) Buy or lease? Most people should own, not lease cars. Its better not to pay for just the most expensive years of a depreciating asset.

The exception is if you can lease with pre-tax dollars — if you own (or are senior enough in) a company, than a lease may be a great deal. But without that tax advantage, the numbers favor owning.

4) Know Your Price Range and Approximate Cost of Cars: All of the cars I mentioned have extensive websites where you can build and price vehicles. You end up with MSRP.

5) Understand Factors Which Impact Pricing: The cost of any given car is a function of its retail price (MSRP), specific programs dealers are running, financing, what is hot or not, and other factors.

6) Be aware of the sales routine: If you followed steps 1-5, you know the approximate cost of the car, plus the options you want, and how that prices it.

7) Understand the buying/leasing math: The purchase math is simple: Negotiated cost of car plus financing expenses.

8) Use Online Salespersons: I asked several dealers for quotes on cars. If they ignored my request for an emailed quote and called, I held that against them. Different dealers have differing demands for specific cars. Some of the deals were very competitive .

9) Go to Competing Dealerships: Don’t be afraid to cast a wide net.

10) Use a car buying service:  That was the suggestion for people who are too busy or intimidated or who simply don’t want to be bothered. Leading suggestions: USAA, Credit Unions, and (multiple recommendations) CostCo.

Check out TBP’s full guide at here


10 Most Common Behavior Biases of Investors

  • April 6, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Seeking Prudent Advice

Robert Seawright with Madison Avenue Securities assembled this list of the ten most common behavioral biases that hinder investors:

  1. Confirmation bias – we gather facts and see those facts in a way that supports our pre-conceived conclusions
  2. Optimism bias – our confidence in our judgement is usually greater than our objective accuracy
  3. Loss aversion – the pain of losing $100 is at least twice as impactful as the pleasure of gaining $100 (causes investors to hold onto their losing stocks too long)
  4. Self-serving bias – the good stuff that happens is my doing while the bad stuff is somebody else’s fault
  5. Planning fallacy – overrate our own capacities and exaggerate our abilities to shape the future
  6. Choice paralysis – we are readily paralyzed when there are too many choices
  7. Herding – we run in herds, latching onto the group think and moving in lock step
  8. We Prefer Stories to Analysis – people love a good narrative and prefer to be swept up by the story rather than work through the definitive numbers
  9. Recency bias – we tend to extrapolate recent events into the future indefinitely
  10. Bias blind-spot – the inability to recognize that we suffer from the aforementioned cognitive distortions!

Putting Clients Second (!?!)

  • February 9, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Best Practices, Fiduciary, Scams & Schemes, Seeking Prudent Advice

fiduciaryAlthough the following makes reference to politicians and political decisions, it’s not meant to be political.  The intent is to inform you and to help protect you and your family’s best interest.

Today the founder and former chief executive of Vanguard, John C. Bogle, penned an article in the New York Times.  It starts off:

 THE Trump administration recently announced that it intends to review, and presumably overturn, the Obama-era fiduciary duty rule that is scheduled to take effect in April. The administration’s case was articulated by Gary Cohn, the new director of the National Economic Council.

Mr. Cohn, most recently the president of Goldman Sachs, called it “a bad rule” and likened it to “putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” Comparing healthy and unhealthy food to healthy and unhealthy investments is an interesting analogy.

The now-endangered fiduciary rule is based on a simple — and seemingly unarguable — principle: that in giving advice to clients with retirement funds, stockbrokers, registered investment advisers and insurance agents must act in the best interests of their clients. Honestly, it seems counterproductive to go to war against such a fundamental principle. It simply doesn’t seem like a good business practice for Wall Street to tell its client-investors, “We put your interests second, after our firm’s, but it’s close.”

To learn more, see Mr. Bogle’s article and The Freedom To be Fleeced — How Donald Trump Made Financial Hustles Great Again

It’s easy to get lost in the details and let our minds glaze over, but what you should know is very simple:

  • An advisor that is a fiduciary has a legal obligation to put your best interests first, always.
  • Most people think that all or most advisors are fiduciaries (WRONG!).
  • Most purveyors of financial products and services are NOT fiduciaries.  They comply with a much lower “suitability standard.”
  • To assure you and your family are getting the most trustworthy care, always ask your advisor or financial salesperson the following:
    “Are you a fiduciary?  Are you always acting in a fiduciary capacity when working with me?”

When we formed our advisory practice many years ago we purposefully chose to be a fiduciary because it’s the right thing to do. Incredibly that ethos is counter-cultural in financial services. It’s bemusing to watch the delicate public-relations dance and contortions that many big institutions are making around or in avoidance of doing the right thing.


Star Wars Lessons for Your Financial Health

  • December 22, 2016/
  • Posted By : admin/
  • 0 comments /
  • Under : Best Practices, Seeking Prudent Advice

The eighth installment in the Star Wars series, “Rogue One,” arrived last week. Excitement is reaching a fever pitch, and our office isn’t immune. Our advisors are fans as well, so to celebrate, here are a few lessons from “Star Wars” to help cultivate your family’s financial health and confirm your advisor is a financial planning Jedi Master.

sw1The Power of Holistic Planning

As young Skywalker’s advisor, Obi Wan Kenobi teaches him that the Force, an energy field created by all living things that binds the galaxy together, is the source of his power. For financial advisors to truly unlock their potential, they need to have a holistic view of their clients’ financial lives, as well as a mastery of investment strategy. By understanding how your various accounts, needs and goals all connect together, an advisor can be a truly powerful guide for your family.

sw2Sticking to the Plan

While Luke is a neophyte just learning the ways of the Force, Han Solo is a hardened skeptic, disregarding advisors like Obi Wan Kenobi and instead preferring the lifestyle of a risk taker, which has led him to real problems with debt. When Luke gets distracted by Solo’s taunts, Kenobi reminds him to trust in his plan instead of making knee-jerk reactions. While things get rocky along the way, Luke eventually reaches his goal of becoming a Jedi Knight. It’s a good reminder for when the markets get rough: Trust in the plan, mitigate short-term emotional reactions, and focus on long-term goals. Han may call it luck, but financial planners know there’s no such thing.

sw3The Quick and Easy Path Leads to the Dark Side

We learn more about the Force in the 1980s’ “Empire Strikes Back,” when Jedi master Yoda teaches Luke about the Dark Side. Like a good advisor, he tells Luke that chasing instant gratification, like investing heavily in a hot stock, can lead to ruin. When Luke ignores the advice, he’s almost defeated by Darth Vader. Yoda reminds us that patience is key with investing, not adventure or excitement.

sw4Know Your Advisor’s True Value

Though his investment strategy might be questionable, Han Solo does understand value. Luke is shocked when Solo initially discloses his fees to pilot them across the galaxy in the Millennium Falcon. Luke says he could buy and pilot his own starship for less, but Obi Wan Kenobi knows expertise can command a fair price and even offers to spend more to ensure results. It turned out that Luke didn’t know flying through hyperspace from dusting crops, and Solo’s experience came in handy.

sw5It’s Not Just About Money

Though Han Solo told Princess Leia that he doesn’t care about her or the rebellion, he becomes a true hero after he realizes that there’s more to life than money. Advisors are worth more than just allocating assets and providing returns; they can be even more valuable to clients by helping them navigate important milestones in life, like buying a home, sending kids to college, and retiring comfortably. Remember what Leia told Han: “If money is all that you love, then that’s what you’ll receive.”

sw5Don’t Judge by Appearances

“Judge me by my size, do you?” Yoda may be small, but his power with the force is great. Similarly, many investors often think bigger is better and don’t realize that small boutique firms can provide superior guidance.

 

sw6

Source: WM


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