Why Investors Can Be Their Own Worst Enemy

Investors often think they are doing better than they actually are. But the reality is that most investors are actually underperforming their benchmark. Two recent articles regarding behavioral finance — Which Investor Personality Best Describes You? and 8 Common Investor Biases That Impact Investment Decisions — detail a concept which is the thought that our own instinctive behaviors are the biggest challenge to us as investors. Another topic that we have written on is the issue with trying to “time” the market. What people often don’t realize is that these two concepts have more in common than you might think.

For over two decades, financial research firm Dalbar has been analyzing investor returns. It recently published its 22nd annual Quantitative Analysis of Investor Behavior study that compared these investor equity fund returns versus the market benchmark. The results showed significant underperformance from investors. Dalbar points out that “for the 30 years ended Dec. 31, 2015, the S&P 500 index produced an annual return of 10.35%, while the average equity mutual fund investor earned only 3.66%. The gap of 6.69 percentage points represents the diminished returns.”

So why is this the case?

As advisors, we have long preached the importance of cost and the large effects it can have on returns. While cost is a factor in investor underperformance, there are other factors that play even a larger role. The study showed that the biggest contributing factor to equity investors’ underperformance over the past 20 years is voluntary investor behavior. What does that mean? Let’s look at a couple of examples of investor behavior that contributes to underperformance.

1. Panic selling: The No. 1 rule in a market collapse is not to panic. Markets can be erratic with times of larger-than-normal volatility. Responding emotionally is never a good idea. Start by understanding what your risk tolerance is. At that point, make sure you understand your investments and what their purpose is in your portfolio. Finally, look at your portfolio as a whole and make sure it is aligned properly with your risk tolerance and goals.

2. Trend chasing/herd mentality/FOMO (Fear of Missing Out): As the phrase goes: what you see is what you believe. When investors see a stock continue to go up, or everyone around them is talking about buying that stock, it is easy to follow the crowd and jump in without thinking. History has shown us that past performance is no guarantee of future returns.

3. Overconfidence: Many investors feel they perform better than what is actually happening or real. This can cause investors to believe they can accurately time the markets.

Source: BlackRock; Informa Investment Solutions

Telling investors about these issues is one thing. Actually seeing the fixes put into practice is another challenge. The key point to remember is that we are often our own worst enemies when it comes to managing our own investments. Having a great financial and investment plan is irrelevant if you don’t have the mindset to follow through and stick to it. Becoming self-aware of these issues is a great first step.

This article was originally published on investopedia.com

***

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Are You Feeling The Heat From Inflation? Millennials Are Too

Has the increase in cost of living impacted your spending habits? Are you tightening your budget due to skyrocketing inflation? Well, you’re not the only one feeling the inflationary heat, many Americans are too, especially millennial millionaires. Inflation worsened in May, rising 8.6% annually, much higher than expected due to surging food, rent and energy costs, marking the largest annual increase since December 1981. The Federal Reserve raised interest rates again last week by 0.75% in order to combat inflation, and will continue to do so throughout the following months to come. So, let’s take a look at how Americans are approaching their spending during this changing economic environment. 

According to CNBC’s Millionaire survey, “Nearly half of millennial millionaires say higher borrowing costs are causing them to delay buying a car, and 44% say higher interest rates have caused them to delay purchasing a home, according to the survey.” The survey also found that over ⅓ said that recent inflation caused them to move or postpone a trip. It’s interesting to see that not only middle and lower-income individuals are feeling the impacts of inflation, but that millionaires too are feeling the need to re-adjust their budget during this time. With inflation hiking up the prices of almost everything, from everyday gasoline and grocery store prices to luxury items as well, all Americans need to revisit their financial plan. 

As we’ve been discussing for some time now, it’s very prudent to get your financial life organized and revisit your financial plan. With interest rates rising, you want to make sure you are aware of all your variable-interest rate debt and make sure that you re-adjust those potentially higher payments into your budget. The cost of borrowing will also become more expensive as well, so you should re-evaluate whether you should still pursue potential projects or loans you want to take out as those things may not make sense anymore given this climate. Lastly, take a look at your overall budget and alter it for this higher cost of living. Check out our blog on how to adjust your wallet for inflation here

We know higher interest rates and prices can be stressful, which is why having a financial roadmap and working with a financial professional to solve for these changes can lift a heavy weight off your shoulders. Regardless of your net worth or investable assets, you should create a financial plan that will provide you with strategies to reach your financial goals. If you have any questions about reaching your financial dreams or altering your financial plan during this economic downturn and uncertainty, we are here and happy to help. Email us at info@shermanwealth.com or schedule a complimentary intro call here

 

The Federal Reserve Raised Interest Rates by 0.75%. What Now?

The Federal Reserve announced at its meeting today they are increasing its benchmark interest rate by 0.75%, the largest increase we have seen since 1994 in order to combat Friday’s 4-decade high inflation report. We saw rates rise over the last few days following the hot inflation report as you can see in the chart below. Fed Chairman Jerome Powell also said that he expects the Federal Reserve to hike rates by yet another 50 to 75 basis points during the July meeting and that “inflation can’t go down until it flattens out”. We will continue to monitor future rate hikes, but let’s take a look at how these increasing rates will impact the consumer. 

We previously wrote a blog discussing how a rise in interest rates will affect your wallet and future financial situation. A great place to start during this uncertain environment is to make sure your financial plan is up to date. Make sure you know everything you have and aggregate your entire financial picture into one place.

While we don’t know exactly where the market and interest rates will go, with talks of a recession near, it’s important to revisit your cash flows, keep a comfortable emergency fund, and review your budget and goals. Next, take a look at the debt you currently have and think about how these rising rates may impact variable interest rate debt you may be carrying or will carry in the future. Additionally, remember the importance of time in the market over timing the market. Especially for you long-term investors out there, make sure you stick to your financial plan and don’t let panic derail your roadmap and financial portfolio. As we continue to watch interest rates rise, seek out high-yield bank accounts with the highest interest rates that you can take advantage of.

We know that the current market environment might have you questioning your finances and current financial plan, which is why we are here to help. For more information on how rising rates will impact your portfolio and financial life, email us at info@shermanwealth.com or schedule a complimentary meeting to discuss your personal financial situation here

Why Organization Is So Prudent In Your Financial Life 

Do you have questions about the markets and skyrocketing inflation? Well, we’re here to break it down for you. We have officially entered a bear market in the S&P500. The markets have gone down 8.9% in the last three days, which is a historic figure. Friday’s consumer price index (CPI) report revealed that inflation was not as contained as investors had thought, leading to huge spikes in Treasury Yields, with the 10-year Treasury note up to 3.44%, hitting its highest level since 2011. The 2-year yield to 3.42%, and the 2- and 10-year yield inverted for the first time in quite some time. We also saw massive increases in mortgage rates. We will continue to monitor and ultimately see how these increases in rates will impact the consumer and the housing market, along with the dollar hitting 20-year highs. 

Due to the 4-decade high inflation numbers, all eyes are now on the Federal Reserve meeting tomorrow where they now anticipate to raise rates by 0.75%, the biggest rate hike in 28 years. Previously, Fed Chair Jerome Powell said that a 0.75% raise is off the table but with the CPI report from Friday, things seem to have changed. 

So, given this uncertain economic climate we are in, we want to make sure we discuss the timeliness of establishing a financial plan and getting organized. We wrote a recent blog that uncovered that many Americans do not have any sort of financial plan, which is worrisome during this time. For those of you who may be panicking about the market declines and volatility, along with the rapidly rising cost of living, you should consider re-visiting your financial plan as a whole, re-thinking your budget, asset allocation, cash flows, and overall goals. Whether you have a financial plan or not, it’s never a bad time to get started or updated to make sure you are on the right path and headed in the best direction. 

Have you automated your finances yet? With the great technology we have today, it’s so easy to aggregate your finances all in one place, so you have access to it at all times. Taking a look at everything you have and seeing the bigger picture will help you make smarter financial choices in uncertain times or economic downturns. At Sherman Wealth, we utilize state-of-the-art financial planning software that allows you to see your whole financial picture at your fingertips. If you would like to trial our financial software, email us at info@shermanwealth.com and we are happy to help.

We believe it’s important for all individuals to have a financial roadmap that will help them navigate murky waters as well as ride out the high times in order to achieve long-term financial success. We know that economic uncertainties in the market can be stressful, so we are here to help you through it. We will be following rates for you after tomorrow’s Fed meeting along with this hot inflation data. Stay tuned for more updates and let us know how we can help you with your personal financial situation. Email us at info@shermanwealth.com if you have any questions or schedule a 30-minute complimentary intro call here

Inflation Hits a 4-Decade High. Are You Feeling The Impacts?

New inflation data was released that reported a CPI increase of 8.6%, marking a 4-decade high. According to the WSJ, prices for energy jumped 34.6% from a year earlier and groceries increased 11.9% on the year. This rise was largely attributed to rising energy and food prices, which we have been tracking for a few months now. So are you feeling the impacts of inflation and rising prices? We certainly are. Have you altered your spending and summer plans? Restaurants have even begun adding additional fees on the bottom of bills for a “non-cash adjustment,” “fuel surcharge,” or “kitchen appreciation”. Have you noticed this?

As you can see from the tweets above, CPI numbers are skyrocketing. We will continue to watch inflation data and its impact on the economy and markets. If you are feeling the impacts of rising prices, now might be a good time to revisit your budget and financial plan as a whole. If you have any questions for us, email at info@shermanawealth.com or schedule a complimentary intro call here.

Ep. 91 Launch Financial- Spring Housing Market Update with Andres Serafini & Daniel Esteban

Overview:Join us on this week’s episode of Launch Financial as we are joined by recurring guests, The Washingtonian Group’s Andres Serafini and Daniel Esteban. On this episode, Andres and Daniel come back on the show a year later to discuss the current state of the housing market and tips to think about when homebuying. 

For more information on Andres and Daniel check out their bios below: 

Andres A. Serafini, Founder & Principle of The Washingtonian Group at RLAH Real Estate is a proud DC Native and Bethesda Resident, as well as a First Generation Colombian & Italian American. Appreciative of the diverse nature of the DC Metropolitan area, Andres prides himself in servicing Domestic and International Clientele in the Residential, Luxury, & Commercial Markets.

Daniel was born and raised in the Washington DC metro area and is a proud Bethesda home owner. Beginning his real estate career during challenging economic conditions, Daniel’s experience in an arduous and complex market has granted him a deeper level of expertise in this dynamic housing industry.

For more information and inquiries about topics discussed in this week’s episode, please reach out to us at info@shermanwealth.com. 

Show Notes: 

Check out this episode!