March Madness and Investing: Surprising Similarities (And How to Avoid Common Mistakes)

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What a great time of the year. Cherry blossoms are out, baseball opening day is right around the corner, and the best single elimination tournament in sports is on its way. That’s right, it’s March Madness time.

For those of you unfamiliar, March Madness, as it’s commonly called, is a 64-team college basketball single elimination tournament. There are four regions that each have 16 teams seeded 1 though 16. The winners of each region meet in the “final four” to determine who will emerge as the champion.

Offices around the country are buzzing with brackets, upset picks and friendly wagers. In other words, it’s chaos both on and off the court and it’s glorious!

In case you couldn’t tell, I love sports. As a financial advisor, I am constantly looking at seemingly unrelated topics, and comparing them to the world of finance. What may come as a surprise to you is that investing and March Madness have more in common than you think.

So what does the tournament have to do with investing? Let’s have some fun and take a look.

You Can’t Predict the Future

Every year people get excited about their bracket. We watch the “experts” on TV and eagerly listen to their reasons for picking one team over another. We all go into the season thinking that this is “our year.” We’ve done the research and we’ve studied history. What could possibly go wrong?

In the first round of this year’s tournament, a record 10 double-digit seeds advanced to the second round! Do you think a lot of people predicted that? Not a chance.

March Madness BracketsHave you ever heard the saying on Wall Street that past performance does not guarantee future performance? There’s a reason the saying exists. Just like last year’s successful mutual fund managers aren’t any more likely to pick this year’s best accounts, the winner of last year’s bracket pool is no more likely than you to pick this year’s winning March Madness team.

When it comes to investing, “experts” love to tell us what is going to happen in the future. People brag about their best stock picks and conveniently leave out their poor ones. The truth is, no one knows what is coming. Once you accept that, you can create a financial plan that takes into account your risk tolerance, and current life situation to make the best investment decisions for you.

Diversification and Risk vs. Reward

No one picks a perfect bracket. The odds of filling out a perfect bracket are 1 in 9.2 quintillion (source: USA Today). According to that number, if everyone in the US filled out one bracket each year, we would see a perfect bracket once every 400 years. You’d be better off gambling with the lottery based on those odds.

However, straying from the standard “favorites” isn’t always the answer either. People love to pick the underdog or “dark horse,” but if you do this consistently year after year, you aren’t likely to have much success. That doesn’t mean you can’t pick an underdog here or there, but the risky picks should be a subset of your overall picks, not the full strategy.

The truth is, no one wins a bracket pool by picking all favorites or all upsets. As the point above taught us, everyone is just guessing. By diversifying your picks with some favorites and some upsets, you give yourself the best chance at success.

The same principal applies with investing. If your portfolio is composed of stocks from one sector or all growth stocks, you are exposing yourself to huge amounts of risk. Sure, the reward may be great if you end up being right, but as we’ve seen time and time again, that is a strategy that can set you up for disaster.

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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.

In Times of Uncertainty, Feeling Certain about Your Plan

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As I was listening to Fed chair Janet Yellen’s testimony in front of Congress last week, I was intrigued by a tweet from Morgan Housel: “Go back to 2008 and tell people that in 2016 our biggest headwind would be low oil prices and a strong dollar. Economics is hard. Not in a “things are actually good today” way. But in mid-2008 surging oil prices and a falling dollar were a big headwind.”

As a Financial Advisor, I read every piece of economic data available to me and follow the thought processes of the top thinkers at virtually all the key financial institutions so I can carefully invest money on behalf of our clients.

Here’s what I’ve discovered: none of them, and none of us, have been given a roadmap to what the future holds. They can watch and study the relevant economic indicators, but they cannot predict the financial future with absolute certainty. We all live with uncertainty while trying to make the best decisions we can with the information available.

Given the certainty of uncertainty, what can individuals do to best prepare for their financial future?

With all of the speculation about the upcoming elections, questions about possible negative interest rates, and concerns about international instability, it’s easy to feel anxious about the potential effects on the economy and on your savings and investments. Particularly because the airwaves and the Internet are full of news reports, commentary, blogposts and Tweets about how volatile and risky the markets are.

One thing that is certain: there will always be volatility and risk in the markets. That’s what makes the stock market the stock market. Even if we are currently experiencing a bit more than just normal market volatility, remember that the markets have historically rebounded extremely well after corrections (which are considered a drop of at least 10%). Don’t take my word for it, take a look at the chart below:

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These charts show 27 corrections of at least 10% or more since 1987. All of those corrections had one thing in common: they all rebounded with a bullish rally. What history has shown is that, over the long run, markets continue to move higher.

What does this mean for individual savers and investors? No matter your age or experience with financial planning and investments, there is one universal “must” that applies to everyone. You need a financial plan:  a carefully thought-out, customized financial plan, not just something you downloaded from Google. Once you have that plan in place, the next steps are to implement it, then put your head down and trust in that plan.

This current market in particular highlights the importance of having a financial plan that is both age-appropriate and risk-adjusted to your specific financial situation, goals, and needs. If you’re in your 20s or 30s, for instance, the correction we’re experiencing is a great opportunity. Why? Because you have the luxury of time on your side. With the market currently down significantly from where it was a year ago, this is a great time to implement a dollar cost averaging strategy and start saving and investing on a consistent basis.

One of the things that differentiates us at Sherman Wealth, however, is that we believe that no two people are alike and that everyone’s investment strategy and portfolio should be customized to suit his or her individual situation, needs, and goals. We get to know each client – or potential client – so we can analyze their actual risk tolerance in a holistic way, rather than just plugging their age and one or two other factors into a simple, one-size-fits all algorithm the way some of the Robo-Advisor platforms do. Then we create a plan that is designed to work for our clients.

I can’t tell you what the market is going to do tomorrow or six months from now – no one can. But with a well-thought-out financial plan – one that takes into consideration who you are now, where you want to be, and how much risk you can tolerate – you will feel much more confident about your own strategy and less likely to panic about what the next crazy pundit to pop up on the internet has to say.

Photo Source: AP

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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.

Straight Talk about Volatility and Compound Interest – the Snowball Effect

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Compound interest is, simply put, the interest you earn on the sum of both your initial investment and the interest that investment has already earned.

Why is it important? Because your two potential advantages when it comes to maximizing potential earnings over time are:

  • The power of compound interest
  • Investing regularly through market highs and lows

Let’s break this dynamic duo down:

 

The Power of Compounding

 

Compound interest is often compared to a snowball. If a 2-inch snowball starts rolling, it picks up more snow, enough to cover its tiny circumference. As it keeps rolling, its surface grows, so it picks up more snow with each revolution.

If you invest $1000 in a fund that pays 8% annual interest compounded yearly, in 10 years you’ll have $2158.93, in 20 years that will be $4660.96, in 30 years it will be $10,062.66, and in 40 years it will be $21,724.52. All it takes is patience to turn $1000 – the price of one ski weekend – into $21,724.52.

That’s why it’s so important to start saving early.

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The above chart is hypothetical and assumes an 8% rate of return compounded annually. It is for illustrative purposes only and is not indicative of the performance of any specific investment.   Investment return and principal values will fluctuate so that your investment when redeemed may be worth more or less than its original cost. Rates of return do not include fees and charges, which are inherent to other investment products. Past performance is no guarantee of future results.

 

Volatility – Market Highs and Lows

 

But what happens if the market dips and your investment loses value?

Volatility – when market value fluctuates up and down – can be an opportunity for disciplined savers who contribute regularly to their investments, regardless of share price. When prices are low, you’re able to buy more shares. When prices are high you’re able to buy fewer shares for the same amount but those shares earn more interest, which is called Dollar Cost Averaging (Dollar cost averaging does not protect against a loss in declining markets. Since such a plan involves continuous investments in securities regardless of the fluctuating price levels, the investor should consider his or her financial ability to continue such purchases through period of low price levels.)

Imagine that snowball again, rolling down a hill, acquiring more and more snow as it goes. What happens when it hits a bare patch with no snow? Often it picks up rocks and pebbles, which add even more surface volume. So, when it hits the snow again, it picks up even more because it’s larger.

That’s how compound interest, coupled with regular investments, may work too: the “rough patches” produce more volume, which then allows you to acquire more compounded interest. So if you buy more shares during a dip, when the market recovers you could hypothetically not only earn compound interest on more shares, you earn more interest. So long as the price of your particular investment recovers, of course.

As Josh Brown points out in his recent blog post about Warren Buffett and David Tepper, both these legendary investors have gotten to where they are today because they’ve successfully ridden out volatility. In 1998 Warren Buffets own Berkshire Hathaway’s “A” shares had dropped in price from approximately $80,000 to $59,000 but Buffet didn’t sell. Those shares just hit a high of $229,000 this year.

If you see volatility – like what we experienced in August – as a tool and keep contributing regularly to your investments, you’ll potentially maximize the effect of compounded interest and watch your investments snowball over time!

 

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Additional Reading:

http://awealthofcommonsense.com/did-investors-just-experience-the-best-risk-adjusted-returns-ever/

http://www.bls.gov/data/inflation_calculator.htm

http://www.moneychimp.com/features/market_cagr.htm

http://investor.gov/tools/calculators/compound-interest-calculator

Millennials – Time to Wake Up and Smell the Stock Market

Smell the Stock Market

On Monday, as things were heating up a bit, Cullen Roche tweeted “The stock market is the only market where things go on sale and all the customers run out of the store…”

The problem is, many Millennials weren’t even in the store.

Only 26 percent of people under age 30 own stocks, according to a CNBC story that same day. That means that, while not panicking, most Millennials may have been missing one of the biggest potential opportunities of the past 10 years.

Why Aren’t Millennials Investing?

There are many theories –from Millennials being shell-shocked by experiencing their families’ anxiety in 2008, to YOLO, the feeling that it’s better to spend and enjoy the money now because who knows what the future may bring. The problem is that the future is likely to bring a whole lot fewer opportunities if you haven’t planned properly!

Are You Even Beating Inflation?

Let’s say hypothetically that the stock market may rebound by 5%… Simple, common sense math shows that keeping your money in the bank at .05% interest means it would take you 100 years to make the same amount of money that investing it now could. And the cash you are saving under the mattress or in one of your vintage vinyl sleeves? That money is just losing value every second you leave it there, as the cost of blankets and concert tickets continues to climb with inflation.

Risk, Volatility, and Paper Losses

It’s important to know the difference between risk and volatility and many people get it wrong.

Volatility – stock prices moving up and down – is a normal part of the stock market and an opportunity for a disciplined saver to buy when the market is both up and down. When you have a solid plan in place you can capitalize on market price dislocations, like what happened this week. Risk is how likely you are to lose it all and it’s important to remember – while everyone has their own risk tolerance – price corrections and market volatility does not necessarily mean you are going to lose it all. As the chart below borrowed from The Irrelevant Investor’s excellent post on staying the course shows, the stock market has historically climbed in spite of dips. And paper losses are just that: it’s not real loss if you don’t sell.

stock market drops

As this chart by Deutsche Bank’s Torsten Slok shows, in spite of other times of great volatility, markets have always recovered. It’s just a question of timing.

 

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Millennials: This is Your Wake-up Call

When I speak to fellow Millennials, they say that the real reasons they don’t invest are that 1) it’s daunting to get started and 2) they don’t know where to get help. The big companies aren’t interested in smaller investors with less than 250-500K and the robo solutions don’t understand what makes each smaller investor’s situation unique. There’s a whole new breed of financial advisors, however, who combine personalized service with targeted tech solutions for smaller investors. So no excuses – there are financial pros ready help you create an investment strategy that makes sense for your personal goals and financial situation. And volatility doesn’t disrupt what we do!

The Bottom Line

If you’ve got a solid financial plan, investing in the stock market does not affect your ability to pay your rent, take care of yourself or your family, or add to that rainy day emergency fund. The money you’re saving and investing is money that you’ve determined you don’t need now, it’s money you have set aside for the long haul. Assuming your planner has planned correctly, you’re not going to miss your car payment because the Chinese stock market is crashing.

And that huge correction that scared you in 2008? It eventually rebounded and the market continued to climb. As a Millennial you’ve got years on your side if you start investing now. And you’re losing the potential for growth and compounded interest every moment you wait.

Baron Rothschild, of the Rothschild banking family, is credited with saying “The time to buy is when there’s blood in the streets.”

Look around. If you’re not investing yet, this might just be the time to start.

 

 

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Has the Internet Replaced Personal Financial Advisors?

human technology

With the wealth of information readily available online, it’s easy to feel that we’re all experts about everything. From scouring the finance blogs and Twitter for the latest “surefire” ways to beat the market, to diagnosing our aches on WebMD, to grilling along with Bobby Flay on YouTube, it can seem like we have almost instant access to the same information as the pros.

So when it comes to personal finances, why is it necessary to have a financial advisor when financial news is so readily available, Twitter is flooded with “hot tips,” robo advisors are ready to automate the whole process for you, and comparison shopping is so easy? Why can’t you just use this treasure trove of information to make your own financial decisions? Or subscribe to an algorithm-based service that will make the best lightning-quick decisions for you?

A couple of reasons…

If you’re good and you dedicate a lot of time online, you can definitely pick up some great information and strategies that the experts are sharing (follow me on Twitter by clicking here!) The tricky part is making sure that the information and the strategies are actually appropriate for you and appropriate right now. We all know that, if we’re not careful, the instantaneous nature of the internet, social media, and impersonal algorithms can lead to impulsive decisions that may not support our own long-term goals and personal risk profile. Quick reactions to new stock market “darlings” or to sudden market volatility can lead to choices that are not the best for your long – or even near – term financial health and growth. In fact, there is a whole science called Behavioral Finance that addresses how personal biases can lead investors to make decisions that actually work against the goals they set for themselves.

A good financial professional is able to sift through the vast amount of information available to you and determine what is significant to your strategy and what may just be a distraction. A financial advisor who understands Behavioral Finance can help you see where your assumptions, habits, and biases about money and investing may be leading you to get in your own way.

The new algorithm-based platforms are increasingly interesting and have a lot of merit, but the level of personalization is not yet very deep. That means that portfolios are based on broad criteria that may have nothing to do with your current situation, lifestyle, and goals. Again, this is where a trained professional will be able to view your unique individual needs and create a tailored strategy that is geared to you and not just everyone who matches your age and salary level. As more and more fiduciary financial advisors are starting to use smart algorithms as part of their offerings where appropriate, the key is “where appropriate” and “in the clients’ best interest,” the very definition of a fiduciary.

Think about it: would you rather grill along with Bobby Flay on your iPad or would you rather have regular meetings with Bobby, where he looks at the size and model of your Weber, the size of your shrimp, and the recipes you’re trying to learn, and works with you to make sure you become the master of your own grill? (and shrimp!)

The same goes for your financial future. While do-it-yourself is getting easier and easier, that doesn’t necessarily mean it’s getting better and better. Look for a fiduciary financial advisor who also has access to the latest information online and is familiar with the latest algorithmic innovations, but who uses that information to get to know clients individually, and tailors a long-term growth strategy for them that will put them on the road to achieving the goals they have set for themselves.

 

With over a decade’s worth of experience in financial services, Brad Sherman is committed to helping his clients pursue their financial goals. Learn more about our Financial Advisor services.

Follow us on Twitter to stay up-to-date with investment news and wealth management information.

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What Should You Do in a Market Sell-off? Rule #1: Don’t Panic

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Whenever there’s a crisis, it’s good to have an emergency plan, and when there’s a financial crisis, it’s good to have a financial emergency plan. When you’ve thought through a plan, it’s less likely that panic – or other “behavioral mistakes” – will lead you to react in ways you may be regretting for a long time.

While most investors say they’ll continue to hold on to their investments when there’s a sharp downturn (and many even say that they’ll add money when their investments go down), data tells a far different story. In December 2008, right as the market was near its lowest point, investors pulled out a whopping $10.6 billion from equity mutual funds alone.

Panicking during market bottoms is a form of “behavioral bias” that can have a devastating effect on financial health. While the S&P 500 has averaged around 10% a year, costly behavioral mistakes cause many individual investors to significantly miss those gains. That’s because, despite good advice, people still tend to put money in the stock market as it rises and pull money out as the market falls. The result: many investors buy at market tops and sell at market bottoms.

While none of us are immune to behavioral biases, there are several things we can do to help avoid costly mistakes.

1.  Learn From the Past

The first step is to understand that market declines are a normal part of investing and resist the urge to panic!

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CRSP 1-10 Index

While the S&P has historically returned almost 10% annually since the 1960s, those returns are not consistent. One year the market could be up 20% and the next it could decline 12%! To make the ride even bumpier: the market also has streaks where returns decline for several consecutive years. That’s when investors often begin to panic and pull their money out. Unfortunately, that’s usually the worst time to do so, and when investors often should be increasing their investments instead.

Although the market can move up and down in the course of a year, or several years, it has historically trended upwards over longer periods of time (10 or 20 years.) So if your investment horizon is longer than just a few years, remember that it’s likely the market will recover its losses – and then some – over time.

Understanding that the U.S. stock market bounces back after its declines is a helpful first step in creating “un-biased” financial habits!

2.  Understand that Accepting Lower Returns May be Okay

Generally speaking, younger investors have more years ahead of them to invest. That means they are often able to put a higher percentage of their money in stocks and a very low, or even zero, percentage in bonds. How much you allocate to stocks will depend on factors such as your own investment objectives and your ability to tolerate risk.

If you know that you’re prone to panicking during market declines, however, you may want to keep your portfolio in more conservative investments than your age and investment horizon would normally indicate.

It’s much better to be a bit more conservative and hold on to your investments during market downturns, than to buy riskier assets and sell during market crashes!

3.  Speak with a Professional

If you’re like most Americans, chances are you spend more time researching your next car than researching your investments!

Investing can be a difficult – and sometimes dry – subject. Learning about the history of the stock market, your own risk tolerance, and behavioral biases that can trip you up is challenging for most people and probably something you don’t want to spend a lot of time on.

That’s where a trusted financial planner can help.

A good financial planner can help guide you along the path in planning for your own financial goals; explain difficult concepts; help you discover your own risk tolerance; recommend appropriate investments based on those risk tolerances; and help you avoid making the behavioral mistakes that ruin so many people’s portfolios.

A good financial planner also understands the history of the market and knows that, while bull markets don’t last forever, declines are generally temporary as well. Knowing that, and having a plan tailored to your specific financial goals will help you to avoid panicking when markets go south, and avoid making the behavioral mistakes that ruin so many people’s portfolios.

 

Brad Sherman is a financial advisor based in Gaithersburg Maryland who is experienced in understanding both the history of the market, as well as how behavioral biases affect investor returns. He has a Masters in Quantitative Finance from American University and over a decade’s worth of experience in the financial industry.

If you think it may make sense for you to hire a financial advisor, call him today to see if you are a good fit.

 

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Are You Making These Two Critical Investment Mistakes?

Are You Making These 2 Mistakes

It’s no secret: getting an early start on saving and investing is one of the most important things you can do for your future! Putting money into the market when you’re young – even small amounts – gives your investments time to grow and compound over time.

Unfortunately, too many millennials haven’t gotten started yet. A recent survey by Bankrate found that only 26% of Americans under 30 were invested in the stock market, compared to 58% between the ages of 58 and 64. (1)

While the stock market has historically seen positive returns over the long run, it’s not hard to understand why many millennials are wary of it. Millennials under 30 have seen two major market crashes: the tech bubble of the late 1990’s as well as the 2008 economic crisis. Many saw how family members and friends lost years worth of savings and were often financially devastated by what happened.

The result: a deep distrust of Wall Street and a desire to avoid the market altogether.

While it is understandable that millennials are wary about putting their earnings into the market, it’s also unfortunate.

In spite of the two crises of 1990 and 2008, if you had invested in the S&P 500 at the beginning of 1985, and kept that money in until the end of 2014, you would have earned over 25 times what you had initially invested. (2) (3)

Even saving just a small amount each week or month would have made a tremendous difference in your retirement savings.

The Second Mistake

While many millennials make the mistake of investing too little in the market, others make another critical mistake. While they may be making regular contributions, they may not be invested in a wide enough variety of securities.

The youngest generations have grown up with access to the internet, social media, online financial media, and the tools to invest in any publicly traded security that they choose and they feel empowered to make investment decisions on their own, without consulting a professional. They’re also able to trade information with friends and make changes to their portfolio in a matter of seconds using their smartphone or computer.

Because of this, millennials are often invested in individual hot stocks, companies they believe in, or companies that sell products they use and like. This can (and will) work for some investors sometimes as a result of sheer luck and the law of large numbers, but it is not a consistent – or wise – strategy to rely on.

Buying What’s in the News

In 2007 researchers at UC Berkeley and UC Davis published a paper where they showed that individual investors have a tendency to buy stocks that had recently been in the news, or that had share prices that had recently gone up (4). By buying these “hot” stocks, new investors were forced to bid up the price to a higher level than they were before the news story came out. The study showed that, because these investors were buying at an artificially higher price, their portfolios ended up performing poorly as a result of having bought these ‘hot stocks’.

Additionally many millennials choose to engage in “socially responsible” investing, avoiding stocks in companies that sell products they don’t believe in, or that engage in business practices they feel are undesirable, and putting their money in companies that they believe in and feel good about.

Unfortunately, this too can have a negative impact on their returns over the long run. By focusing so narrowly, their portfolios are missing a major piece of the market, which limits their diversification. Additionally social responsible investments can have higher fees than their non-SRI counterparts, because they have the added cost of screening out stocks based on certain criteria.

Along with the added costs, and the decrease in diversification that result in focusing only on SRIs, researchers from Princeton and New York University published a paper in 2009 that showed that ‘sin stocks’ have historically outperformed their non-sin counterparts. (5)

Whether you are choosing to invest your money in a single stock, or several stocks, or you choose to invest in a SRI investment, you are limiting your investment choices, which in turn limits your level of diversification and possibly your returns over the long run.

Bottom line: if you avoid these two critical mistakes by starting to save – and invest – early, and by making sure your portfolio is diversified, you’ll be setting yourself up to watch your money grow over time.

 

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Broad-based investment vehicles with low fees and high levels of diversification, if appropriate to their specific circumstances, is one strategy to help clients toward their goals.

 

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One Secret to Investing: Do Less

matchbox car

We’ve all been tempted. Whether there’s a hot new sector that seems to be on fire, or a classic U.S. company that seems poised for a new burst of life, or, worse, a pundit who keeps warning us not to get caught flat-footed.

It’s human nature to be attracted to the next shiny new thing. My 2-year old son was perfectly happy playing with his trusty push truck, for instance, until he got a shiny red Matchbox car for his birthday and abandoned the – still very serviceable – truck.

It’s also human nature to try to catch winners on the way up and want to abandon the underperformers. But that doesn’t mean it’s always a good idea.

While the market as a whole has done quite well over the last 20 years – the S&P 500 has returned approximately 9.9%, and a diversified portfolio of 60% stocks and 40% bonds would have returned 8.7% [1]– the same can’t be said for the average investor.

During the 10 year period from 2003- 2013, the average investor’s portfolio only returned 2.6% annually, [2] barely a quarter of what the S&P returned, and not much higher than the rate of inflation.

What’s the reason for this underperformance?

By trying to beat the market by chasing performance, by trying to time markets, and by overpaying in fees, investors hurt their returns significantly.

Chasing Returns

When a particular investment is performing well, investors often get excited and invest more, causing the price to continue to climb. As it does, more investors are attracted to its returns – even as the stock becomes more expensive – causing the price to rise even more.

Eventually however the investment will return to its intrinsic value, and fluctuate slightly around that number.

When that happens, the investors who tried to chase performance and bought on the more expensive upswing, will lose money or underperform the market.

Timing the Market

It is not surprising that investors try to time the market. If we were able to predict when markets would top and when they would bottom, we’d all be enjoying extraordinary returns. In reality, however, very few people who try to time the markets actually succeed.

According to Morningstar, market timing costs the average investor 1.5% annually. For a hypothetical portfolio that returned 8.7% annually, a 1.5% additional ‘expense’ ends up eating up over 17% of the investor’s returns.

Warren Buffet once said, “the only value of stock forecasters is to make fortune tellers look good.” Famed investor Peter Lynch said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves”. [3]

If Warren Buffet and Peter Lynch don’t believe in trying to time the market, and studies have shown that strategies that try to time the market have very low success rates, it’s a good sign that you’re probably better off not trying too.

Overpaying Fees

If you are chasing returns, and trying to time the market, chances are you are making more trades than you would with a buy-and-hold strategy. That means you are paying more fees, which also affects your overall rate of return negatively.

A Potential Solution

The smarter approach may be to do less. Investors have historically hurt their returns by over-trading. Looking at your portfolio too often or constantly checking up on how the markets are doing can be detrimental to your finances if you are prone to reacting too impulsively. Rather than trying to time the market, or always buying the next hot stock or asset class, investors tend to have more success by taking a hands off approach.

Yes, his red Matchbox car is shiny and bright. But, as my son grows up, I hope he’ll learn to value the tried and true as well. And smart investors do the same, thinking carefully before they leap into the next big thing, or try to catch the current wave and ride it to the top.

Sometimes doing less is doing more.

 

 

It may be helpful to speak with a financial advisor to determine if your current portfolio and your current strategy are appropriate for your individual investment needs.

1) https://www.jpmorganfunds.com/blobcontentheader/202/900/1158474868049_jp-littlebook.pdf  (page 65)

2) http://www.forbes.com/sites/advisor/2014/04/24/why-the-average-investors-investment-return-is-so-low/

3) http://www.nytimes.com/2014/01/28/your-money/forget-market-timing-and-stick-to-a-balanced-fund.html?_r=0

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Financial Planning for Millennials: Overcoming the Fear Factor

financial planning for Millennials

What do you think of when you think of Millennials? The media loves to paint Millennials as “adventurous”, “risk takers,” and “thrill seekers.” But, surprisingly, when it comes to financial planning for Millennials, their behavior is anything but risky.

In fact, there is evidence that, while emotions and biases play a large part in Millennials’ investment decisions,  fear leads the list of behavioral influences.

We Millennials grew up during the Internet crash and have witnessed one of the most turbulent market cycles in recent U.S. history. With the financial crisis of 2008, and the housing bust leading to a recession, many of us have watched our parents struggle with financial security and worry about whether they’ll ever be able to retire. Many recent grads have experienced unemployment as a result of the crisis, and many are burdened with significant student loan debt. Good times? Not.

These experiences during their impressionable years have led many Millennials to take an emotionally driven approach to Financial Planning for Millennials and to adopt conservative money habits that analysts have compared to the investment behavior of young adults during the Great Depression.

They tend to be wary of investing in equities, for instance, resorting to a behavioral bias that favors peer narratives and unscientific anecdotes – such as stories of retirement-age people whose nest eggs were destroyed by the financial crisis – over careful data analysis.

In May 2013, Wells Fargo released the results of a study surveying more than 1,400 Millennials, that found that Millennials view the stock market, and most investments, as a risk not worth taking. More than half of Millennials are “not very confident” or “not at all confident” about the stock market and many of the Millennials who do consider investing in stocks see the market as a short-term investment. The survey also found that Millennials’ primary concerns were student loan debt and paying their monthly bills.

In fact, Millennials have not only taken on more student loan debt than any previous generation but they continue to struggle in a challenging job market. With many Millennials remaining unemployed or underemployed, and with bills and debt as their top priorities, they have very little disposable income for investing. Many, according to a Pew Research poll released in October 2013, did not even begin thinking about saving or establishing a 401(k) until about five years into their careers.

Additionally, a UBS Wealth Management survey report featured on Bankrate.com found that, more 39% of the Millennials surveyed – more than any other age group – said that cash is their preferred way to invest money that they don’t need for at least ten years. That’s three times the number who chose to invest in the stock market, despite the fact that the S&P 500 has gained 17% over the past year while most cash investment yields remain below 1%.

The Danger of Playing it Safe

The problem with short-term stock investment approaches and dipping in and out of the stock market is that it can work against investors, because short-term investments may be subject to a higher rate of volatility. Instead of looking at the long-term data, which shows that stocks typically outperform other more conservative asset classes over the long run, those young investors are fearful of the short-range volatility, clouding data about the positive potential of long-term investing.

That reluctance to get into the market can be problematic for long-term portfolio growth because, without the returns from stocks, it can be difficult to reach savings and retirement goals.

Bigger is Not Always Better…When Finding a Financial Advisor

With the crash of the big banks and the negative publicity surrounding Wall Street financial firms, Millennials became a generation that looked at financial professionals with mistrust. Instead, they rely more heavily on the Internet, social media, and personal networks for financial advice. Their experience with market volatility and lack of job security has had a significant impact on their attitudes and behaviors toward investing. With very little disposable income after bills and debt payment, Millennials want to feel a sense of security with their investments.

When it comes to working with a financial professional, ‘old school’, traditional banking services are of no interest to them. Bigger is not better in their minds; a smaller, more independent financial planning firm may be able to offer a more hands-on and collaborative approach to investing that Millennials feel more comfortable with.

It’s important to Millennials that they find someone they can trust and who can relate to their concerns and be open to new ideas and methods of investing. Sherman Wealth Management understands that being a part of the investing process is a must in financial planning for Millennials. We fill a role for clients who can no longer relate to, or trust, the large financial institutions that once held a stronghold in the marketplace. The professionals at Sherman Wealth Management provide a personalized plan for investing and help our clients navigate through the difficulty of prioritizing financial obligations.

Remember how it was the overconfidence of the large financial firms and irresponsible investors that brought us the financial crisis in the first place? That Millennial reluctance to let history blindly repeat itself may turn out to be a pretty good thing after all!

Learn more about Financial Planning for Millennials and our Financial Planning services.

Related Reading:

5 Planning Tips for New Parents

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Having the Money Conversation

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Millennials have a tremendous advantage over their Baby Boomer parents because they are comfortable talking about money. Having grown up with social media and the internet, this generation is not as private as their parents and grandparents are, especially about subjects like money and finance. The advantage is that open conversations can reduce fears and increase understanding, which can result in better decision making.

Yet, with all this comfort in discussing financial matters, many Millennials are hesitant to meet with a financial advisor. It’s one thing to gather information from family and friends or read articles about investing, it’s another to discuss your personal information with a financial advisor. That’s when it moves from theoretical to personal and that can create a great deal of fear and discomfort.

Why Fear Gets the Best of Us

How Much Do You Really Know About Finances? As educated professionals, it’s common to feel like you should know everything. After all, if you don’t understand it, a few internet searches should provide the answers!

When it comes to money matters, though, many Millennials feel like a fish out of water. Internet searches can provide information that’s both confusing and conflicting, and that doesn’t answer individual questions about strategy and direction.

Then there is the question of what information can be trusted. Is the site legitimate and can the writer’s – and site’s – motivation be trusted? While financial information is plentiful, much of it’s either very general or coming from a sales site that promises a secret formula that will turn you into a millionaire.

Financial decisions by nature are very individual and personal. Because there’s no one-size-fits-all investing strategy, personal consultations are invaluable.

Advisor motivations. Can the advisor be trusted? A trusted advisor needs to understand your circumstances, goals, dreams, and aspirations. Once they do, they can help to create a long term strategy that will help to make those dreams a reality. But you must be able to trust that your advisor will make recommendations that are most beneficial to you, the client, not the best for them, the advisor.

Addressing these concerns in an open conversation will go a long way. No one wants to be sold a product. We all want to invest money in a sound strategy. Understanding the reasons for the recommendation will help you understand how it may benefit you and help you pursue your long term goals.

Fear of not being understood. As complicated individuals we want to appear like we have everything in order. In reality, sometimes we’re confident, other times not so much.

Financial advisors have seen nearly every level of financial preparedness. They have seen financial messes and worked with clients to get things corrected. They have seen strong portfolios, weak portfolios, no portfolio, and everything in between.

Even if you don’t feel you have all your ducks in a row, an advisor can help. If you’ve made bad decisions in the past, they can make recommendations for corrective action. If you’ve been unable to get things in order on your own, working with a professional can be the fastest way to get on track.

Markets not doing as expected. This can go two ways. If you invest conservatively and the market takes off you might end up kicking yourself for not being more aggressive. If the markets are slow and you invest aggressively you can end up wishing you’d been more conservative.

When you meet with an advisor, you’re meeting with a professional who understands the investment business and who can make recommendations that are consistent with your financial goals. An advisor does not have a crystal ball; remember that long term investing is not about beating the markets, it’s about making strong financial decisions that over time will lead to increased confidence in financial matters.

Pulling the Trigger

The first step is always the hardest. This is true whether you’re trying to establish a workout routine, learn a new language, start a new job, or change your investing strategy. Resisting change is natural and we are creatures of habit. However, there comes a point when, in order to grow and progress, we have to stop making excuses and get started by meeting with a financial advisor.

Make the appointment. Even if you don’t think you know enough, have enough money to invest, have a good enough paying job, or whatever the excuses for delays have been.

Before you meet with the advisor, write down questions you have. What things have you heard and what things do you want to understand. This can guide the conversation as you begin to develop a relationship with an advisor.

A financial advisor at Sherman Wealth is someone you’ll want to get to know! You’ll want them to know everything about you and your family’s needs. As your advisor learns more about you, they’ll be able to make the appropriate recommendations as opportunities arise.

Learn more about our Financial Advisor services.

Related Reading:

The Top 10 Questions to Ask a Financial Advisor
Transparency on Both Sides

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