Here’s The Importance of Financial Literacy

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Sherman Wealth has long been advocates of promoting financial literacy and empowering our world to become more educated on how to manage all aspects of their financial lives. We want to highlight an interesting article we saw on www.evidenceinvestor.com, discussing several reasons why “high flying professionals fail at investing”. This piece highlights the lack of financial literacy in our country, regardless of occupation or socio-economic upbringing. According to the article, “the best investors often times aren’t those with the highest IQs or who’ve read the most books, it isn’t knowledge, but SELF-knowledge, that really sets them apart.” 

Often, high-earning professionals think they are saving enough but countless financial complexities exist within a professional services career track. Biases or mental errors are some of the biggest things standing in the way of financial success, mainly because they’re not easy to recognize in ourselves. Additionally, people are naturally resistant to change and most people are hesitant to pay small costs even for big gains. 

Failure to rebalance is also something that many people struggle with and contributes to financial literacy. People are reluctant to take action to rebalance a portfolio. It’s too much fun to let winners run. It’s also psychologically difficult to sell winners to buy losers. But failure to rebalance quickly causes the client to be dangerously exposed to a downward turn in the markets

People also tend to overestimate the significance of recent events and irrationally discount longer-term trends. Those of us over a certain age remember Black Monday on October 19th, 1987. The stock market lost a quarter of its value in a single day. That spooked a lot of people – and many got out of the market right after. Looking back at it now, Black Monday barely registers as a blip on the graph. This is an example of recency bias. Recent losses play havoc on our emotions and cause us to lose perspective. The long-term trend of the stock market makes any single day’s volatility look insignificant in comparison, so when we look back at a single day like Black Monday on a chart, we wonder how we could have panicked. Furthermore, given the current climate with COVID-19, it’s important to consider this idea, as people may have panicked back in March, selling assets in their portfolio, instead of holding onto them as the economy recovers. While it often seems natural to panic during an economic downturn, it’s important to remember that these dips recover naturally over time. 

These are just a few examples of how society and perception can lead us to make poor financial decisions. Given the current climate we are living in today, it is crucial to make sure you fully understand the decisions you make within your portfolio and that they are long-term, strategic moves. With a lack of financial literacy amongst all career fields and economic classes in our society, we realize the importance of being financially educated and would love to help you to make smarter decisions. If you have any questions or would like to set up a time to talk about your finances, please feel free to reach out at info@shermanwealth.com. Check out more of our blogs that discuss the importance of financial literacy.

Recent Market Volatility

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This past week marked another volatile one in the market.  After a significant rally, stocks suffered a large drop Thursday, with the S&P 500 down 5.9%, its worst day since March 16. The market had previously rallied 45% from its late March lows, and was flat for the year to date and trending lower overall. The Dow rose 400 points on Friday, but Wall Street recorded its biggest weekly loss since bottoming on March 23.


After a downturn in March, momentum turned positive in April and continued into May, as stocks registered healthy gains, and investors looked to future economic hopes rather than current woes.  As we look to June, many investors believe a sustained and complete economic recovery may rest on developing a vaccine for COVID-19.

  

In recent days, there have been growing concerns as coronavirus counts in a number of states are on the rise, including Texas and Arizona, which had been spared the worst of the first wave. The US has now seen over two million confirmed coronavirus cases and over 110,000 deaths.

 

There have also been concerns when it comes to policy response to the COVID-19 crisis. While the initial policy response was overwhelmingly supportive, the Fed released an outlook on Wednesday suggesting an extended recession while at the same time not increasing their monetary support. Many feel as though they should have stepped in further. Furthermore, Congress, which offered significant support for both Wall Street and Main Street in the early days of this crisis, is now torn about the next round of stimulus.

 

When you take a look around the country and the world, it is clear that we are in an awful recession as well as a humanitarian crisis. Policymakers will have to do more to get us through the challenges that lie ahead. There are valid reasons to be optimistic about possible treatments in the near future and about potential vaccines later on, but this pandemic will continue to grind on our economy and on our society.

 

As the market continues to assess the long-term value of these businesses, it will periodically become too optimistic, and periodically become too pessimistic. Due to the uncertainty surrounding our current circumstances, we should expect elevated volatility for a prolonged period, which is hard for many people (and the markets they form) to digest. This volatility will create opportunities—sometimes to buy undervalued assets and sometimes to sell overvalued ones. Days like Thursday are why we consistently recommend diversification—while stocks fell, bonds rose slightly. 

 

The key to successful, long-term investing is a well-diversified, customized portfolio that focuses on tax-efficiency, cost-effectiveness and risk management.  We create and manage investment models tailored to your goals, timeline and evolving life circumstances. This is a challenging time in the real world and in the financial markets. We are continuing to monitor the markets, re-assessing portfolios and assisting our clients in any way necessary during these uncertain times. Click here to find out if your investments match your risk tolerance. And, as always, please reach out with any questions you may have – we are here to help!

 

Should you “Inaugurate” a New Financial Plan on January 20th?

new financial plan

Time for a New Financial Plan?

The market’s wild ride after the presidential election might have you wondering if a change in leadership should mean a change in your financial strategy.

While no one can ever predict with certainty what will happen to the market – or even on Twitter these days – there are two important points to remember.

It Matters Less than We Think

The first is that there has been a long-term upward movement in the market through many changes of administration.

Ironically, who’s in the White House makes less difference than we think it will in terms of overall market performance: markets are driven by market conditions more than by the policies individual Presidents advocate. As Barry Ritholz noted in an excellent piece in the Washington Post last week, during President Grover Cleveland’s first term stocks rose 53 percent while in his second term they fell 2 percent. That wasn’t because President Cleveland forgot how to make stocks go up – it was overall market drivers that made a difference. So for medium and long-term goals – like saving for retirement or your children’s education – taking the long view with your investments is critical.

How Much Risk is Too Much?

The second point is that everyone has a different level of risk tolerance.

That is why it’s critical that you have access to a sophisticated risk tolerance tool that really drills down to who you are, instead of only generic questions about age, income and whether or not you call yourself “aggressive” or “cautious.”

If you’re risk adverse and you’re anxious about a crash or a downward trend that may affect your short term plans, you can always use January to re-balance your portfolio and lock in profits. As a wise investor once said: “no one ever lost money taking a profit.” If your risk tolerance is higher, you can view the volatility as an opportunity to maximize the possible potential for your investments. By continuing to contribute regularly to a savings or investment plan, you take advantage of the power of dollar-cost averaging and compounded interest to make your money work for you. If you had sold in the sharp downturn last January, for instance, instead of sticking to your plan, you would have lost out on the dramatic returns afterwards.

Of course every January is a good time to meet with your advisor to rebalance your portfolio based on your own changing circumstances, tax needs, and risk tolerance. But, fundamentally, your plan is still your plan, no matter who wins the presidential election. Your goals are still your goals and compound interest still compounds. If you have worked with a good – fiduciary, fee only – financial advisor to create a workable plan based on your life goals and your circumstances, then staying the course – with minor adjustments – is very often the smartest plan. Data overwhelmingly shows that it’s “slow and steady” investing – not playing a guessing game by jumping in and out of investments – that ultimately wins the race.

Other Sources:
What is a Financial Plan?
The Importance of Personal Finance Knowledge
Financial Planning for Millennials: Overcoming the Fear Factor

 

This article was originally published on Investopedia.com

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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.

 

 

Going the ETF Route? What You Should Know

CNBC recently published a story on the growing popularity of exchange-traded funds, or ETFs. According to the article, 81% of advisors surveyed said they used or recommended ETFs to their clients in 2015. We have been advocating ETFs as a secure, flexible investment for our clients since the days when they weren’t as popular.

Here’s a look at some ETF basics. (For related reading, see: Why Investors Can Be Their Own Worst Enemy.)

What Are ETFs?

An ETF combines features of stocks and mutual funds. Like a mutual fund, it is composed of a group of stocks, giving investors access to a diverse array of securities with only one transaction, an investment in the fund. And like stocks, an ETF can be bought or sold on the open market at market-determined prices. ETFs are usually used to track specific indexes of the securities market as a whole or of specific sectors. The first ETF in 1993 was created to track and match the performance of the S&P 500 index.

Why Do We Use Them?

ETFs have a number of advantages for investors who are saving for retirement. These include:

  • Transparency: While the holdings of a regular mutual fund are only reported every quarter or year, ETFs report their holdings every day since they are traded and the holdings are a reflection of an index. Knowing exactly which positions you are invested in can help with fine-tuning your portfolio according to your risk tolerance.
  • Lower costs: The passive nature of ETFs allows them to have significantly lower costs than a mutual fund. In short, actively managed funds, as the name implies, execute a far greater number of trades than passive funds like ETFs, which are generally not overseen by a fund manager on a daily basis. As a result, ETFs usually incur much lower costs than actively managed funds. (For more, see: Don’t Expect to Win With Actively Managed Funds.)
  • Flexibility: Mutual funds, whether active or passive, can only be sold at the end of the trading day. On the other hand, ETFs are traded throughout the day and their price continually updated.
  • Tax efficiency: There are several factors underlying the structure and operations of ETFs that make them more efficient than a lot of mutual funds. To buy shares of a mutual fund, you must exchange cash for shares directly with the fund. There is no middleman; therefore, when the fund realizes capital gains on an investment, those gains are passed through to the individual investors and you must pay tax on it. When purchasing shares of an ETF, the shares in the ETF are purchased through a middleman called an Authorized Participant, not the fund itself. (The AP purchases shares from the fund when they are originally issued.) This degree of removal from the fund and the capital gains it realizes can help you avoid significant taxes on long-term capital gains. Additionally, since ETFs don’t make as many trades as actively-managed funds, there are fewer chances for an event that could generate capital gains, which will be taxed.

So how do they fit with our investment strategy? We think that your best chance at building wealth through the markets for retirement is to work with a fiduciary advisor to utilize a long-term approach that emphasizes diversification, tax efficiency, risk management and cost effectiveness. We believe in the efficient market hypothesis, which dictates that in the long run, it is nearly impossible to beat the returns of the market by picking individual stocks and market timing. Therefore, an ETF is generally a stable—but flexible—tool for long-term growth if used properly. (For related reading, see: 8 Common Biases That Impact Investment Decisions.)

 

This article was originally published on Investopedia.com

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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.

Instituting Investing Rules: Lessons from the Brexit

Brexit Rules

The world had its eyes on the United Kingdom on June 23, as returns from their national referendum on whether to withdraw from the European Union began to roll in. The ultimate victory of the “leave” camp sent shock waves through political and financial sectors, as investors saw the British pound crash to a 30-year low and markets experienced a significant drop.

Rules-Based Investing

The Brexit tale is only just beginning, and its ultimate effects are anyone’s best guess. That said, there is a lot to be learned from what’s already happened. We think that in the aftermath of Brexit, you need investing rules that you stick to hard and fast.

The market crash post-Brexit panicked a lot of investors. Of course, investors and advisors should have basic philosophies that they stick to, even in times of market crashes, such as not following the herd and selling off when a stock is lowest. (You can read more about the detriments of panic selling here.) But it may be beneficial to establish some firmer rules for exactly what qualities the investments you make will have.

For example, consider the following from Kevin O’Leary, Shark Tank judge and O’Shares chairman: “Imagine if you could create the perfect portfolio manager that had no style drift, that never, ever got emotionally involved in a stock, that only used the most hardcore rules on balance sheet testing, and never, ever strayed from that. That’s what rule-based investing is. It takes out one of the challenges I’ve found as an investor over the decades.”

In other words, you have to eliminate emotion from your investing. As a retirement saver, this can be incredibly difficult after big market swings, whether up or down. We’ve previously explained why active management doesn’t win and one of the benefits of passive investment management is that since it takes a long-term view, it reduces the role of emotion in investment decisions. Creating investing rules can be a good extension of this strategy.

 

This article was originally published on Investopedia.com

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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.

6 Questions to Ask A Financial Advisor

6 Questions for Financial Advisor

Finding a financial advisor who is right for you is an important process. A good financial advisor is there to prevent you from making decisions that would have a negative, unintended impact on you. Who wouldn’t love to have a financial coach to keep you on track to achieve your financial goals?

Just like with any working relationship, it’s a good idea to interview advisors until you find the one who is the best fit for you, your life, and your financial goals. Since you are entrusting your financial well-being to someone, you should get to know them and their financial planning and investing philosophy before committing to a long-term relationship.

As you may have heard the Department of Labor (DOL) has just released its new fiduciary rule in its final form. We previously wrote about the reasons why someone would oppose this rule considering it was created to improve financial transparency and eliminate conflicted advice from advisors. While this rule would still allow advisors to keep their “conflicted” commissions in some instances, it would require advisors to act as fiduciaries (a.k.a. “best interests contract”) when handling client’s retirement accounts.

We have long been proponents of more transparency and conflict-free advice and feel this is a step in the right direction.

So how does this affect your search for the right financial advisor? Here are 6 questions to ask to help with finding a financial advisor.

1. Are You a Fiduciary? (Are You ALWAYS a Fiduciary?)

As we mentioned earlier, this new rule will only require financial advisors to act as a fiduciary for client’s retirement accounts. A fiduciary is regulated by federal law and must adhere to strict standards. They must act in the client’s best interest, in good faith, and they must provide full disclosure regarding fees, compensation, and any current or potential conflicts of interest.

Until now, broker-dealers, insurance salesman, bank and financial company representatives, and others were only required to follow a Suitability Standard. That means they only had to provide recommendations that are “suitable” for a client – based on age or aversion to risk for example – but this may or may not be in that client’s best interest.

The brokerage industry, as you can probably imagine, and all those who earn their compensation from commissions are strongly against these new rules.

Even with this new law passed, we feel it is important to make sure your advisor is acting as a fiduciary when dealing with ANY of your finances, not just retirement accounts.

 

2. What is Your Fee Structure? (Difference Between Fee-Only, Fee-Based and Commission)

Advisors throw out terms like “fee-based” and consumers assume that is the same as
“fee-only.” That is not the case. At Sherman Wealth Management, we are fee-only which means that we are paid exclusively by our clients, so we are completely conflict-free. We do not get commissions from the investments or products we recommend. We do not get bonuses based on how many clients we get to invest in company products. We are paid an hourly or quarterly fee by our clients who retain us because we are making their money work for them with only their best interest in mind.

Think of it this way: would you want to work with an accountant who also gets commissions from the IRS? Of course not. You want your accountant to represent your best interests. Would you go to a doctor who makes money each time he prescribes penicillin? No, you want your doctor to prescribe what is right for you.

Do not assume that an advisor is following a fiduciary standard with their compensation now. The new rules will not be enforced until 2018. Ask your financial advisor to clearly specify their fees. With many layers of diversification that can be applied to your portfolio, you want to be aware of whether you are exposed to up-front charges, back-end fees, expense ratios, and/or whether a percentage of your returns will be deducted.

 

3. Why Are They Right for YOU?

A financial advisor should be able to tell you their strengths and what sets them apart. Some advisors will advise on investments while others specialize in comprehensive financial planning. While you may think all advisors are the same, and it certainly may seem like that on the surface, by now you should be seeing that is not the case.

Ask how involved they are with their client’s portfolios. Are they hands-on in their approach? How available are they for their clients’ needs?

For us, we enjoy serving a wide-range of clients, from young first-timers who are just getting started with investing and financial planning, to experienced savers, to high-net-worth investors who are well on their way to financial independence.

We strive to understand our clients wants and needs. We help our clients plan for the long term while simultaneously working to avoid short-term roadblocks. We do so by making it a point to SHOW you that you are not alone. We’re just like you, we’ve been there, and we know that financial planning can be an anxiety provoking activity for many. We use a fluid process to help set clear, realistic goals with an easy to understand roadmap of what you need to do to get there. We are right there with you every step of the way.

In today’s world you don’t just want a trusted advisor, you want instant access to your accounts and the progress you are making. That is why we offer some of the best in new financial services technology tools.

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The relationship with your financial advisor is an important one. You need to feel comfortable with whom you are working with.

 

4. What is Your Investment Philosophy?

Every financial advisor has a specific approach to planning and investing. Some advisors prefer trying to time the market and actively manage funds versus passive investments. Others may seek to gain high returns and make riskier investments. Your goals and risk tolerance need to align with the advisor’s philosophy.

When anyone invests money, they are doing so with the hopes of growing it faster than inflation. While some traditional investment managers not only want to generate a profitable return, they aim to beat the market by taking advantage of pricing discrepancies and attempting to time the market and predict the future. Some investment companies offer “one-size-fits-all” investment management solutions that only take into account your age and income.

We have a different approach. We believe an individuals best chance at building wealth through the capital markets is to avoid common behavioral biases in the beginning and utilize a well thought out, disciplined, and long-term approach to investing. We create a well diversified, customized portfolio that focuses on tax efficiency, cost effectiveness, and risk management. Read more about how we do this.

Make it a top priority to understand the strategy your advisor uses and that you are comfortable with it.

 

5. How Personalized Are Your Recommendations for Your Clients?

It is important that your financial advisor tailors your financial plan to your specific goals. Your retirement plan and investment strategy should be customized to take into account your risk tolerance, age, income, net-worth, and other factors specific to your situation. There should not be a one-size-fits-all approach to managing your money.

Some traditional brokers and insurance companies are so big that it becomes impossible for them to give you a truly individualized experience. They have a corporate agenda that they must follow and it can restrict the service they provide to you.

As frustrating as the requirement for a high minimum balance is for first-time investors, it has also inspired a new breed of smaller independent Registered Investment Advisors (RIAs), like Sherman Wealth Management. What our clients all have in common is that they appreciate the focus on their own individual goals and best interests that we guarantee as a boutique, independent, fee-only fiduciary.

We know that each client is unique.  We don’t look for “market efficiencies” or work for sales commissions on the products we recommend. Our focus is different. We strive to help investors build a strong foundation and grow with them, not by profiting off good or bad trades. This gives us the opportunity to create individual strategies and plans that are uniquely suited to each client, not just a cookie-cutter plan based on age, income, or broadly assessed risk tolerance.

 

6. Do You Have Any Asset or Revenue Minimums?

Some have argued that the proposed DOL rule will end up hurting the small investor because larger institutions will not be willing to serve small accounts. This logic is fundamentally backward and flawed, as those clients were never on their radar to begin with. In fact, the ability for these large institutions to generate commissions and thus charge more to these small investor clients have driven that business, without regard to the best interests of the individual investor.

For example, In a company statement quoted by Janet Levaux in Think Advisor, Wells Fargo, the most valuable financial institution in the world according to the Wall Street Journal, said that in 2016, “bonuses will be awarded to FAs with 75% of their client households at $250,000.”

Wells Fargo isn’t the only large institution effectively ignoring Millennials and other smaller and entry-level clients. Most of the corporate institutions prefer high-net-worth clients because it creates “efficiencies of scale” and a higher profit margin on larger trades.

The complaints against the new DOL rule have nothing to do with protecting the little guy. Rather, the complaints are driven by the desire of commission-based large institutions, insurance companies, and broker-dealers who are trying to protect their ability to generate commissions and charge clients unnecessary fees.

Make sure you understand your advisor’s motivations. If they don’t want you, why should you want them?

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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.

Don’t Expect to Win With Actively Managed Funds

actively managed

This article was originally published on NerdWallet.com

Trying to pick individual stocks is a losing game, and this doesn’t just apply to individual investors. It’s also true for professionally run, actively managed mutual funds.

Actively managed funds are tasked with picking a collection of stocks and bonds that will outperform market indices, or benchmarks, such as the S&P 500 or the Dow. They’re armed with Ph.D. analysts, hundreds of interns, and tools and research to which very few of us have access — but they can’t consistently beat their benchmarks by enough to justify their costs.

Long-term underperformance

Eighty-six percent of actively managed funds failed to beat their benchmarks in 2014, according to the S&P Dow Jones Indices scorecard. “So what?” you may say, “That’s only one year.” But 89% of funds failed to beat their benchmarks during the past five years; 82% failed to do so during the last decade.

The following data help illustrate how unlikely it is for active managers to beat the market over longer periods. During a one-year period, a high percentage of active managers in some categories may outperform their benchmarks. But over five- and 10-year periods, fewer active managers outperform.

Percentage of Actively Managed Funds That Outperform Benchmarks

1 YEAR 5 YEARS 10 YEARS
Source: 2015 Morningstar data
Large-cap value 36.5 19.6 33.7
Large-cap core 28.7 16.7 16.6
Large-cap growth 49.3 11.9 12.2
Mid-cap value 53.5 22.7 42.3
Mid-cap core 42.1 27.7 11.0
Mid-cap growth 41.6 26.0 32.4
Small-cap value 66.7 38.0 38.3
Small-cap core 44.7 32.8 23.1
Small-cap growth 22.2 20.5 23.1

Some managers do outperform the market, but picking a winning manager is as tricky as picking winning stocks. If you still think you can find “a good manager” who is the exception, consider this widely accepted Wall Street rule of thumb: Past performance doesn’t guarantee future performance. A manager who outperformed last year may not do it again this year.

Reasons for underperformance

There are a few main reasons actively managed funds underperform, aside from picking the wrong investments:

FEES

Many actively managed funds charge 1% to 2% per year in management fees, while a passively managed exchange-traded fund could charge as little as 0.1% to 0.2% per year. And many actively managed mutual funds are loaded funds, which means you’ll pay a sales charge, typically between 4% to 8% of your investment, when you buy or sell the fund — though the fee may decrease the longer you stay invested. Compounded over time, these higher fees can eat up a lot of gain, reducing overall returns.

TAXES

Because actively managed funds try to time the market and pick winners, they buy and sell positions frequently. These transaction costs reduce the fund’s returns, and all the buying and selling can also create taxable gain. Fund managers have no incentive to avoid this because they simply pass those taxable gains on to you, the shareholder.

MARKET EFFICIENCY

Some argue that markets are becoming more efficient, making it difficult to identify overvalued or undervalued stocks. The efficient market hypothesis states that stocks are constantly adjusting to news and information, and thus their share prices reflect their “fair value.” In simpler language, other than in the very short term, there are no undervalued stocks to buy or inflated stocks to sell. This makes it virtually impossible to outperform the market through individual stock selection and market timing.

An unsustainable approach

Whether active management can outperform is a controversial topic. Many experts dismiss the science and say that they can indeed beat the market. Some of them may even do so for a year or two, or even five, but what about over the long run? It’s simply not sustainable, and to think otherwise is dangerous.

If the data shows that the vast majority of the brightest and most well-equipped professional investors can’t beat their benchmarks, why should you believe anyone who says they can?

This story also appears on Nasdaq.

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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.

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

March Madness (1)

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.

Why Stock Picking Is a Losing Investment Strategy

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This article was originally published on NerdWallet.com

Picking a stock that goes up 100% in a year is exhilarating. But there’s a problem with this method of investing. Like gambling in Vegas, it may be fun and even rewarding in the short term. Yet in the end, just as the house always wins, picking stocks is a losing game.

I talk to friends all the time who say they invest in stocks — meaning individual ones rather than broad-based index funds that capture the movement of the entire market — and I always wonder why. I think many people see a company that carries a well-known name — maybe they are customers or they hear about it on the news — and they assume it’s a good investment. But history has shown us time and time again that picking stocks of individual companies, and thus trying to determine which will be the winners, is not a good investment strategy.

No company is immune to short- or long-term failure, no matter how good they look in the moment. The company’s value may not go to zero, but it could certainly take a huge hit relative to its underlying industry or index. Just think about how the Standard & Poor’s 500 index has changed in the past two decades. There has been a revolving door among the largest companies in the S&P 500, proving that even the biggest companies out there are not immune to volatility and risk.

Individual stocks vs. an index

As further evidence that picking stocks is risky and ultimately a losing game, consider recent research from financial firm JP Morgan Chase & Co. It compared the Russell 3000 index — which, as the company notes, “represents approximately 98% of the investable U.S. equity market” — between 1980 and 2014 with information on individual stocks. Here are the three main findings:

  1. The risk of ‘catastrophic’ failure among individual stocks is higher than you think. “When looking at how often a stock has what we call a ‘catastrophic decline’ — falling 70% or more and never recovering — we see that 40% of all stocks suffer this fate at some time in their history. And some sectors — like telecom, biotech and energy — saw higher-than-average loss rates,” the report states.
  2. Most stocks underperform over their lifetime. According to the report, “The data shows that two-thirds of all individual stocks underperform over their ‘lifetime,’ as compared to the Russell 3000. On average, the outcome for individual stocks was underperformance of about 50%.”
  3. Concentrated holdings in individual stocks add huge amounts of risk to your portfolio. “When computing the optimal risk-adjusted return for a concentrated holder,” the report notes, “we find that 75% of concentrated stockholders would benefit from some degree of diversification.”

Why investors keep picking stocks

So why do so many individuals keep trying to pick stocks? I see two main reasons.

We all enjoy making money, and we don’t usually associate the word “boring” with something we enjoy. That reason alone likely explains why so many people try to pick stocks. It’s the “sexy” way to invest. But the research is clear that this is not an optimal strategy. When it comes to investing, “sexy” might as well be spelled “sucker.”

Rather, investing should be boring. It’s like baseball: Base hits are the name of the game. By properly diversifying your investment portfolio — picking a mix of asset classes with exposure to many sectors and countries — with a long-term strategy, you allow yourself to take advantage of compounded gains without subjecting yourself to unnecessary risk (i.e., swinging for the fences).

The other major issue is that not all investors understand what they are doing. When you’re stock-picking, you may think that you are diversified by owning five different stocks; but if that’s all you own, you’re exposing yourself to a huge amount of risk by having such a large percentage of your portfolio invested in just one stock or industry. One catastrophic loss could devastate your portfolio.

Diversification

The logical question you might have is, “OK, so what should I do?” While answers are going to vary slightly for each individual, one applies across the board: Diversify. That doesn’t mean owning many different individual stocks in the same sector, but rather spreading your investments throughout multiple asset classes, industries and countries. Proper diversification of your portfolio is key to your investing success over the long run.

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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.

Why Volatility Is an Opportunity for Long-Term Growth

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This article was originally published on NerdWallet.com

The market has been on a wild ride lately, which has provided a wake-up call for investors who rode the six-year bull market — and its low volatility — without a care in the world. Now reality has set in.

As with all market corrections, this one has inspired retail investors to question whether it’s time to pull money out, shift to safer and more stable investments or just throw in the towel entirely.

While it is normal to feel anxiety during a downturn, there’s another way to look at it. As long as downturns and dips don’t affect your financial plan or, more specifically, your immediate need for cash, they can be an opportunity.

Remember the mantra “buy low and sell high”? The volatility, geopolitical risk and uncertainty we’ve experienced so far in 2016 have presented a particular opportunity for investors in the accumulation stage of their lives, or for anyone who has money but hasn’t started investing yet, to actually buy low (or at least lower). If you’ve been delaying investing regularly because the “market was too high” or “you knew a correction was coming,” now might be a good time to start.

The key is to view volatility — like what we experienced last August and what we are seeing now — as a tool to keep contributing regularly to your investments. This will let you maximize the possible potential for your investments and enable you to watch them grow. The two best concepts to help you do that are dollar-cost averaging and compounded interest.

Dollar-cost averaging

Dollar-cost averaging is the process of spreading out the costs of your investments as the market rises and falls, rather than purchasing shares all at one (potentially higher) price. The key is to pick a schedule — whether it’s monthly, bimonthly or weekly — and an amount, no matter how small, and stick to it by purchasing as many additional shares in your investments as your fixed amount will allow. This is much more effective than trying to “time” the market by buying shares when they are at their lowest or selling when they are at their highest.

Using this system, you are regularly contributing the same amount, regardless of the price of shares. As a result, that fixed dollar amount buys more shares in times when the market has dropped and prices are low, and it limits the amount of shares when the market has risen and prices are high. Over time you will come out ahead, compared with trying to time the market.

Compound interest

Once you have started to build up the size of your investment with the help of dollar-cost averaging, the concept of compound interest gives you a boost. Compounded interest is the interest you earn on the sum of both your initial investment and the interest that investment already has earned. If you have $1,000, for instance, and it earns 5% interest yearly, you will earn $50 at the end of the first year. Then, if you keep that money invested, the next year you will earn 5% interest on the total — $1,050 — which is $52.50. The following year, you will earn 5% on $1,102.50, which is a little more than $55.

Because dips in prices allow you to buy more shares with a fixed amount, volatility allows you to maximize the potential for compound interest as well.

Using these two concepts, the daily ups and downs and market corrections are not a cause for undue concern. If you are sticking to your dollar-cost averaging plan and taking advantage of compound interest, news events shouldn’t affect your long-term plans and goals. Any dollar that is invested in the stock market should be a dollar that you are comfortable keeping invested through a bear market or a major correction.

If you are disciplined about investing, and consistent about reinvesting, you’ll start to look at market volatility as a tool and an opportunity, rather than as a source of anxiety or, worse, a reason to throw in the towel and lose out on long-term growth.

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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.