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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Do You Share These 4 Habits of the Wealthy?

Wealthy Habits

In his book “Rich Habits: The Daily Success Habits Of Wealthy Individuals,” author Thomas Corley outlines what he learned when he surveyed both wealthy and struggling Americans about their habits and attitudes.

Here are a few “rich habits” he identified that are worth integrating into your professional, financial, and even personal life, to help you on the road to achieving your own goals.

The Wealthy are Goal-Oriented

Corley found that 67% of the wealthy people he surveyed put their goals in writing, 62% of them focus on their goals every day, and a whopping 81% keep a to-do list.

It’s hard to reach your goals if you’re not focused on them and they’re not your top priority, and it can be daunting to have too many goals (one reason so few people are able to keep their New Year’s Resolutions.)

A more productive approach is to prioritize one important goal, create a plan of actionable steps that help you accomplish that goal, then add those steps, tasks and habits to your daily to-do list. These three simple steps will give your increased focus and will help you move closer to that goal.

Once you’ve incorporated them in your daily routine, identify a second goal and follow the same plan. The key to success is taking it one step at a time!

The Wealthy Use Downtime Wisely

At the end of your workday, do you like to relax with Netflix, video games, or YouTube? According to Corley’s data, 66% of the wealthy said that they watch less than an hour of television a day, 63% spend less than an hour a day on the Internet unless it is job-related, an impressive 79% say they read career and educational material each day, and an equally impressive 63% said “I listen to audio books during the commute to work.”

While we all like to relax and recharge with entertaining media, that time can never be recovered for things that help you become a stronger, more successful individual like reading, networking, exercising, or volunteering for a cause you believe in.

Time is the great equalizer: we all have 24 hours a day. What you choose to do with that time can either help you to reach your financial and life goals, or distract you from it, so choose wisely!

The Wealthy Invest in Their Future

Corley’s research also showed that the wealthy live within their means, pay themselves first, and don’t overspend.

Building wealth is not accomplished by upgrading to each new electronic gadget, leasing the newest model car, and living in an extravagant home. The wealthy, according to Corley, spend less than they earn, own and maintain their cars for many years, and save a significant portion of their income. While saving money and living modestly is not as sexy as a flashy smartphone, it will go a lot further toward providing a comfortable future.

Living within your means also includes not carrying credit card balances or heavy debt. When you are carrying debt, what you earn today is paying for yesterday’s expenses. Living within your means while saving and investing a portion of your income lets you invest in tomorrow, rather than yesterday, while learning to be satisfied with what you have today.

The Wealthy are Willing to Take Risks

Another fascinating finding of Corley’s research is that 63% of the wealthy people he interviewed said they that they had taken risks in search of wealth, while only 6% of the struggling Americans he interviewed said that they had taken risks.

For many, fear of failure is a great de-motivator and can be paralyzing. When you do not fully understand something, whether it’s a challenge, a potential project, an investment, or even a social problem, it can be easier to do nothing than to act. But without risk, there is often no reward.

What Corley discovered is that, instead, rather than fearing failure, the wealthy consider failure to be part of the process and – most importantly – an opportunity to learn.

How can you face risk without fear so that you can seize potential opportunities? Educating yourself is the key step. Researching the investment, the project, or the choice, and learning about the options and risks, help keep fear and anxiety about the unknown from clouding your decision-making process.

Even with the best preparation though, choices don’t turn out as envisioned. When that happens, take a page from the wealthy: learning from those failures and experiences will lead to more opportunities and better choices down the road!

Are Your Own Habits Setting You Up for Success?

While following each of these habits may not make you rich, they will certainly help you get into a success mind-set. 68% of the Americans on Forbes billionaire list consider themselves to be “self-made billionaires,” which means that they worked hard to reach their own professional and financial goals. The true route to financial success is through discipline and steady habits that grow your net worth over time.

Do you already share these four habits of the wealthy? If so, congratulations on your focus and your commitment to success. If not, try adopting one – or all four – of these important habits and see if it doesn’t get you closer to achieving your own goals!

 

With over a decade’s worth of experience in financial services, Brad Sherman is committed to helping his clients pursue their financial goals. Contact Brad today to learn more about how you can better pursue yours.

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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Not Investing Yet? Here Are 4 Simple Steps To Get You Started

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Close your eyes for a moment and envision where you’d like to be in 30 or 40 years… Are you sailing to Tahiti? Writing that book? Running your vineyard? Building a new company?

If you had trouble envisioning where you’d like to be, you’re not alone. But unless you can visualize it, unless you’ve got your destination planned, it can be hard to get there. That’s why it’s so important to start thinking about what your goals currently are – whether it’s for yourself, your career, your startup, your art, and/or your family – and take the first – or the next – steps to invest in your future.

What does investing mean? Very simply, it means putting your money somewhere you expect it to grow. It can be traditional stocks, bonds and mutual funds, or real estate, collectibles, annuities, and other things that are expected to gain value over time.

When you’re just starting out, thinking about – and setting aside money for – your future can feel like a challenge; when you’ve just set up your first lemonade stand and barely breaking even, it’s hard to think about re-investing part of your profits in lemon groves that will someday produce income for you.

The trick is to overcome inertia, get started, and make a commitment, even if it’s just a tiny first step.

Inertia is not your friend

Inertia is one of the biggest reasons people waste opportunities to started investing when they’re young.

Objects at rest tend to stay at rest:

If you’re not investing yet, or if your money is sitting in a non-income producing bank account it can be hard to get started or get moving.

Objects in motion tend to stay in motion:

If your money is constantly in motion, if you’re spending everything you make, or if your money is following the crowd to the next big glamour stock, it can be hard to slow down and take stock with a Financial Planner to build a solid foundation.

A study by Hewitt Associates found, for instance, that only 31% of employees in their 20s invest in their company’s 401K plan¹. That means almost 70% of young employees who could be investing in a matching 401k plan haven’t started taking advantage of what is essentially free money. Whether inertia is keeping them from getting started, or inertia is keeping their money in motion so that there’s none left over to invest, they are not only leaving free money on the table, they’re not letting that money grow through compounding.

According to an article in US News and World Report, if you start investing just $100 a month in your 20s, increase contributions as your income increases, and make good financial decisions along the way, you are on your way to potentially retiring with over 1 million dollars.²

How Do You Get Started?

Here are four simple steps to get you past inertia and get you started.

  • Find your motivation

We are all passionate about certain things. The more you care, the more focused you are about achieving your goals. Make a list of the things that are important to you and the things you want to achieve.

  • Find extra money

There are only two ways to “find” money – spending less or making more. While it may seem daunting – inertia again! – you’d be surprised by how easy it is to discover places you can cut back a little or spend a little less. And, while you have a lot more control over your spending than your earnings, you can also look for ways to find extra sources of income, work more hours, or even get a better paying job.

  • Move financial goals up

If you plan to save “whatever you have left” or “whatever you’ve saved” at the end of each month, don’t be surprised by how little that actually is. We all have a tendency to spend what we have, and spend more as our income goes up. You can avoid that pitfall by paying yourself first. When you prioritize saving in your budget and take that money “out of circulation,” your spending will fall in line.

  • Get advice from an adviser you trust

The world of finance and investing can be complicated and confusing. Don’t let fear of the unknown keep you from getting started. You don’t need a large amount of savings to meet with an adviser who can answer a lot of your questions. Getting a roadmap from someone who knows the territory will help you get started and may allow for a smoother journey.

Investing in your future is an investment in yourself. If you take these four simple steps, even with limited assets, you’ll be laying the foundation for a lifetime of investing in your own plans and goals, and your own vision of financial freedom.

 

All investing involves risk, including the possible loss of principal. There can be no assurance that any investing strategy will be successful. Investments offering higher potential rates of return also involve a higher level of risk.

Learn more about our Investment Management services.

Related Reading:

What is Dollar Cost Averaging?

5 Things Investors Get Wrong

5 Big Picture Things Many Investors Don’t Do

Behavioral Investing: Men are from Mars and Women are from Venus!

¹http://www.bankrate.com/finance/financial-literacy/retirement-planning-for-20-somethings-1.aspx#ixzz3JfVGNIYk
²http://money.usnews.com/money/retirement/articles/2012/07/30/7-ways-to-retire-with-1-million

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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.

 

**

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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5 Important Planning Tips for New Parents

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Expecting a visit from the stork soon or has it already dropped off a new bundle of joy? If so, you know the full range of emotions that come with a growing family. Along with the love and excitement you feel with a new baby boy or girl, comes the pressure of new responsibilities and additional financial obligations.

Babies change your life in many ways, including requiring large amounts of time and money. While you may already be thinking about childcare costs and options, or about paying the medical bills that accompanied your new child, there are several other – important – financial considerations you should be thinking about even before the new baby arrives.

Evaluate Financial Priorities. It’s important to consider both short-term and long-term expenses that come with the addition of a new family member. It is a natural impulse, for instance, to want to put your child first and redirect retirement savings into college savings. But remember, you can borrow for college but you cannot borrow your way through retirement. It’s also important to balance long-term goals, like retirement and college expenses, with current financial needs, to help you allocate resources in an appropriate way.

Update Insurance Needs and Your Will. With the expansion of your family, insurance needs can change significantly. Having enough insurance is important in feeling confident about your family’s financial future. Adding your child to your health insurance policy can usually be done with a phone call. Making sure you have enough life insurance for both parents can help ensure you have the funds to raise your child if the unthinkable happens. Short-term disability insurance provides benefits if you have an accident that takes you out of work temporarily. Long-term disability insurance is critical in case a major accident has a permanent impact on your ability to work and earn. While some companies offer disability insurance, it can also be purchased independently.

Updating your will or creating a trust can provide care instructions for your child and allocate resources for their upbringing. Without a will or trust, if you and your spouse die, the state will decide who will raise your children. A will establishes your wishes for who will care for your child. A trust can direct funds specifically earmarked for raising your children and can be an effective way to cover financial expenses and provide for college expenses.

Start Planning For College Early. The sooner you start the better. While it is impossible to know exactly how much you’ll need to save – given that you don’t know what kind of college your child will choose – consider that in 2013-2014 the cost of a moderate in-state public university was $22,826 per academic year and the cost of a “moderate” private university averaged $44,750, according to a College Board survey. ¹

For new parents this means that college could cost over $100,000 for a public college and more than double that number for private school. Instead of trying to fund the entire cost of their education, determine how much you want to contribute. Having children be responsible for a part of their education is often a good lesson in work ethic, even if you can afford to pay for everything, and a critical life lesson if you can’t.

Keep Spending and Debt under Control. When you have an adorable child it’s very easy to overspend. You want them to have the best of everything. Setting a budget and sticking with that can help you keep your spending in line with your established budget. This can also help you maintain the discipline needed to continue contributions to long-term financial goals like retirement and their college education. And remember, the best gift you can give your children – your time and attention – is free.

Another important consideration is debt. When you carry debt, you are paying today for yesterday’s bills. Investing potentially allows you to pay today for tomorrow’s bills. By keeping yesterday’s bills settled and debt to a minimum, you lay the foundations for having enough to enjoy today with your children and plan for tomorrow.

Teach Children About Finances At An Early Age. Finances are a part of our daily lives. When you involve children early on they gain an appreciation for what things cost and how to choose what we want and what we can live without. As soon as your child old enough, start helping save their pennies for something they really want, and teach them that work is part of the process of earning money. These skills, if taught early, can lead to a lifetime of responsible money management.

Parenting is an amazing adventure that changes the way you see yourself and the world. Keeping an eye on finances can provide you with the confidence you need to not only enjoy your growing family but help lay the foundations for a stronger future.

 

¹ http://www.collegedata.com/cs/content/content_payarticle_tmpl.jhtml?articleId=10064

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Four Things Entrepreneurs Can do Now to Save for Retirement

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While retirement may seem a long way off when you’re young and just starting to build a business – or older and rebooting – it’s important to have a retirement savings plan and stick to it to create the future you want.

Retirement planning can be difficult for anyone, but entrepreneurs and small business owners can face unique challenges. According to a 2013 American Express survey, 60 percent of small business owners said they weren’t saving enough for retirement, and over 73 percent said they were worried about not being able to afford the lifestyle they want in retirement.

While many employees can choose to make automatic deductions from their paycheck towards a 401k, for instance, entrepreneurs have to make a conscious decision to sock away money for retirement, as well as find plans that work for them.

Fortunately there are several things that you can begin doing now to contributing to your long-term financial future. As always, please review these and other options with your financial planner to see what strategy may be most suitable for your individual situation.

1) Open an IRA

If you haven’t already, now may be as good a time as any to open an Individual Retirement Account (IRA). IRAs are long term investments that allow you to save money for the future in a tax efficient way. They also offer catch up contributions if you’re over 50.

Traditional vs. Roth

Traditional IRAs allow you to deduct contributions the year in which they are made, then pay taxes when you withdraw the money. A Roth IRA allows you to pay taxes on your contributions now, rather than upon withdrawal and earnings and distributions may not be taxable if held in the Roth IRA for up to 5 years.

For older investors who are approaching retirement, traditional IRAs probably make more sense, as their tax rate may likely be lower in retirement than it is currently. Younger investors, however, may want to consider a Roth IRA if they believe their tax rate could be higher in the future than when they make their contributions.

Contribution Limitations

Regardless of whether you elect to contribute to a Roth or Traditional IRA the IRS sets annual limits each year stating the maximum individuals can contribute to their IRA based on their annual earnings. For instance, in 2015 you are limited to a maximum of $5,500 annually (or $6,500 if you are 50 or over).

Finally, with either type of IRA, there are penalties and taxes for early withdrawals prior to 59 ½ years old!

Please consult your tax professional regarding your specific situation and the specific rules that apply to you.

 

2) Consider alternative forms of IRAs to increase your contribution limits

If you are your company’s only employee, or you only have a couple of other employees, you may want to look into setting up either an SEP-IRA or a SIMPLE-IRA.

SEP-IRA

SEP-IRAs allow you to contribute up to 25% of your salary, or $53,000 (as of 2015) whichever is smaller. This is significantly more than what non-SEP-IRAs allow for.

Setting up a SEP-IRA may be an easy choice if you and your spouse are your only employees, but there can be other costs associated if you have other people working for you.

SIMPLE-IRAs

SIMPLE-IRAs provide an alternative that is cheaper for companies with several employees.

With the SIMPLE-IRA, the employer creates an IRA for each employee. Employees have the option to contribute a certain percentage of their income to their IRA. Employers are then required to match that percentage up to a maximum of three percent of the person’s salary, or contribute two percent of each person’s salary into the IRA.

By creating a SIMPLE-IRA the owner is then able to contribute an additional $12,500 ($15,500 for those 50 and over) to his or her own IRA.

If you have only a few employees working for you and you expect to contribute either the full $12,500 or a large portion of it, there is a good chance that your tax savings may more than pay for the cost of contributing to your employee’s IRAs. Please consult your tax professional for more specific information about how this could affect you and your employees.

 

3) Setup Automatic Deductions

Unfortunately, we all have a tendency to procrastinate, and thinking about retirement is often not at the top of our priorities! It’s easy for entrepreneurs and small business owners in particular to become distracted and forget to contribute to your retirement account(s). Automatic deductions solve this problem.

By setting up your IRA and other retirement accounts to take money directly out of your bank account or paycheck each week (or month,) you can ensure that you contribute as much money as you feel you can, up to the full tax deductible amount, each year. You no longer have to worry about forgetting to, or putting off, contributing.

With any IRA, think carefully about how much you can realistically contribute. They are considered long term investments and you cannot access the money prior to a specific age without incurring taxes and significant penalties for making early withdrawals. Please make sure you are carefully considering your short and medium term goals. And remember: starting to save early is a good way to get on the road to achieving your goals.

 

4) Speak with as Experienced Financial Planner to Help You Create a Plan

Taking care of long-term financial goals can be a challenge but fortunately you don’t have to go it alone. Financial planning professionals can help you create an individualized plan focused on your specific goals. Whether they are:

  • Saving for retirement
  • Saving for your children’s education
  • Buying a home
  • Having a baby

Financial planners are here to help you plan for the future you envision for yourself and your family.

 

 

With over a decade’s worth of experience in financial services, Brad Sherman is committed to helping his clients pursue their financial goals. Contact Brad today to learn more about how you can better prepare for retirement.

Learn more about our Retirement Planning services.

Related Reading:

Finding Financial Independence

YOLO (You Only Live Once) so you Need a Retirement Goal

Your 401K Program: A Little Savings Now Goes a Long Way

How Much Money do you Need for Retirement These Days?

The Benefits of Saving Early for Retirement

Advantages of Participating in Your Workplace Retirement Plan

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It’s National 529 Day!

National 529 Day

Friday, May 29 is “National 529 College Savings Plan Day,” to raise awareness about the benefits of college savings plans.

Surprisingly, nearly 70% of Americans are unsure of exactly what types of college savings plans are available. Are you one of them?

If you have children, a college savings plan should be considered as an important part of a diversified long-term savings plan!

With all 50 states and the District of Columbia offering at least one type of college savings plan, many states also offer state tax favored treatment of contributions to those who use their state’s plan. And, in honor of National 529 Day, many states are having promotional offers.

Don’t procrastinate when it comes to your child’s future. Sherman Wealth Management can offer further information and detailed explanations with regards to opening and contributing to a diversified college savings plan. With Sherman Wealth Management’s experience, you can start saving for your child’s future today.

 

 

Withdrawals from a 529 Plan used for qualified higher education expenses are free from federal income tax. State taxes may apply. Withdrawals of earnings not used to pay for qualified higher education expenses are subject to tax and a 10% penalty. Participation in these plans does not guarantee that contributions and the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend an institution of higher education. The plan is not a mutual fund, although it invests in mutual funds. In addition to sales charges, the plan has other fees and expenses, including fees and expenses of the underlying mutual funds. The plan involves investment risk, including the loss of principal.

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One Secret to Investing: Do Less

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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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Should You Start to Save… or Pay Down Debt?

Pay Down Debt

Millennials have an entrepreneurial spirit and tend to have a lot on their plates. Being able to juggle several balls in the air and multi-task is par for the course for this generation. So why do Millennials often struggle with how to prioritize between saving for the future and paying down debt?

Many Millennials still have college loans to pay off or have acquired credit card debt while taking home minimal starting salaries. And advice about how to get started is confusing: some financial professionals recommend having at least one month of income saved prior to starting to pay down your debt, while others recommend up to 8 months of savings. That’s a daunting prospect when you’re young and living from paycheck to paycheck!

Because of the power of compounding interest, the 20s and 30s are your prime savings years. Not taking advantage of the opportunity to save now may end up costing you later. So how can you start to build your savings and pay down debt, while still maintaining a reasonable quality of life?

The good news is that – because they’re used to a struggling economy – Millennials have become very resourceful when it comes to finances. Here are several factors to consider when you’re deciding how much you can – or even if you can – allocate for both.

Three Questions to consider about saving vs. debt:

What is my monthly incoming & outgoing cash flow? Hopefully it’s not negative! If it is, though, try to find daily and household expenses that can be trimmed or eliminated (that venti caramel latte? An expensive cable package?) If it’s positive, determine if there’s enough left over to pay credit card minimums while allocating a portion, however small, toward a saving plan.

What is the interest rate on my debt? Debt with an interest rate of higher than 5% is a priority to pay down, otherwise you’re spending your hard-earned cash on borrowing costs. Can you roll over your debt to a lower-interest or zero-interest credit card? If not, create an action plan to pay off high-interest debt first. If you have debt with interest rates that are lower than 5%, consider contributing to a 401K or a Roth IRA. The same way interest compounds with your debts, it also grows with your savings, so the sooner you take action, the more you will gain over time.

What is my stress level regarding debt? If the stress of having debt is overwhelming, then make paying the debt before contributing to your savings a priority. If your debt seems manageable, start getting in the habit of making monthly contributions to a savings plan.

Remember, no two people, and no two financial plans, are alike. Whether you can contribute to a savings plan and pay down debt simultaneously depends on you and your unique situation. Talking to a financial advisor can help put you on a path that is right for you. The important thing is to create a goal and a plan!

Learn more about our Budgeting and Savings planning.

Related Reading:

What’s your Credit Score?

Brad Sherman is a financial planner who is committed to helping individuals and families achieve financial independence and gain confidence with regard to financial issues.

Call or contact him today to see if his services are a good fit for your needs.

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Navigating the Stock Market: Tips for Millennials

Understanding the Stockmarket

Navigating the stock market can be daunting for anyone, especially if you’re new to investing.

Between struggling to pay off student loans, finding jobs in a difficult market, and setting goals for financial independence in a stressed market environment, it’s been a daunting few years in general for many Millennials, who may have put off investing because they just don’t feel comfortable or ready.

Feeling comfortable with investing – and understanding how the stock market works – is critical, however, as you start gaining independence and start making important financial decisions. If you get started now, you’ll be maximizing your chances of hitting those marks on your way to achieving your goals!

Here are some basic tips to help you get started.

7 Tips For The Long Term Investor

● Start today: Procrastination can put a large dent in your ultimate savings. Whether you’re investing in a retirement savings plans or a regular investment account, it’s important to start early so that your investments compound. Remember, even small amounts add up over time!

● Create a plan and stick with it: There are many ways to be successful and no one strategy is inherently better than any other. Once you find your style, stick with it. Bouncing in and out of the market makes is just as likely you will miss some of the best days and hit the worst.  Readjust your portfolio when necessary, but not too often.

● Think long term and be disciplined: Be prepared to buy and hold your positions. Big short-term profits can be enticing when you’re new to the market but short-term wins will get you off track. Start a program, stay invested, and don’t be too concerned with day-to-day profits and losses.  Warren Buffet once asked, “Suppose you’re going to be investing for the next several years. Do you want the price of the stocks to go up or down?” While everybody assumes it’s “up,” in reality, it’s only people who are withdrawing in the near future who really want stocks to go up!

● Do your research: Always be an informed investor. Do your own due diligence with companies you’re interested in. Don’t go for a ‘hot tip’ just because there’s a lot of buzz; research companies, get advice, and decide if they’re investments that are right for you.

● Never let your emotions influence you: The markets move in cycles. When the markets are up, we feel elated about our investment decisions. When markets start to move down, we may experience anxiety and panic. Reacting emotionally can lead to spur of the moment decisions that don’t benefit you in the long run. Again: think long term.

● Always have a margin of safety: The first rule anyone new to investing needs to learn is that there are no guarantees in the stock market. An investment that looks great on paper does not always pan out in real life.  Know how much risk you are willing to take and make sure your investments are aligned with your risk tolerance.

● Diversify: Never put all your eggs in one kind of basket. It’s important to make sure your portfolio includes both stocks and yield-producing assets, such as bonds, to cushion you against market volatility. Diversification doesn’t just mean investing in multiple companies either; investigate ways to invest in different markets, bother national and international, as well.

One final tip: find an experienced financial planner you trust, who “gets” you, your goals, and your timeline, and who can guide you as you invest in your future.

Brad Sherman is a financial planner who is committed to helping individuals and families achieve financial independence and gain confidence with regard to financial issues.

Call or contact him today to see if his services are a good fit for your needs.

Related Reading:

What is Dollar Cost Averaging?

5 Things Investors Get Wrong

5 Big Picture Things Many Investors Don’t Do

Why and How to Get Started Investing Today

Mitigating Your Investment Volatility

The Psychology of Investing

Rebalance Your Portfolio to Stay on Track With Investments

Behavioral Investing: Men are from Mars and Women are from Venus!

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