Do’s And Don’ts In A Market Correction

As we’ve been making our way through this market correction, we’ve been getting many questions about which financial moves you should be making and which ones to avoid. While market volatility can be stressful and scary for us all, the way in which you approach and react to the fluctuations in the markets themselves can say a lot about your portfolio and investments. So, let’s jump in. 

First and foremost, it is important not to panic and make sure you stick to your long-term plan when the market is going through a correction period. As we have seen time and time again, your long-term strategy will most likely stay the course through the ebbs and flows of the market. Don’t obsess over the markets – they will always do their own thing! 

If you do happen to have some extra cash sitting on the sideline during a market correction, you should think about putting that money to work and invest! Dips in the markets are good opportunities to enter or invest more if you are comfortable with your overall risk.

However, if you find yourself having trouble sleeping at night through all this volatility, it might be a sign that you have too much risk in your portfolio. Maybe think about re-allocating your portfolio or working with a professional to feel more comfortable about your situation. It’s extremely important to understand your risk tolerance before investing to ensure that you can handle the investments you are taking on. If you would like access to our complimentary risk tolerance questionnaire software, email us at info@shermanwealth.com to learn more or click here

If the COVID-19 pandemic taught us anything, it’s the importance of having a plan in place for when life throws uncertainties and hardships our way. If you do not have a financial plan, NOW is the time to implement one. Not only is it smart to have a financial plan set in case of emergencies, but you should also have an estate plan set up. For more resources on how to get started on estate planning, check out our blog here. Remember, long-term plans are put in place for a reason, so try not to panic and do not derail your plan in the presence of volatility. Also keep in mind that everyone’s personal and financial situation differs, so make sure not to confuse your time horizon with your friend or next door neighbor. If you find yourself nervous or anxious during this time or even feel comfortable but have questions, we are here to help. You can send us an email at info@shermanwealth.com or schedule a complimentary meeting here.

8 Common Investor Biases That Impact Investment Decisions

Sherman Wealth Management | Fee Only Fiduciary

This article was originally published on investopedia.com

One of the biggest challenges to our own success can be our own instinctive behavioral biases. In previously discussing behavioral finance, we focused on four common personality types of investors.

Now let’s focus on the common behavioral biases that affect our investment decisions.

The concept of behavioral finance helps us recognize our natural biases that lead us to making illogical and often irrational decisions when it comes to investments and finances. A prime example of this is the concept of prospect theory, which is the idea that as humans, our emotional response to perceived losses is different than to that of perceived gains. According to prospect theory, losses for an investor feel twice as painful as gains feel good. Some investors worry more about the marginal percentage change in their wealth than they do about the amount of their wealth. This thought process is backwards and can cause investors to fixate on the wrong issues.

The chart below is a great example of this emotional rollercoaster and how it impacts our investment decisions.

The Psychology of Investing Biases

Behavioral biases hit us all as investors and can vary depending upon our investor personality type. These biases can be cognitive, illustrated by a tendency to think and act in a certain way or follow a rule of thumb. Biases can also be emotional: a tendency to take action based on feeling rather than fact.

Pulled from a study by H. Kent Baker and Victor Ricciardi that looks at how biases impact investor behavior, here are eight biases that can affect investment decisions:

  • Anchoring or Confirmation Bias: First impressions can be hard to shake because we tend to selectively filter, paying more attention to information that supports our opinions while ignoring the rest. Likewise, we often resort to preconceived opinions when encountering something — or someone — new. An investor whose thinking is subject to confirmation bias would be more likely to look for information that supports his or her original idea about an investment rather than seek out information that contradicts it.
  • Regret Aversion Bias: Also known as loss aversion, regret aversion describes wanting to avoid the feeling of regret experienced after making a choice with a negative outcome. Investors who are influenced by anticipated regret take less risk because it lessens the potential for poor outcomes. Regret aversion can explain an investor’s reluctance to sell losing investments to avoid confronting the fact that they have made poor decisions.
  • Disposition Effect Bias: This refers to a tendency to label investments as winners or losers. Disposition effect bias can lead an investor to hang onto an investment that no longer has any upside or sell a winning investment too early to make up for previous losses. This is harmful because it can increase capital gains taxes and can reduce returns even before taxes.
  • Hindsight Bias: Another common perception bias is hindsight bias, which leads an investor to believe after the fact that the onset of a past event was predictable and completely obvious whereas, in fact, the event could not have been reasonably predicted.
  • Familiarity Bias: This occurs when investors have a preference for familiar or well-known investments despite the seemingly obvious gains from diversification. The investor may feel anxiety when diversifying investments between well known domestic securities and lesser known international securities, as well as between both familiar and unfamiliar stocks and bonds that are outside of his or her comfort zone. This can lead to suboptimal portfolios with a greater a risk of losses.
  • Self-attribution Bias: Investors who suffer from self-attribution bias tend to attribute successful outcomes to their own actions and bad outcomes to external factors. They often exhibit this bias as a means of self-protection or self-enhancement. Investors affected by self-attribution bias may become overconfident.
  • Trend-chasing Bias: Investors often chase past performance in the mistaken belief that historical returns predict future investment performance. This tendency is complicated by the fact that some product issuers may increase advertising when past performance is high to attract new investors. Research demonstrates, however, that investors do not benefit because performance usually fails to persist in the future.
  • Worry: The act of worrying is a natural — and common — human emotion. Worry evokes memories and creates visions of possible future scenarios that alter an investor’s judgment about personal finances. Anxiety about an investment increases its perceived risk and lowers the level of risk tolerance. To avoid this bias, investors should match their level of risk tolerance with an appropriate asset allocation strategy.

Avoiding Behavioral Mistakes

By understanding the common behavioral mistakes investors make, a quality financial planner will aim to help clients take the emotion out of investing by creating a tactical, strategic investment plan customized to the individual. Some examples of strategies that help with this include:

  • Systematic Asset Allocation: We utilize investment strategies such as dollar cost averaging to create a systematic plan of attack that takes advantage of market fluctuations, even in a down market period.
  • Risk Mitigation: The starting point of any investment plan starts with understanding an individual’s risk tolerance.

The most important aspect of behavioral finance is peace of mind. By having a thorough understanding of your risk appetite, the purpose of each investment in your portfolio and the implementation plan of your strategy, it allows you to feel much more confident about your investment plan and be less likely to make common behavioral mistakes.

Working with a financial planner can help investors recognize and understand their own individual behavioral biases and predispositions, and thus be able to avoid making investment decisions based entirely on those biases.

***

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 It’s A Good Time For Roth Conversions

Given all the recent economic data and the current market downturn, you may be thinking about moves you should be making within your investment portfolio. While it’s important to revisit your asset allocation, risk tolerance, and time horizon during such a time, considering a Roth conversion is also a great idea. So let’s take a look at what a Roth conversion involves and why an economic downturn presents a good opportunity to do one. 

A Roth conversion is when you convert money from a traditional retirement account such as a Traditional IRA or Traditional 401(k) into a Roth vehicle. As mentioned in previous blogs, a Roth vehicle is an account where you pay taxes on the money before entering the account, allowing you to withdraw tax-free monies in the future. So, if you do decide to do a Roth Conversion, you would have to pay taxes on the pre-tax money you are converting, allowing tax-free withdrawals in the future.  

So, why is now a good time for a Roth conversion? Well, given the current market downturn, a Roth conversion is a great idea because since your account value is probably currently lower than previously, a conversion will allow you to capture the values and convert the same amount of shares at a lesser value, ultimately paying less money in taxes on your next tax return. If your overall compensation and income is currently lower possibly due to equity compensation or you are a retiree awaiting social security, a Roth conversion might be a great opportunity for you. Click here to see the 2022 Roth income limits and thresholds from the IRS and see if you qualify to participate.

 

All individuals we work with have different financial situations, which is why it is a great time to connect with a financial professional and/or CPA to see what options you may have to take advantage of during this time. We have been doing conversions with a great deal of clients during this extreme market downturn and are happy to help you as well. If you want to learn more about your ability to utilize a Roth conversion, email us at info@shermanwealth.com or schedule a complimentary 30-minute consultation here

How Do You Feel About Investing During Extreme Market Volatility

Given the extremely volatile current market environment, how are you feeling about your investments and your overall financial stability? We know that this is a uncomfortable and difficult time for many people, as they are watching their hard-earned savings and investments plunge; however, we are here to discuss the long-term nature of investing and the importance of looking at the bigger picture. Tune into our audio recording below for our thoughts about these intense market swings and the importance of long-term investing.

As discussed in our recording and further shown in the chart below, it is quite valuable to stay invested in the stock market for the long term, despite market crashes and corrections.  We know that headlines in the news and day-to-day fluctuations can be scary and induce anxiety, but keep in mind your initial goals for investing and your time horizon. If you are a long-term investor, try not to get too caught up in the day-to-day volatility, and rather the bigger picture and longer timeline. Although we do not know the direction the stock market will take in the future, as the chart depicts, time in the market instead of trying to time the market seems to be the better choice.

For those of you who are feeling stressed or worried about your investment portfolio, now is a prudent time to meet with a financial professional to discuss your risk tolerance, asset allocation, and specific finances. If you have any questions for us, we are here to help in any way we can.  To reach our team, email us at info@shermanwealth.com or schedule a complimentary 30-minute consultation here.

What Are I-Bonds And Should You Buy Them?

In a rising interest rate environment, many of you may be thinking what vehicles you should be utilizing moving forward to invest your money. Given four-decade high inflation numbers, I-bonds are becoming an attractive way to invest your money while also protecting against inflation. So, for those wondering what I-bonds actually are, let’s take a look. 

I-bonds are bonds issued by the U.S. Treasury designed to protect investors’ savings from inflation risk and loss of purchasing power. These bonds are purchased directly from the US government, hold lower risk, provide more safety and are estimated to deliver a 9.62% annualized return starting next month. Given the current climate with inflation through the roof, if you have cash sitting around that is currently earning 0%, now might be a great time to consider purchasing some I-bonds for next few years.  

However, there are a few important details to note when considering I-bonds. There is currently a $10,000 per person limit on the amount you can invest each year into I-bonds. Your I-bonds will have a maturity of 30-years and cannot be redeemed for one full year. However, if you redeem your I-bonds before five years, you will inflict a withdrawal penalty of 3-month’s interest. So, keep in the mind that if you are considering investing in I-bonds, you should do so with the intention of keeping them invested for 5 years. Additionally, you can buy an extra $5,000 in I-bonds within your tax refund if applicable or eligible. 

If you have a long-term view about your investments and might have some cash you don’t need access to for a while, you should definitely check out I-bonds to protect the purchasing power of your cash. If you have any questions about your specific financial situation and how I-bonds may fit within your portfolio, email us at info@shermanwealth.com or schedule a complimentary intro-meeting here and we are happy to help.  

Has This Market Correction Changed Your Thoughts On Investing?

As you probably already know, it’s been quite a ride in the markets recently. When a stock index falls more than 10% from a recent high, it is often said to have entered “correction” territory. Has this recent market correction taught you anything about investing? As a young investor, this correction has been quite a learning experience, to say the least. From a sideline perspective and as an investor myself, watching the reactions of clients and peers around me has given me insight into behavioral discoveries behind investing. I’ve also seen how individuals deem their own comfortability with risk, especially within their equity. 

Charlie Bilello posted an interesting blog discussing the difference between investing and merely speculating, whether people are “excited or nervous” when their favorite asset falls in price. He suggested that despite our natural panic response to the market crashing, when the market declines, it serves as an opportunity to reinvest in the market and add capital to your portfolio for the long term. 

This is such a crucial mindset to have when approaching your investments, especially if you are investing for your future, with a long time horizon. If you were having trouble sleeping over the weekend and panicking Monday morning as the market opened, is it possible that you have too much equity risk and are investing money you may need in the short term? At Sherman Wealth, we consistently discuss the importance of time in the market versus timing the market, which should ease some of the panic during these market corrections.

 Another point to keep in mind is how quickly these fluctuations occur. We re-posted an interesting Stocktwits instagram story on Monday afternoon depicting how the equity markets started just after 9:30 in the morning and how they were going when the bell struck 4pm. You can see the clear fluctuations that often occur in a day of trading, and why you shouldn’t always assume the worst at the beginning of the day.

Furthermore, as we have seen time and time again, history repeats itself with corrections that happen constantly throughout the year. However, if you are a new or nervous investor, check out the data in the tweet below. 

As the tweet describes, this is normal. Market corrections happen and will continue to occur for years to come. If you were excited or nervous this week during the market decline, that may be a good tell of your comfortability with your risk and overall portfolio. What also becomes apparent during these volatile times is the importance of having a sound financial plan. If you have any questions about your risk tolerance, fund line up, or the markets in general, we are here and happy to help you in any way we can. Send us an email at info@shermanwealth.com or schedule a complimentary 30-minute intro call here

 

The Financial Industry Is Changing, And What You Want Is Too

As generational wealth continues to transfer, we are seeing a shift in the way today’s consumers are wanting to conduct relationships with those who are managing their money. According to a recent WSJ article, rich customers are changing what they want; they are shifting away from these bigger public companies and are seeking niched start-ups and individualized advice and relationships. We are also seeing that those who only offer asset management services are becoming less desirable and holistic financial planners are the future. 

At Sherman Wealth, we have noticed similar attitudes amongst prospects and clients, those who are feeling ignored or unheard from their “Wall Street-esq” or parents’ financial advisor that they assumed a relationship with. With this ever evolving bifurcation of financial advice, clients are no longer interested in working with their parents financial advisor they may have an estranged relationship with, but rather are looking for evolved and all encompassing individualized wealth management and financial planning advice delivered at the ease of their fingertips. We’ve been seeing tons of clients and individuals getting organized under COVID-19, stressing to us the importance of finding the right person to walk them through their whole financial life. This is where we come in. 

We have long recognized this shift in financial service needs and are constantly battling financial stigmas and adapting the way in which we deliver unique and customized advice to our clients. We recognize that holistic financial planning is the future. This new way of navigating your financial life encourages those seeking an advisor to look for someone in line with this approach. With a financial concierge such as Sherman Wealth, your advice will stay current and constantly communicated, not getting lost or forgotten.

At Sherman Wealth we can help you with the following 

  • Goal Setting 
  • Cash flow analysis and budget planning 
  • Net worth analysis 
  • Debt strategy 
  • Student loan planning 
  • Retirement planning/projections
  • Work benefits 
  • Rent vs. buy mortgage strategy 
  • Education planning 
  • Investment management 
  • Tax planning 
  • Insurance need analysis 

We are a fiduciary to our clients, but we are also, in some respects, a concierge and a coach. What we mean is that we work with you in an all-encompassing way- ensuring your specific needs are being heard, understood, and proactively addressed. For further details on our philosophy and core values, click here to learn a little more about who we are and what we strive to deliver. If you feel that your financial needs align with our core values and philosophy or your current situation feels stale, email us to inquire about our services at info@shermanwealth.com or schedule a 30-minute complimentary intro call here.

Holding Onto Too Much Cash? Here’s Why You Shouldn’t 

Accumulating a large sum of cash in your bank account can be a good feeling and it might bring you a sense of security and safety. Building up your savings accounts knowing that the cash is sitting there risk-free and easily accessible can give you a sense of comfort. However, this isn’t always the smartest option when it comes to your finances. Sitting on too much cash in a savings account can often hinder your ability to build wealth for retirement and other long range financial goals. In addition, you could actually be losing money due to inflation instead of growing your assets, and here’s why. 

At Sherman Wealth, we often talk about diversifying your portfolio and the importance of long-term market investment in order to increase and grow your money over time. In a recent survey by Personal Capital and Kiplinger Personal Finance within retirees and soon-to-be retirees portfolios, 26% was made up of cash, which tends to be on the conservative side of diversifying and investing. It’s okay to be nervous about market volatility and the natural ups and downs in the stock market; however, holding on to too much cash can actually hurt you in the long run. It’s crucial that you find an equilibrium point between your cash and investments that works with your financial situation and risk comfortability.

So how do you know if you are sitting on too much cash? As mentioned in our previous blogs, you should always have an emergency fund that typically has enough liquid cash to sustain your monthly bills for about 3-6 months. If you have any upcoming large purchases, you should have a separate bucket of funds available to pay for those goals as well. When planning your budget, think about your wants versus your needs, while also taking your cash flow into consideration. Once you have fulfilled these liquid cash buckets, you should then determine your risk tolerance and think about allocating your dollars towards diversified investments that will gain long term returns, such as equities, fixed income and real estate. 

We know choosing the right investments and asset allocation for you can be overwhelming, which is why there are professionals to help in this process. So, if you have questions for us or would like to use our risk tolerance software to help determine where your investment risk comfortability stands, email us at info@shermanwealth.com or schedule a complimentary 30-minute consultation here

 

Here Are The Differences Between A Roth and Traditional 401(K)

Have you been hearing more about Roth 401(k)’s lately. There are more and more options in company 401(k)’s recently, including the Roth option, whereas before many companies only provided traditional 401(k) options. More employers are now offering this option to their employees so check out the rest of the blog and then see if it’s a valuable option for you. 

So, you may be asking yourself, what is a Roth 401(k)? A Roth 401(k) is an employer-sponsored retirement savings account that can be funded with after-tax dollars up to its contribution limit. For people who think they may be in a higher tax bracket down the line, this might be the better option for you. On the other hand, in a traditional 401(k) plan, you contribute pre-tax money, which will be taken out based on your future tax-bracket in the future. 

Now that you know what a Roth 401(k) is, you may be wondering, do I qualify for one? As long as your employer offers the Roth options, you are eligible for it if you are also eligible for your company’s traditional 401(K). 

Let’s take a look at this example: 

​​Your yearly base salary, gross income is $50,000.  If you choose to contribute 10% ($5,000) to a traditional 401(k), your taxable income becomes $45,000 for the tax year. You took that 10% and deferred paying taxes on it. That $5,000 now grows tax-deferred inside of your traditional 401(k). When you withdraw the money from your traditional 401(k) at retirement, your total will be taxed then with regards to your tax bracket. 

Within a Roth 401(k), you are paying your income taxes as you should, and then the funds head into your Roth account. So with that same $50,000 salary, if you choose to contribute 10% to your Roth 401(k), you will pay income taxes on your full $50,000.  After income taxes are taken out, your funds for the year ($5000) goes towards your Roth 401(k). When you withdraw the money from your Roth 401(k), you can take both the contributions and earnings out tax-free since you had previously paid them. 

For both Roth and Traditional 401(k)s, the contribution limits are the same, at 19,500.  You can defer $19,500 out of your paycheck into a traditional 401(k). In contrast, you also can contribute $19,500 to your Roth 401(k). Additionally, you are also allowed to contribute to both a Roth and Traditional 401(K), as long as you stay within the contribution limits. 

Considering Roth options when deciding on your 401(k) and IRA contributions is a very important step. If you want your money to grow tax deferred, you should highly consider opening a Roth account. Continue following along to see if there are any tax changes in the near future, and make sure you consult a tax professional to see what options make the most sense for you.  If you have any questions about your personal situation or want to know how to get started, email us at info@shermanwealth.com or schedule a 30-minute consultation here. 

 

How American’s Became 401(K) and IRA Millionaires A Year After The Pandemic

Even though the coronavirus pandemic over, retirement accounts are thriving. Retirement account balances, which took sharp declines almost exactly one year ago, have now bounced back entirely, according to the latest data from Fidelity Investments, the nation’s largest provider of 401(k) savings plans.

“Despite recent losses in the market, from January 2020 to the beginning of May, the S&P 500 has had an annual return of more than 20%, Fidelity Reported. ” This data shows record levels that surpasses previous highs pre-pandemic. As we can see from these statistics, during this time, many more people contributed to their investment accounts and enrolled in company retirement accounts, leading there to be more retirement millionaires in our midst. 

So, you may be wondering, how do I become a retirement millionaire? Well let’s take a look at this graph.

401(K)

The picture above shows how much wealth you can build over time if you contribute from a young age and consistently over time. We are thrilled to see an increase in funds and savings amongst Americans especially given the hard year we have had.  If you have any questions about how to better your personal financial situation, please let us know at info@shermanwealth.com or schedule a complimentary 30-minute consultation here