Investing Archives

5 Big Picture Things Many Investors Don’t Do

These simple strategies can make a big impact on your long term portfolio.

Investing and finances can be overwhelming and confusing. Having so many options available, how is an investor to choose which direction to go. For those who seek to understand, it can become paralysis by analysis, where the more you study, the more you realize you need to know. With all of its complexity, simple investment strategies can be very effective, if the right choices are made.

Here are 5 Strategies most average investors don’t focus on, but should.

Have a thought out strategy with a purpose. A common mistake of investors is to put money in an account without a lot of thought as to the goals you want to achieve. Starting an investment fund without goals is like driving in a car with no destination in mind. Without a purpose for the money, it is impossible to measure the success or failure of the investment.

Start Early with a Time Horizon. Starting early gives your money more time to grow. The longer the money is invested, the better it can weather market fluctuations and the more likely you are to successfully reach your goals. Along these same lines, set specific goals around a time horizon. How long will each bucket of money be invested? This is a very important piece to your overall strategy because it will help evaluate the specific investments that will be most beneficial. If you are 15 years away from your goal, investment choices will be much different than if you are 5. The closer you get to the destination, the less able you are weather market fluctuations. This should be considered in your overall strategy.

Increase The Amount Invested Each Year. When looking over your investment strategy, separate the performance and the contributions. The performance is how much your money has grown through your investment strategies. Contributions are the dollar amount that you have added to your investment accounts. These two factors make up the total growth of your portfolio. Both of these numbers are important to your overall strategy. The account performance should be reviewed independent of contributions to help you stay on track with the right investment choices for your risk tolerance and time horizon. The amount you have added in contributions is what you have built into your budget for long term financial goals. When you increase those contributions each year, your account should grow significantly faster. Small increases are often not felt in the monthly budget.Let’s say you currently contribute 6% from your paycheck into your 401k. In addition to that you are putting $50 a month into your IRA and $50 a month into a college fund. At the beginning of the year, increase your 401k contribution by 1%. Now you are putting away 7% in pretax dollars for retirement. Then the next quarter increase your IRA contribution to $75 a month and the quarter after that, increase your college fund contributions by $25 a month. These small increments will barely be noticed in your monthly budget. The $25 a month increase is less than $1 a day. If you are earning $50,000 a year, the 1% increase with your 401k is only around $21 a paycheck if you get paid bi-monthly, in pretax dollars. Meaning your paycheck will be reduced by less than $20 a paycheck due to the pretax allocation. If you increase the contribution at the time of your annual raise, it will only be noticed in the form of larger investment accounts.

Review your asset allocation as a whole picture. When you have separate investments for different financial goals, it is more of a challenge to see your portfolio in a complete picture. Having investments with different companies can increase these challenges. When you have a 401k at a current job, and maybe one or two from previous jobs, they are more difficult to keep up with. Then you might have current investments for retirement, college and savings for your first home. Taking a holistic view of all your investments will help to ensure you have the best asset allocation possible. When your allocation gets out of whack, you might end up taking on more risk than you are comfortable with, without realizing it. It is not always possible to have all your investments under one roof, especially with a current 401k. However, including these investments in all financial reviews will help you stay on track for your overall investment goals as well as ensuring your asset allocation and risk profile are appropriate.

Understanding what you can control. In life we like to have control over our current and future destinations. Happiness and success often come from recognizing what we can control and focusing on that. Investing is no different. We cannot control the markets and we cannot control the economy. There is a host of circumstances and events that are outside of our control. Stressing and worrying about those things is not beneficial. You can control spending and investment rate. You can control which investments you choose and the amount of risk in your portfolio. Staying focused on these elements will lead to higher comfort levels which will encourage staying the course.

Financial investing success has more to do with implementing sound strategies, rather than luck or great market timing. It is more about staying the course, than picking the “hot” stock that will make you a millionaire.

Learn more about our Investment Management services.

Mitigating Your Investment Volatility

Volatile markets can be unsettling. You work hard for your money and even losing money on paper, to market fluctuations, can make you want to put all your cash under the mattress. In reality most investments will have volatility. Fixed rate products like CD’s may not have volatility, but will have their own risk of not keeping up with inflation. Currently 1 year CD’s are paying around 1%, and 5 year CD’s are only paying around 2%, according to Bankrate. This makes it necessary to have investments in your portfolio, which will fluctuate in value, in order to potentially have the needed funds to pursue your financial goals.

With inflation averaging 3.22% per year from 1913 to 2013², it is easy to see that establishing an investment portfolio that provides higher returns than inflation is essential to any long term plan. Investors look to mitigate the risk of the volatile markets, while seeking a return that will build investment values.

For all its Bull and Bear markets, runs and crashes, stock market investments in the last 100 years has been positive when looking at any 10 year period from 1903 to December 1912³. The average stock market return since 1932 is around 7% and when inflation is taken into account the average return is over 10%⁴. So while the markets do go up and down on a daily basis, the overall market pattern has a consistent upward trend. However, past performance is not indicative of future results and your investments selection(s) and time horizon will affect your results.

Investing With Your Risk Tolerance in Mind

Investment risk, by definition, is the likelihood of losses in relation to an expected rate of return for a specific investment. All investments have some investment risk. The challenge for you is to determine which investments have risks you are willing to accept, and may be potentially rewarded with higher returns on a consistent enough basis.

This is where a Sherman Wealth Management financial professional comes in. They work with you to determine a level of risk that is suitable for you and provide the potential growth needed to pursue your financial objectives. This requires not only understanding specific investments but also having a good pulse on what you, as an investor, need.

In order to give the best advice, it is necessary to truly understand the client’s needs. Just asking, how much risk are you comfortable with, is not enough. Educating and teaching you about risk and what it may mean for your future, is the goal. This allows you to select investments that reflect your risk tolerance and financial aspirations.

Taking a high level of personal interest in the changing needs of our clients is our goal. We believe this is the best strategy for maintaining an investment portfolio that is designed to have the appropriate amount of risk to pursue your financial goals, while striving to minimize the risk taken on individual investment choices.

Each investor has individual needs and no investor’s taste for risk is the same. You need recommendations that take all of your circumstances and life goals into account. Added risk might lead to higher returns, but not always.

If you have a lower tolerance for risk, building an investment portfolio that is designed to withstand market turmoil is more appropriate. These strategies still experience ups and downs, but the right blend of investments potentially moderate the fluctuations to align with your tolerance for risk.

The stock market offers investments that carry various levels of risk. There are value, dividend paying stocks that have a lower volatility than emerging small cap stocks. Bonds are also available at various risk levels, allowing you to manage risk and performance within the portfolio.

Asset Allocation for Mitigating Volatility

Another method to help mitigate market risk and volatility is through Asset Allocation. This is the process of using several asset classes within an investment portfolio by apportioning a portfolio’s assets according to the individual goals, risk tolerance and investment horizon. Stock market investments have the general categories of stocks and bonds.

Stocks are broken down further between value stocks and growth stocks, with value generally being more conservative. Stocks that pay dividends are usually more conservative than stocks that do not, because investors are getting some return while they still hold the position. Stocks are also broken down by company size. These are denoted as large cap, mid cap and small cap stocks. Large cap stocks include companies like Microsoft, Apple, Bank of America and national names we all recognize. Small cap companies are those with 300 million to 2 billion in revenue, and mid-caps are between these two. The last large category is US companies and International or global companies.

Bonds are rated much like individual credit is rated. There are consumers that are a much lower risk than others and this is measured through individual credit scores. Bonds operate in a similar way. There are independent credit agencies like S&P and, Moody’s which rate company bond offerings. Bond ratings are expressed as letters ranging from ‘AAA‘, which is the highest grade, to ‘C’ (“junk“), which is the lowest grade. Different rating services use the same letter grades, but use various combinations of upper- and lower-case letters to differentiate themselves. Lower ratings represent higher default risk and thus higher interest rates to investors.

Selecting the best mix of stocks and bonds is a delicate balance. Spreading your investments choices across different categories may provide an effective way to reduce the overall volatility of a portfolio. As the market fluctuates not all stocks and bonds move up and down at the same rate or the same time. When asset allocation is used correctly there is a designed buffer against losses and the overall risk of the portfolio should be reduced.

Advantages of Dollar Cost Averaging

Dollar cost averaging is an investment strategy where you invest a fixed dollar amount on a regular schedule, regardless of the actual price of the stock, bond or other investment vehicle. There are several advantages to using this strategy.

Smaller amounts can be invested providing potential benefits of growth over time. Time in the market is much more important than market timing and dollar cost averaging gets you in the market on a regular basis.

Buying more shares when the stock has a lower price and less shares when the price is higher. . Even the best companies will see stock prices fluctuate based on a current news reports, events that impacts the industry, or seasonal fluctuations.

Dollar cost averaging helps reduce the risk of the overall portfolio because you are investing at regular intervals and buying more shares when the prices are low. This can be an effective way to grow your portfolio. Studies have shown that those who invest in regular intervals are more consistent with their investments, providing better overall growth, according to Morningstar⁵.

Dollar cost averaging does not protect against a loss in declining markets. Since such a plan involves continuous investments in securities regardless of the fluctuating price levels, the investor should consider his or her financial ability to continue such purchases through period of low price levels.

Financial strategies require a long term strategy. As such, volatility must be considered in your investment choices. Avoiding volatility because of fear can result in negative returns, when adding the impact of inflation. Working with a financial professional who understands volatility and uses strategies designed to enable you to build a portfolio which is suitable to your risk tolerance. Let us help you determine which investments are appropriate for your financial goals.

LFS-1056941-111014

Learn more about our Investment Management services.

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

While no person falls neatly into statistical averages, as humans, we are all emotional beings and subject to all different kinds of behavioral biases when it comes to investing. There are three major ways in which men and women differ when it comes to behavioral investing.

Investment Goals and Strategies: According to the Wall Street Journal, finance professors Brad Barber and Terrance Odean, women tend to focus more on longer-term, non-monetary goals. Women generally associate money with security, independence and the quality of their life and their families’ lives. Women have a ‘safety first’ mentality. Generally speaking, women are more inclined than men to wear seat belts, avoid cigarette smoking, floss and brush their teeth and make regular doctor visits. They even have been shown to be 40% less prone than men to run yellow traffic lights. Men, on the other hand, who tend to be more competitive and thrill-seeking by nature, often focus on the short-term track records of their portfolios, incurring larger overall returns, and tend to be more risk tolerant. In contrast, women tend to be more averse to risk and are more skeptical. When it comes to investing and planning for their future, women shy away from uncertainty and will take a longer time to make investment decisions, are more methodical in how they go about research, and ask more questions.

Both men and women should make sure that their investment styles and horizons match their overall financial goals. For women, this may mean taking on more risk. As they become more familiar and understand the ups and down of the stock market they will naturally become more risk tolerant. For men, this may mean focusing more on longer-horizon goals, rather than on short-term trading track records and larger gains.

Prudential’s study Financial Experience & Behaviors Among Women

The Learning Curve: A 2012-2013 Prudential study on women investors reveals that women are more receptive to financial research and advice than men. Women seek help more often. Men tend to enjoy learning on their own and take a more independent approach, like the internet, while women prefer learning in a group setting. Women rely more on personal networks with friends, family, financial planners, and they take a networking approach to gathering information. They often require more of a financial advisor’s time and resources, but are looking for a trusted relationship to be established, one they can rely on long term. Men, however, prefer to teach themselves and are more self-directed learners, using the Internet (more often than women) to gather information and are more likely to claim they understand financial matters than women. In actuality, knowledge levels are not high for either gender.

Thus far, evidence does not support, however, whether one source of information or learning technique is more or less effective than another.

Information Sources Used By Men Vs Women — Source: Source: Women & Investing, Gender differences in investment behavior. FINRA Report August 2006

The Confidence Factor: Women tend to be thorough and take more time to make decisions than men. Several studies, including a national survey by LPL Financial, show that women tend to research investments in depth before making portfolio decisions, and the process, as a result, tends to take more time. Women also tend to be more patient as investors and consult their advisors before adjusting their portfolio positioning, whereas men are more prone to market timing impulses. Men veer toward overconfidence while women lean towards indecisiveness and insecurity.

Overconfidence can lead to taking too much risk. While women risk missing out on some investment opportunities in taking more time to make decisions, men’s generally higher impatience when it comes to seeing investment returns makes them more likely to attempt market timing, and prone to loss when the timing is off. Women are less afflicted than men by overconfidence, or the delusion that they know more than they really do and are more likely (than men) to attribute success to factors outside themselves, like luck or fate.

Yet, taking too little risk, due to lack of confidence, can hurt your investment goals just as much as overconfidence. When it comes to investing for the long term, taking risk is not a luxury. Insecure investors can confine their results by investing too conservatively, nearly as much as their overeager counterparts could do by excessive trading and risk-taking.

Meanwhile, to help avoid rash decisions and market impulses, men may benefit from implementing a systematic investment strategy and a periodic, rather than continuous, review of their accounts and rebalancing. They may want to consider becoming even more open to professional financial advice. Women may also want to review the efficiency of their investment allocations across their portfolios to counter the negative impact of mental accounting. In addition, they may want to consider attending financial education seminars to help boost their confidence levels and ability to make timely, well-informed investment decisions.

Men Vs Women Confidence Level — Source: Women & Investing, Gender differences in investment behavior. FINRA Report August 2006

Call Brad Sherman at Sherman Wealth Management for information on what investment strategy is right for you.

Learn more about our Investment Management services.

Millennials: The Fiscally Conservative Generation

Millennials Investors-Fiscally Conservative

As the Millennial Generation continues to get more work experience under their belt, statistics from a UBS Wealth Management survey show that this generation is the most fiscally conservative generation since the Great Depression. With most recent generations, the advice that has served them best is to invest their money. With this generation, more and more people are listening to the advice that tells them to save their money in CDs or bank accounts.

Because interest rates are at nearly rock-bottom, investors who play it too safe will very likely lose money due to the effects of inflation. According to Judy Martel in her recent blog “Cash is King for Millennials”, Millennials allocate an average of 52 percent of their portfolio to cash, compared with 23 percent for investors of other generations.
Many companies are promoting the merits of starting a 401(k) program and giving their clients tips on 401(k).

Tips for the fiscally conservative

• Don’t opt out, opt in

• Don’t reduce your company match, find out how to potentially maximize it

• Adjust your investment allocations as you age• Do not borrow or withdraw money from your 401(k) until you are retired

and, most importantly…

• Start saving and investing now

Informative data at your fingertips.
Sherman Wealth Management

LFS-867213-022614

401k plan Millennials retirement Wealth Management

Rebalance Your Portfolio To Stay On Track With Investments

A drift portfolio 60% invested in stocks delivers risk comparable to a portfolio with greater market exposure, 80% invested in the stock market in the example of Figure III-2. This added risk from an unbalanced portfolio is not rewarded by a significantly greater return on your investment. Thus, a professionally balanced portfolio may help reduce risk that isn’t delivering a significant increase in return. Sherman Wealth Management understands that increasing potential risk without increasing the potential returns is unnecessary. It’s time to rebalance your portfolio to stay on track to help mitigate unnecessary risks.

“The S&P 500 Index is representative of domestic markets and includes the average performance of 500 widely held common stocks. This is a hypothetical example. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges or expenses. Past performance is no guarantee of future results. The performance of indices would be lower if fees and charges were incurred.”

Learn more about our Investment Management services.

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

Though it may seem daunting, investing in your future is a positive choice. Your experience doesn’t have to be intimidating; I will be happy to serve as your financial planner to help guide you through the process. There is no better time to begin than now. The earlier you can begin to save, the greater earning potential you have at retirement.

Why a 401k program is essential

Assuming an average annual return of 8 percent, setting aside only $4,000 per year starting in your 20s could make you a millionaire by age 62, according to an article by Hitha Prabhakar in U.S. News and World Report. The article further explains that the Employee Benefit Research Institute reported in January 2014, that 30 years of 401(k) savings, combined with Social Security benefits, should generate an income that replaces at least 60 percent of per-retirement salaries.

In addition to putting away money on your own, many companies offer a “matching” program for retirement savings. Some companies may have avesting schedule, which means that the match is earned over time. However, if you don’t take advantage of a 401k program, you are passing up the opportunity for “free money” contributed to your retirement account by your employer.

We started this company with a goal to help educate investors, and guide them through an otherwise daunting experience. Sherman Wealth is happy to look at your 401(k) plan and give you ideas on how to best manage your money. Give us a call at (240) 462-5273 if you would like more information in creating a retirement savings fund. Your retirement may seem far away, but developing a savings plan early you can help ensure confidence in your financial future.

Find an accessible path to your financial future at Sherman Wealth Management.

Learn more about our Retirement Planning services.

National 529 Day! So What Is A 529 Plan?

With nearly 70% of Americans unsure of what a 529 plan is, Thursday, May 29 is National 529 Day (or more officially “National 529 College Savings Plan Day”), serving to raise awareness to the benefits of a 529 investment plan.

Essentially, it is a college tuition plan for your children that is tax-free both on savings and investments, as long as it is used for qualified expenses and does not have income limitations on contributors. With all 50 states and the District of Columbia offering at least one 529 plan, many states offer a tax deduction to those who use their state’s plan. And this Thursday, many states are having promotional contests, including Maryland and Virginia. Don’t procrastinate any longer 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 529 Plan. With Sherman Wealth Management’s guidance and expertise, you can start saving for your child’s future today so you can ease the worries of tomorrow.

Dependable advice in a fluctuating market.
Sherman Wealth

LFS-934378-052814

Custom Investments For Your Life

History shows chasing the prior year’s hot asset class doesn’t always pay off. Fixed income investments could highlight a portfolio one year, but deliver losses only two years later. Portfolios are individually tailored to clients’ so your needs with custom investments and are met in ever-changing markets. Sherman Wealth Management emphasizes quarterly client meetings to discuss performance of diversified portfolios. Revisiting portfolios quarterly or at a time of change in personal financial goals helps to ensure that client needs are matched with the right investment strategy.

Customized investments for your life.
Sherman Wealth

LFS-932674-052314

5 Big Picture Things Many Investors Don’t Do

These simple strategies can make a big impact on your long term portfolio.

Here are 5 Strategies most average investors don’t focus on, but should.

Related Reading:

Mitigating Your Investment Volatility

Investing With Your Risk Tolerance in Mind

Asset Allocation for Mitigating Volatility

Related Reading:

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

Related Reading:

Millennials: The Fiscally Conservative Generation

Tips for the fiscally conservative

Rebalance Your Portfolio To Stay On Track With Investments

Related Reading:

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

Why a 401k program is essential

Related Reading:

National 529 Day! So What Is A 529 Plan?

Custom Investments For Your Life

INFORMATION

Sign up for Sherman Wealth Snaps