Personal Finance – Why Didn’t I Learn That?

I recently returned from a reunion weekend with some of my college buddies. We caught up on wives, kids, work and all the other important parts of our lives. One thing struck me about the conversations, no matter whether I was speaking with liberal arts majors or those who studied corporate finance: While we all know that E=MC2 and maybe even know a fair amount about Einstein’s theory, most of them graduated without having a real clue about personal finance.

In other words, the financial skills we learn in school are not necessarily the ones we need in the real world — at least when it comes to our personal lives.

Personal finance is not typically part of a college curriculum. And while some of us have parents or family members who can guide us along the way, those individuals may not be financial experts, and there is a limit to the help they can provide.

From my experience, most people are interested in financial literacy but don’t know where to go to get started. We all face similar issues, and the less familiar we are with the mechanics of approaching them, the more anxiety-provoking they become.

The younger you learn, the better off you are. When I was in the first grade, I wanted to be Alex P. Keaton, the money-savvy teenager played by Michael J. Fox on the television sitcom “Family Ties.” It was clear early on that I had an affinity for sound saving, investing and growing money. When I was 7, my grandmother gave me a dollar; I turned it into $5, then $50. I am thrilled by the challenge of helping people reach their financial goals at all stages of their lives.

For example, take buying that first home. Your career is on track, and becoming a homeowner seems like an appropriate goal. So with some excitement and anticipation, you decide to start looking.

Then the questions begin flooding in. How much home can I afford? How much should I be saving? When is the ideal time to buy? How does a mortgage work? Will I qualify? What’s my credit score? Do I need insurance? How do property taxes work?

Imagine if there were a course in college (let’s not get crazy and imagine they would teach this in high school) called Personal Finance 101. In addition to the homebuying lessons above, the curriculum could look something like this:

Cash flow and budgeting

Topics covered: What is a budget? How do I create one? How do I know what I can afford?

Building credit and understanding credit cards

Topics covered: What are the advantages and disadvantages of owning a credit card? How should I decide which one to get?

Intro to the stock market and investing

Topics covered: What are the differences in the various investment vehicles — exchange-traded funds, mutual funds, stocks, bonds, certificates of deposit?

Taxes

Topics covered: How do I pay taxes? What do I need to pay attention to in my tax planning?

Future workplace retirement plan options

Topics covered: What is a 401(k), IRA, Roth IRA? When should I start saving? How much should I save?

My guess is that a course like this would be incredibly valuable to many. It’s complicated stuff. It’s important stuff. It’s the kind of stuff that you actually need to know.

This is the main reason I chose to get in this line of work. Younger people have no idea where or how to start, and they have no idea where to find help. Traditional financial management institutions have investment minimums that most of us won’t be able to meet for over a decade, if ever. These minimums can range from $250,000 to $500,000, and sometimes are higher. Even if you were fortunate enough to be accepted by a big institutional investment manager, you’re kidding yourself if you think a large institution is going to take the time to explain to you the difference between a traditional IRA and a Roth IRA.

That’s why I chose to create a wealth management model where we would provide the same customized service to all of our clients, without consideration of a minimum initial investment and irrespective of the size of their accounts. We hope that by investing in you early, you’ll see our value for the long term.

If you are reading this and can relate to some of these thoughts, know that it’s not just you. It doesn’t matter whether you majored in art or corporate finance, you almost certainly did not take a class in Personal Finance 101. The good news is, you don’t have to go at it alone. Seek the help that is out there, and learn what you may have missed in college.

This article was originally published on NerdWallet.com

This article also appears on Nasdaq.

 

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Why Volatility Is an Opportunity for Long-Term Growth

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This article was originally published on NerdWallet.com

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

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

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

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

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

Dollar-cost averaging

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

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

Compound interest

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

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

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

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

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

When A Storm Hits Are Investors Still Gluten-Free?

Empty Shelves

More snow coming?

Get ready for Instagrams and TV reports about empty bread shelves!

Here’s one from my local store before the blizzard a couple of weeks ago:

BreadShelvesNo matter how many people have resolved to stick to a gluten-free diet, that gluten seems much more appealing when a storm is on the horizon and gluten-free bread may get harder to find.

The same thing happens to investors. When the market is stormy, anxious investors often disregard their financial plans and start switching to what they perceive as “staples,’ sometimes at surge prices.

The trick with smart investing, as well smart shopping, is to make sure you’ve got enough of what you need – and want – before the storm hits, not during a run on the shelves. If you’re gluten-free, that means having a pantry already stocked with gluten-free pasta and a gluten-free loaf of bread in the freezer – not to mention beans, rice and tomato sauce – to tide you through the blizzard. It also means sticking to what you know has made sense for you in the past and realizing that two days without bread is not the end of the world – the bread will return to the shelves once the storm has passed.

Likewise, if you know your risk tolerance and have already planned effectively, you’ll have a balanced portfolio that contains the right balance of stocks and other less volatile instruments before a storm hits. With a fully diversified asset allocation strategy, there will be parts of your portfolio that go up, as well as other parts that go down, during times of stress. That way you’ll be comfortable sticking to your investment strategy and plan when the market is stormy. Plus, you’ll have purchased those less volatile instruments before pundits start shouting and everyone starts panic-purchasing.

A good financial advisor will help you build a portfolio strategy that truly for reflects your risk tolerance and, importantly, helps you understand exactly where the risk is in your portfolio. Your advisor will help you understand if, when and why to own bonds, Munis, Treasuries, and CDs, and how much of a cash component makes sense for your particular situation and need for liquidity.

The volatility we’re experiencing, current geopolitical uncertainty (like Japanese negative interest rates), and Federal Reserve uncertainty are all great litmus tests to determine whether you have a properly diversified portfolio and whether or not it’s an accurate match for your true risk tolerance.  If current market conditions or any paper losses you may be experiencing make you feel uncomfortable – or keeps you up at night – it’s likely that your investment strategy does not match your actual risk tolerance and needs to be re-balanced.

If, however, you’ve worked with your financial advisor and are comfortable with where you, then you’re best bet is probably to ignore the noise, ignore the panicking pundits, and stick to your saving and investing plan. Remember, if your investments made sense to you a couple of weeks ago, they probably continue to make sense for you, even during market volatility.

Just like a diversified pantry will help you stick to your nutritional goals when there’s a run on the supermarket, a good fee-only financial advisor can help you create a portfolio that is truly diversified, risk appropriate, and with the exact amount of liquidity that makes sense for your long-term goals, so you can sit back and weather the storm with confidence.

Photo Source: Reuters/Shannon Stapleton

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Still haven’t won the Powerball?… Now what?

Powerball

Still haven’t won the Powerball/? You may have to postpone that fantasy of buying a private island in Thailand, but that doesn’t mean you can’t still be on your way to achieving your financial goals and dreams.

Here’s one way to do it – take that money you’re sinking into lottery tickets and invest it instead.

Why are so many people willing to waste hundreds of dollars on a lottery they won’t win instead of investing it in capital markets that have shown growth over time? Many reasons. For some people, the hardest part of saving and investing could be just getting started. For others, it’s not understanding the benefits of compound interest and that even small amounts add up over time. For others it may be fear of volatility and distrust or the markets from listening to too much CNBC, Fox Business, and Bloomberg!

While it’s true that markets have dipped significantly in January, market dips are a potential opportunity to buy low and earn higher returns over time. The bottom line is that, for most people, even those starting with modest amounts, keeping money in cash is generally not a winning proposition.

Here’s why:

Lets say you are contributing $250 each month ($3k/yr) to your 401k plan with a 100% company match and invest it in a diversified basket of stocks and bonds based on your risk tolerance. At the same time, you save and invest $20 a week (the cost of 10 Powerball tickets a week) in a regular investment account. Assuming historical 4.8% annual returns*, here is how your money will grow over a 20-year period (in today’s dollars) vs. saving the same amount as cash:

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*based on a diversified portfolio that assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Barclays Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NA REIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data represents total return for stated period. Past performance is not indicative of future returns. Data are as of 12/31/15. Annualized (Ann.) return and volatility (Vol.) represents period of 12/31/99 – 12/31/15. Source: Page 59 https://www.jpmorganfunds.com/blobcontent/202/900/1158474868049_jp-littlebook.pdf

So go ahead and keep dreaming about that island! But first speak with a financial advisor about your current situation and future goals and what the best steps are to start working towards financial freedom.

And when the next Powerball comes around? Our guess is that a good financial advisor can help you find better ways to let that $2 grow for you!

 

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Why Go Where Your Money’s Not Wanted?

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In the film The Shining, a ghostly bartender tells Jack “your money’s no good here,” while other ghosts are planning to do away with Jack and his family. In December it was Wells Fargo doing the “ghosting.” By urging its brokers to get rid of clients with a minimum balance of less than 65,000, Wells Fargo Advisors sent a clear message to younger investors that, going forward, their money is “no good” at Wells Fargo.

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

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

As frustrating as the requirement for a high minimum balance is for first time investors, it has also inspired a new breed of smaller independent RIAs, like Sherman Wealth Management (“SWM”), as well as the the new “robo-advisor” firms.

Younger, breakaway firms like SWM aren’t looking for “efficiencies” or working for sales commissions on the products we recommend. Our focus is different. We strive to help investors build a strong foundation then grow with them, not by profiting off the trades, good or bad, we recommend for them.

Where large brokerages currently see a “revenue problem,” we see a growth potential and are building long-term lasting relationships. By the time Wells Fargo and the other firms with traditional models get around to investing their time and attention in younger investors, it may just be too late. Those Millennial clients will be growing their wealth with firms that didn’t “ghost” them and, like Jack – spoiler alert! – may end up being “frozen out” of the largest wealth transfer in the history of the world as capital shifts from Boomers to Millennials.

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.
*http://www.wsj.com/articles/wells-fargo-co-is-the-earths-most-valuable-bank-1437538216

Why You Should Consider Buying that Powerball Ticket

Powerball

If you won the Powerball today, what would you do with the $90 million dollars?

While I’m not the first to tell you that you are definitely not going to win the Powerball – you have a 20 times greater  chance of having identical triplets – it’s a great idea to think about what you would do with the 90 million dollars if you did win.

Here’s why: your answer is a great way to understand what you truly care about in life.

What’s the first thing you thought of? Was it “retire and live on a boat in Hawaii?” “Quit my job and become a deejay?” “Book a ride to the Space Station?” Or even just “Stop worrying about how to pay for my kids’ college?”

Your answer – however crazy or however normal –  is a window into what’s really important to you and a great way of evaluating your current financial strategy. Is upgrading your home a potential goal? Have you budgeted enough for your passions? Should you start saving more for more travel and adventure? Have you looked into 529 plans?

As a Financial Advisor, I would advise that you not waste that $2 when it would be better spent collecting compound interest. I would ask you whether you’d already contributed to your 401K plan, your emergency fund, and your other long or short term savings goals. Then I would suggest that if you really wanted to play Powerball, that you re-allocate that $2 from another area –  skipping the caramel latte this morning, for instance, or biking to work tomorrow to save on gas – so that the $2 is amortized.

But I would also tell you to keep dreaming, because those things you are dreaming about are a great way to evaluate whether your current savings and investment goals are tailor-made to help you achieve the life you really want, the life you’d lead if there was nothing standing in your way.

So consider it: if you won $90 million dollars, what’s the first thing you’d do? Now call your financial advisor and take the first step to actually making that happen.

p.s. – If you want to see what your chances of winning actually are, click here to try the LA Times’ Powerball Simulator!

 

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

7 Tips to Maximize the Value of a Bonus or Raise

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Expecting a bonus or a raise? Read these tips before you start Googling timeshares in Cancun

If you’ve got an end-of-year bonus or a well-deserved raise coming, it’s easy to think of it as “extra money” you can use to splurge on a trip to Mexico, a new phone, or a serious visit to the outlet stores. It’s particularly easy if you’ve been sticking to your budget and feel you deserve a little fun after behaving so responsibly all year!

Before you blow that bonus on a phone upgrade or a cruise, though, consider these smart ways to really reward yourself with the extra infusion of resources.

1. Upgrade Your Budget Instead of Your Phone

Still rocking a flip phone from the 90s? If so, yes, maybe you should invest in something smarter. But for most of us, it’s smarter to spread the extra cash across several budget items. Go ahead and add a little to your entertainment or entertaining budget, but consider allocating the rest of it to these smart ideas!

2. Make a Bigger Dent in your Debt

Are you feeling the weight of college loans, a mortgage, or, even worse, high interest credit card debt? You can lighten that load by using your bonus to make a larger payment than usual. It lowers your balance so it reduces some of those high interest charges moving forward. Increasing this budget category when you get that raise can also add up to a significant reduction of interest in the long run.

3. Invest to Watch it Grow

Setting aside money when you have large expenses to deal with now can be daunting. But the earlier you start investing the more time your money has to grow. If you haven’t already, create an investment account and put that bonus money to work for you, instead of leaving it in a checking account.

4. Kickstart Retiring

If you’ve kicked your tires and they need to be replaced, by all means, safety first! Use some of the rest of the money, though, to max out your company’s 401(k) contribution limits. If you qualify for an employer match, your bonus just got bigger!

5. Recalibrate Your Portfolios

If you’re already an investor, consider adding some of those extra funds to your investment portfolios. While you’re at it, take a look and see what’s working and what’s not. Your financial advisor can help you evaluate whether your allocations should be adjusted based on your risk tolerance and your long and short-term financial goals.

6. Start a College Savings Plan 

It’s never too early to start saving for a child’s college education. By starting early, you can get a good head start and maximize compounded interest. Your financial advisor can help you choose a plan that works with your life, you goals your timeline, and, most importantly, your bonus!

7. Save for a Rainy Day

Those emergency funds may seem like low priority, until you suddenly need them. If you haven’t already, create an account with funds for unexepected expenses like job loss, emergency repairs, medical bills for you, your family, or your pets, and even weather emergencies (remember Hurricane Sandy?) A good rule of thumb is to have three to six months of expenses saved up just in case.

There’s nothing wrong with treating yourself a little. You worked hard and you deserve it! Remember though, that by keeping the splurging and celebrating to a minimum, and letting that bonus or raise work for you, chances are you’ll have much more to celebrate when next year’s bonus comes around!

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.

If you have any questions regarding this Blog Post, please Contact Us.

The Most Important Question You’ll Ever Ask Your Financial Advisor

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Does your financial advisor follow the Fiduciary Standard or the Suitability Standard?

If you don’t know the answer without peeking – or calling your Lifeline – you’re not alone. A surprising number of people don’t know what these very important terms mean and whether their advisor is acting in their best interest.

Aren’t all financial advisors required to act in their client’s best interest?

Surprisingly, not all financial advisors are.

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

Having a waiter recommend an expensive chocolate cake that is “suitable” for adults and for someone who is willing to risk trying chocolate with sea salt may not be that critical, in spite of the fact that having fresh strawberries may clearly be in your best interest. But having a financial advisor who is making recommendations primarily based on your age and risk tolerance – and who could be putting their own, or their company’s, financial interests ahead of your interests — could be disastrous for your financial future.

Instead, the Fiduciary Standard, which is the standard for registered investment advisors under state and federal regulations, requires that a financial advisor act solely in a client’s best interest when offering financial advice.

Registered Investment Advisors – like Sherman Wealth Management – must follow – and are held to – the Fiduciary Standard. That means that a RIA must put their client’s needs ahead of their own, provide fully-disclosed, conflict-free advice, be fully transparent about fees, and continue to monitor a client’s investments, as well as their changing financial situation.

Here’s a potential scenario that illustrates the differences

Let’s say your broker-dealer has three possible funds to recommend to you. The first is a “suitable” index fund, offered by her own company, which pays her a 6% commission on the sale and charges a 2% annual fee. The second is a similarly suitable index fund that would pay her a 3% commission on the sale and has a 1% annual fee. The third is an index fund that has no sales commission and an annual fee of .5%. Under the Suitability Standard, she can recommend the higher priced fund and still satisfy the standard. Under the Fiduciary Standard, she would be required to recommend the third fund.

This is not to suggest that broker-dealers or others operating under the Suitability Standard don’t look out for their clients.  While many reps who follow the Suitability Standard give their clients excellent advice, they operate with an inherent conflict: the pressure to sell products that are more profitable for them and/or their firm can be important factors in how they direct you to invest.

So go ahead and let the waiter talk you into that chocolate cake (even though you know you’ll feel better tomorrow if you have the strawberries.) But when it comes to your money, think carefully about whose advice you are taking.

 

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http://www.finra.org/investors/suitability-what-investors-need-know

http://financialplanningcoalition.com/issues/fiduciary-standard-of-care/

Straight Talk about Volatility and Compound Interest – the Snowball Effect

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

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

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

Let’s break this dynamic duo down:

 

The Power of Compounding

 

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

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

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

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

 

Volatility – Market Highs and Lows

 

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

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

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

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

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

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

 

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Additional Reading:

How two of history’s greatest investors deal with losses

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

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

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

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

Has the Internet Replaced Personal Financial Advisors?

human technology

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

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

A couple of reasons…

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

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

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

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

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

 

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

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