Teachers: Who is Managing Your 403(b)?

teachers 403b

With autumn just around the corner, many teachers have returned to their classrooms. The end-of-summer teacher ritual of decorating, stapling and contacting parents has made its return. I know from personal experience, though, that teachers would be wise to use any spare time to investigate their retirement accounts and determine whether their money is being deployed as effectively as possible.

My mom was a public school teacher and single mother. You can imagine how slim her finances were. Still, she managed to save up some money despite her paltry salary. After a while, however, she found out that the managers of her 403(b) plan were not investing her money as effectively as they should have been. A lot of her savings were tied up in a high-cost annuity that could have been invested in much cheaper options. These people, who were employed by the county to help her money grow, were actually eroding her savings. (For related reading, see: Do You Need to Change Your Financial Advisor?)

Digging Deeper Into Your Retirement Account

My mom’s experience is what drove me to operate as an independent, fee-only, fiduciary advisor. Those words mean that a fiduciary will never do to clients what my mother’s managers did to her—we are legally obligated to act only in clients’ best interests. Most schools will offer a 403(b) plan for teachers. However, as with the custodians of my mom’s savings, these plans can often be managed by a third party, non-fiduciary advisor who may not act in clients’ best interests. Non-fiduciary advisors are held only to a suitability standard, which means that they are obligated only to make investments that are suitable for you.

These advisors can buy investment products that are the best for their own pockets, not yours. In fact, the Indexed Annuity Leadership Council is one of the many groups suing the Department of Labor over its new fiduciary rule. Additionally, several big insurance companies are projected to see reduced earnings as a result of a predicted decrease in annuity sales when the fiduciary rule takes effect. (For related reading, see: The Conflicts of Interest Around 401(k)s.)

By contrast, fee-only, fiduciary advisors make only the investments that are the most suitable. We aren’t looking for efficiencies or working for sales commissions on the products we recommend to you. Fiduciaries strive to provide the best advice to investors looking to build a strong foundation, like teachers. These advisors grow with you, not at your expense by profiting off the products assembled for you.

Teachers, we encourage you to spend some time finding out more about the practices of your retirement fund manager. It’s vital to find out whether they are a fiduciary, how they make money (fee-based or fee-only), and how personalized their investment strategy is.

READ MORE: Comedian John Oliver recently did a segment on the subject of retirement planning that addresses this. You can check out our 4 quick takeaways from the monologue.

This article was originally published on Investopedia.com

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

How to Cut Back on Spending Like a Billionaire

How to Cut Spending

Even the richest few people in the world maintain some financially cautious habits. Warren Buffett (who, by our math, is worth more than all of the NFL’s teams combined) famously still lives in the same Omaha house he bought for $31,500 in 1958. Many of the world’s wealthiest don’t indulge in extravagance, even with billions at their disposal (and when they do, it’s not always a happy ending.)

While this ranges in degrees of neuroticism from simply wanting to give most of the fortune to charity to an Indian tech mogul monitoring employees to track toilet paper usage and make sure they shut off the office lights, wealth is not accumulated by throwing money away. (For related reading, see: The Importance of Personal Finance Knowledge.)

Frugalities of the Rich

While of course most people don’t have $51 billion like Mark Zuckerberg, there are undoubtedly some lessons to extract from the financial behavior of the wealthy. All of them have certain habits where they save money. Dish Network chairman Charlie Ergen packs a brown-bag lunch from home every day and Zuckerberg reportedly drives a Volkswagen hatchback (although this could just be a Peter Gregory-style “Silicon Valley” mannerism).

At the same time, neither of these routines are specific requisites for financial success. But they do indicate the importance of planning expenditures and saving where possible. That’s where a financial advisor can be of help. We don’t believe in telling you to lose your favorite habits. If you enjoy a latte from Starbucks every morning, then by all means you should keep getting that latte. But good financial planning includes understanding trade-offs between keeping things you enjoy and cutting down on things you can live without. (For related reading, see: 6 Questions to Ask a Financial Advisor.)

Planning cash flows goes a long way toward reaching this goal. It is impossible to know how much you need to trim (or have room to grow) without first taking stock of what’s coming in and what’s going out. If your different bank and credit card accounts are the canvas, the actual cash flows are the paint that makes up the picture of overall financial health.

A good financial planner shouldn’t act like a strict parent that never lets their kid eat dessert or play outside. Their goal should be to work with you to understand your financial situation, both in broad strokes and the details of monthly spending. That way, they can help you make decisions about where best to deploy your spending money. This isn’t always easy—sometimes trade-offs have to be made. But when even billionaires are bringing lunch from home, we all owe it to ourselves to thoroughly examine our spending habits. (For related reading, see: Why Investors Can Be Their Own Worst Enemy.)

This article was originally published on Investopedia.com

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

The Importance of Personal Finance Knowledge

Financial Knowlege

For years, the Financial Industry Regulatory Authority (FINRA) has tracked American personal finance knowledge through a survey about saving habits and basic financial principles. FINRA recently released the results of its 2015 survey, which includes the fact that only 37% of those who took the survey could answer four of the five questions on a basic financial literacy quiz. Four out of five is FINRA’s baseline for high financial literacy. Back in 2009, 42% of the respondents were considered to meet this level of financial literacy. (If you’re curious, you can take the quiz here.)

We’ve previously written about biases in financial habits and the desolate state of personal finance education in high school and college, and this study re-confirms our suspicions. Way less than half of the American population has a sufficient understanding of the basic ideas necessary for successful saving and financial planning! That is nearing crisis levels.

Make no mistake–an ignorance of personal finance, while probably unintentional, has serious consequences. Just over half of respondents said they are worried about running out of money in retirement, only one in five are willing to take risks when investing, and 57% say they set long-term financial goals. But, when taken together with those statistics, the most concerning part is that 76% have a high self-assessment of their financial literacy.

As finance writer Jeff Sommer points out in his recent column, this means that Americans don’t know very much about personal finance and saving, but think they do. The positive self-perception is also the only figure to have significantly increased since 2009.

Improving financial conditions can create a false sense of security for many savers who think their current status makes them recession-proof. This is a huge reason why I decided to start my own firm. I recognized the alarming lack of awareness about saving, spending and the markets, and noted many common bad habits that can lead to trouble in an economic downturn. (For related reading, see: Behavioral Finance: How Bias Can Hurt Investing.)

The lack of education is compounded by the unavailability of many big-name institutions who offer financial advice and wealth management services to many. Traditional wealth management practices often have high account minimums that make their financial advice unreachable for most people. Moreover, even if you can open an account with a wealth manager, they may not be required by law to act in only your best interest, which can lead to inefficient investments for you that pay them commissions.

The reality is that many people are scared by the thought of investing. Since many Americans are mostly in the dark, they may not know where to go or how to start. That’s why it’s important to use online resources and educate yourself on all aspects of personal finance. (For related reading, see: 6 Questions to Ask Your Financial Advisor.)

This article was originally published on Investopedia.com

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

Summer Interns: Time to Focus On Long-Term Gains

Summer Intern

The light at the end of the tunnel is nearing for America’s summer interns. Full-time offers will be tendered, sighs of relief exhaled and paychecks cashed. Interns who receive offers will be bright-eyed with lofty visions of moonshot careers at their new place of employment. As these interns begin to accept the end of college and pivot towards the start of the rest of their lives, we strongly encourage them to start considering a long-term financial plan.

Sure, it is tempting to put most of your extra cash earned this summer in your checking account for drinks, trips to visit friends or to buy yourself something nice. The decidedly less glamorous option is to put a chunk of that cash into a Roth or Traditional individual retirement account (IRA). But, almost certainly, that is the option for which your future self would pat you on the back. (For related reading, see: The Conflicts of Interest Around 401(k) Plans.)

Early Planning Is a Tough Sell

We know this is a tough sell for most college students. Salaries and long-term financial security aren’t big concerns for today’s generation as it has been before. Even on Wall Street, where compensation is high, interns seek other qualities in a company. For example, interns at investment bank Jefferies said they valued relatable leadership, a family atmosphere and inclusion. So we get that saving for retirement may not be where your mind is at—especially if you received an offer and want to celebrate. (Which, by all means, you should.)

We aren’t here to suggest you start living a life of austerity now that college is almost over. But you must consider that right now is the best time in your life to put a bit of money away for retirement. The power of compound interest means that the earlier you start saving, the greater your returns will be. It doesn’t matter how small the amount—money invested in the stock market can grow exponentially over time because it compounds year over year.

In our experience, many college-aged people don’t know where to start, even if they are interested in opening an IRA. The choice between, for example, a Roth or Traditional IRA can be opaque and intimidating. And then, once an account has been opened, where do you actually invest the money? How can it be monitored? (For related reading, see: 6 Questions to Ask a Financial Advisor.)

To pile on top of that, as you graduate and find a new pad, start work and are presented with options for employer-sponsored retirement plans, you might be forced to consider trade-offs. Should you work on paying off your student loans or invest that money into growing your retirement account? Or, you might ask yourself, why invest at all when I can just keep my earnings in cash?

All of this “adulting” can be overwhelming, and unfortunately often leads to poor financial decisions. (For some guidance, we highly recommend John Oliver’s take on saving and financial advice.) But one thing you can be confident of is that starting to save now has almost no downside. If you aren’t totally sure of your ability to open an account and invest on your own, follow John Oliver’s advice and contact a low-cost, fiduciary financial advisor who can work with you to grow your investment.

We recognize that putting a chunk of your income towards retirement at such a young age isn’t sexy. But it has enormous benefit and will set you on a path of financial wellness. It’s the right thing to do. (For related reading, see: Why Playing It Safe Could Hurt Your Retirement)

 

This article was originally published on Investopedia.com

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

Why Playing It Safe Could Hurt Your Retirement

playing it safe

A new survey from Bankrate indicates that many Americans hold quite a low view of the stock market. In answering what was the best way to invest money unneeded for at least 10 years, real estate (25%) and cash (23%) took the top spots, followed by the stock market and gold (16% each) in a tie for third. This comes on the heels of Bank of America finding that cash levels in portfolios are at their highest since November 2001.

In a time of volatility in the market, many Americans, particularly those who are young and/or without a huge amount of money to invest, are hesitant. They prefer the certainty of a house or even cash under the mattress to the unpredictability and seeming inaccessibility of the public markets. On the surface, this seems like the safer option, and we understand why many people feel this way. Loss aversion is countered by having a tangible stack of cash that will always be there.

Unfortunately, it’s wrong and can be dangerous in the long term.

What many cash-focused savers don’t realize is that because of inflation, the value of cash fluctuates over time—just like a stock. As Alex Gurevich, CIO of HonTE Investments, points out, that means that cash is subject to bubbles similar to tech in 2000 or the mortgage crisis. Moreover, saving only cash eliminates access to the market’s long-term returns; $10,000 invested in the S&P 500 in 1980 would yield $166,600 at year-end 2015, adjusted for inflation. Even with the ups and downs, in the long run the stock market remains the best place to invest for retirement. (For related reading, see: Why Investors Can Be Their Own Worst Enemy)

Saving cash is still important for short-term emergency funds. But if simply stockpiling cash is your long-term plan for retirement, you probably have no shot unless you’re very wealthy.

Many people may avoid the stock market out of a fear of the bad days when the market tumbles. Some people panic when the market dips (for example, in the event of a major world event like Brexit) and sell most or even all of their stock. Besides the fallacy of panic-selling at play here (you’d be selling low rather than buying low and selling high), by withdrawing from the stock market you miss out on the good days as the price of shielding yourself from the bad. Reporter Spencer Jakab points out in the Wall Street Journal that a couple good days a year produce the entire year’s returns, on average. (For related reading, see: Behavioral Finance: 8 Common Investor Biases That Impact Investment Decisions)

“Investors sit out on some really good days by trying to avoid bad ones,” Jakab writes. “Nearly all of those happen around scary episodes such as October 1929, October 1987 and in 2008 following the collapse of Lehman Brothers. Pretend, for example, that you took your money out of the market following the choppiest episodes over the last 20 years and wound up missing the epic rebounds that made up the 40 best days. You actually would lose money.”

The stock market can be threatening and, sometimes, punishing. But the solution isn’t total withdrawal; on the contrary, find an advisor you trust and create a plan that makes you more comfortable about investing. As Ben Carlson writes, “The alternative for stepping out into the unknown is the known of never building your wealth.”

This article was originally published on Investopedia.com

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

Fear Keeps Millennials on Investing Sidelines

Fear of Investing

Millennials are nervous about investing. Recent surveys have shown that 70% of millennials keep their savings in cash rather than invest it in the stock market.

But by not investing early on, these people in their 20s and early 30s miss out on the key advantage they have at a young age: time. Because your investment returns are compounded, the earlier you start investing the more — and longer — will the returns add up, ultimately leaving you with more money in the bank.

So what are millennials waiting for? Many of the concerns holding them back from the market boil down to a lack of information about investing. Some of the most common fears are:

‘I have no idea where to start’

Many potential young investors have no idea where to start even if they wanted to buy just one stock. And then they don’t know how to choose which stock or fund to invest in. Since most people don’t get personal finance education as part of their schooling, investing can seem enormously daunting and precarious.

A little online research can demystify many of the basic investing concepts, such as how compounded interest works, how patience can be beneficial, and how to not overreact to temporary dips in the market. Working with a financial advisor to develop a plan and ease into an investing strategy also can help reduce your stress and anxiety about entering the stock market.

‘I haven’t even paid off my loans — I can’t start saving’

Concern about debt, particularly student loans, is understandable and widespread among millennials. Student loan borrowers have an average debt of almost $30,000 for undergraduate loans. The question of whether to pay off student loan debt more aggressively or use the extra money to start saving is a tough one because people don’t have the same financial situations. Your debt, cash flow and spending circumstances are unique and will require a plan that’s customized to you.

Keep in mind, however, that your years as a young professional are your prime saving period. If you can stomach not using all your extra money to pay off loans, you could reap the long-term benefit of investing early. Paying down a high-interest loan is a priority. But if the interest is low enough, consider creating a financial plan that allots some of your savings to an IRA or 401(k). Over time, the return on that investment, with the help of compounded interest, can make the trade-off worthwhile.

If you don’t have high-interest loans, creating a long-term, comprehensive financial plan that includes saving and investing is the best way of making sure you’ll have the funds you’ll need in the future, whether it’s to pay down debt, buy or rent a house, or make any other important expenditure. If you live on a tight budget, controlling and mapping out your spending becomes even more important.

‘I don’t trust, or can’t afford, financial advisors’

Many advisors require high asset minimums that may be well out of reach for young investors. And even then, the advisor could put your money in inefficient investment products that could generate commissions and other hidden fees for the advisor and inflate your investing costs.

Many advisors are not legally obligated to act only in their clients’ best interest; they merely have to suggest “suitable” investments. In many cases this means investments for which they are paid a commission. But those who uphold the fiduciary standard are required to put their clients’ interests first. And fee-only advisors are paid solely for the advice they give you, and not through commissions on the products they recommend.

Millennials are right to be wary of the industry, but there are advisors who won’t put their profit goals ahead of yours. Look for a fee-only fiduciary advisor. You may also want to work initially with a fiduciary advisor who charges by the hour if advisors with asset-management minimums are out of reach.

You need a financial plan that’s customized for your own situation and goals. But that doesn’t mean you can afford a delayed start. The sooner you map out a financial plan and start saving and investing, the bigger the payoff will be down the road.

This article was originally published on Nerdwallet.com

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

Financial Failings of NBA Legend Antoine Walker

Antoine Walker

Former NBA All-Star forward Antoine Walker possessed a varied skill-set that enabled him to play both inside and outside. A big man who also shot the three, Walker was notorious for his hilariously erratic shot selection and, later in his career, an aversion to running that led to lazy play.

The quality of financial advice Walker received throughout his career was evidently very close to the quality of his shot attempts, as he filed for bankruptcy in 2010, two years after he retired from the game. In a recent column in the Players’ Tribune, Walker writes a letter to his younger self detailing what went wrong and what he could have done better.

Surprisingly, there are a few money management lessons that anyone—NBA star or not—can apply. (For related reading, see: Do You Need to Change Your Financial Advisor?)

Actively Screen Advisors
Screen advisors before you hire them, and after you do, make sure you know where your money is going. Walker frames his letter with the importance and difficulty of saying “no,” whether to friends asking for money or, most crucially, a friend of a friend who asked for money to start a real estate venture.

The advisor, who Walker met at a dinner with NBA colleagues, started Walker Ventures with bank loans guaranteed by Walker’s personal portfolio, an incredibly risky move. Walker let the advisor have complete control of managing the properties since he was playing basketball nine months of the year. Ultimately, Walker Ventures was forced to close after the housing crash with $20 million of debt. The advisor went to jail, and Walker was forced to file for bankruptcy.

There were a couple ways this could have been prevented. First, Walker didn’t do much due diligence before making the deal. He could have run it by another advisor, who probably would have told him it was structured as an extremely risky venture. Second, because of his schedule, Walker did not adequately check up on the investments.

Many people, particularly young investors, share Walker’s desire to make some money outside of their main job, especially to save for retirement. Finding a financial advisor who is trustworthy, and right for your unique needs, is very important. (For related reading, see: 6 Questions to Ask a Financial Advisor.)

The Upside of Having Someone Say No
Walker’s trouble with the real estate venture was compounded by his reckless spending. While he confesses that he spent lavishly on himself, including a $350,000 Maybach car, it appears that what took the biggest bite out of Walker’s wallet was his spending on family and friends. “I gave them whatever they wanted and spoiled them. You can’t do that,” Walker said in a CNN/Money interview. “It ended up being an open ATM throughout my career.”

While most of us don’t take our friends to a Gucci store and let them buy whatever they want—as Walker has said he did—spending without at least an idea of what is manageable is a problem many people encounter. For young professionals in particular, overspending can seriously hinder retirement saving.

A good financial advisor will do more than simply invest your money. They will incorporate periodic spending goals, major expenditures like vacations, and life events like a new home or wedding into your comprehensive financial plan. Sometimes, this could mean advising against a big purchase for the sake of a long-term goal.

Obviously, we don’t all have $110 million to blow like Antoine Walker. But lackadaisical spending control and being too busy to check on our investments or advisors are traps anyone could fall into. Ensuring that your money is in the right hands is a universally important objective. (For related reading, see: Which Investor Personality Best Describes You?)

This article was originally published on Investopedia.com

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

Going the ETF Route? What You Should Know

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

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

What Are ETFs?

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

Why Do We Use Them?

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

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

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

 

This article was originally published on Investopedia.com

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

Instituting Investing Rules: Lessons from the Brexit

Brexit Rules

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

Rules-Based Investing

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

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

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

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

 

This article was originally published on Investopedia.com

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

Do You Need to Change Your Financial Advisor?

Financial Advisor

In his song “Real Friends” musician Kanye West raps, “Real friends. It’s not many of us. We smile at each other. But how many honest? Trust issues.” West wonders whether those around him are there because they really have his best interests at heart, or if they only care about him for his money.

Given recent developments in the financial advisory industry, many Millennials might be wondering the same thing about their financial advisor. The Department of Labor (DOL) will soon be enacting a new rule that requires all financial advisors handling a retirement account to abide by a fiduciary standard, which means always acting in the best interests of the client and not the advisor’s or corporation’s profits. It might be surprising, but that is currently not always the case. If your advisor is not a fiduciary, he or she may not be obligated to act only in your best interest. You can read more about the new rule and our take on the fiduciary obligation here.

Opponents of the rule, unsurprisingly the financial services industry’s lobbyists, who largely oppose the rule, point to a study saying that it will decrease access to financial advice for small investors since advisors “cannot figure out how to make money when working with them.” Without the fiduciary obligation, how do advisors currently profit from younger investors? Forbes recently published an article by the Morgan Stanley team where advisor T. Gregory Naples says that with Millennial clients he,

“starts them out in managed mutual funds until they reach $50,000. After that, he often switches them to more transparent and lower-cost stock and bond funds managed by institutional money managers.”

Breaking it Down

This is a huge admission. Let’s break down exactly what Naples is saying. Crucially, Naples admits that, until you hit $50,000 assets under management (AUM), he invests your money in more expensive, less efficient funds. Many of these “actively managed” funds, which try to beat the market’s returns, have higher costs because of labor and number of trades they execute. After this period, once your AUM gets to a point where Naples can more easily make money off of you through fees, he puts your money into more efficient places it should have been all along.

Later on, he mentions examples illustrating the power of compound interest, but neglects to mention that the unnecessary fees you are incurring from the inefficient funds he has invested your money into will eat away at the returns you get from the compound interest. This illustrates the folly of the argument that the fiduciary rule will drive young investors away. Young investors who are just starting out are, in fact, much better off being driven away from advisors with non-fiduciary practices like Naples. Entrusting your money to a non-fiduciary, traditional financial advisor as a young, new investor is like intentionally hitchhiking on a road known for having murderous truck drivers when there’s a much safer road nearby. (Read more about 6 Questions to Ask A Financial Advisor)

People naturally gravitate towards big firms with name recognition. But as the Naples quote demonstrates, these large, non-fiduciary firms may not always be the best option, particularly for young investors. What the back-and-forth over the DOL rule reveals is that non-fiduciary advisors often don’t even really want your money. Most seek accounts with higher balances. So why go where your money is not wanted?

 

This article was originally published on Investopedia.com

***

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.