Which Investor Personality Best Describes You?

psycology-investment

This article was originally published on investopedia.com

According to many studies, our different personality traits and preferences, along with a range of emotional and mental behavioral biases, have a strong impact on the way we invest. This is commonly referred to as behavioral finance. As part of a two-part series on Behavioral Finance, we will start by exploring the different personality types of most investors. When it comes to money and investing, there are many factors that contribute to the “how” and “why” of important financial decisions.

Investor Personality Types

There are four different types of investors, according to the CFA Institute, each with their own distinct behavioral biases. Understanding your own investor personality type can go a long way toward helping you determine and meet your long term investment goals, as well as producing better returns. (For more from Brad Sherman, see: 6 Questions to Ask a Financial Advisor.)

Which of these profiles best describes you?

Preservers

Preservers are investors who place a great deal of emphasis on financial security and on preserving wealth rather than taking risks to grow wealth. Preservers watch closely over their assets and are anxious about losses and short-term performance. Preservers also have trouble taking action for fear of making the wrong investments decisions.

Common Issues with Preservers: An investment strategy should take into account short-, mid- and long-term goals. By overemphasizing short-term returns, an investor risks making an emotional decision based on the short-term performance, which may end up being more detrimental to them in the long run.

Accumulators

Accumulators are investors who are interested in accumulating wealth and are confident they can do so. Accumulators tend to want to steer the ship when it comes to making investment decisions. They are risk takers and typically believe that whatever path they choose is the correct one. Accumulators have frequently been successful in prior business endeavors and are confident that they will make successful investors as well.

Common issue with Accumulators: Overconfidence. We recently wrote a blog on the issue with stock picking and active management. Overconfidence is a natural human tendency. As investors, accumulators consistently overestimate their ability to predict future returns. History has shown that it is impossible to predict markets at large scale, yet accumulators continue to try and do so and expose themselves to extreme risk.

Followers

Followers are investors who tend to follow the lead of their friends and colleagues, a general investing fad, or the status quo, rather than having their own ideas or making their own decisions about investing. Followers may lack interest and/or knowledge of the financial markets and their decision-making process may lack a long-term plan.

Common Issues with Followers: The herd mentality is a concept of investors piling into the same investments as others. This is often the basis of investment bubbles and subsequent crashes in the stock market. When you are a follower, you are typically following fund managers who have tools and recourses to act on new information in a fraction of a second. By the time the average investor “follows” them into a position, it is often too late. It is always important to understand your investment decisions and how they fit into your overall plan.

Independents

Independents are investors who have original ideas about investing and like to be involved in the investment process. Unlike followers, they are very interested in the process of investing, and are engaged in the financial markets. Many Independents are analytical and critical thinkers and trust themselves to make confident and informed decisions, but risk the pitfalls of only following their own research.

Common Issues with Independents: Similar to overconfidence bias associated with accumulators, independents face similar issues with relying too heavily on their own train of thought. We as humans have ability to convince ourselves that we are correct or that we don’t need guidance, even when that is not the case.

 

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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.

Is Your Retirement Advisor a Fiduciary?

Is your Retirement Advisor a Fiduciary?

Do you want a financial professional who is opposed to financial transparency managing your money?

The upcoming and long anticipated proposed rules by the Department of Labor (“DOL”) exposes that very debate, as it seeks to eliminate the ability of financial advisors to profit by selling retirement account products to investors without being held to a “fiduciary standard.”

For those wondering what that means, with a fiduciary standard an advisor must always act in your (their client’s) best interests. A fiduciary standard ensures that the advisor’s duty is to the client only, not the corporation they represent. To the surprise of many, that currently is not always the case. Financial advisors have had the ability to profit (through commissions and high fees) to the potential detriment of their clients. That is exactly what many large financial institutions and insurance companies have done. In fact, the federal government estimates that there are roughly $17 billion dollars of fees generated each year from conflicted advice.

The DOL has made clear –and we agree– that a commission based investment model creates a conflict of interest. Companies with a commission based model 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. For example, an advisor may receive a 5% commission by selling you a fund through their company when you could get a similar product elsewhere without commission. Think of it this way: would you want to work with an accountant who also gets commissions from the IRS? Of course not. You want your accountant to represent your best interests. Would you go to a doctor who makes money each time he prescribes penicillin? No, you want your doctor to prescribe what is right for you. That is the primary reason we stay completely independent and operate as conflict-free, fee-only advisors.

The proposed DOL rule will hopefully begin to fix this issue as it is expected to require a strict fiduciary standard for financial advisors in the context of sales for retirement account products.  This standard will require advisors to certify that they are acting independently and in their client’s best interest, and are not motivated by the prospect of a commission. This has created a firestorm among big insurance companies, broker dealers and other institutional investors who, as we pointed out, don’t typically operate as fiduciaries.

In a letter sent last week to the SEC, Senator Elizabeth Warren, a strong proponent of the proposed DOL rule, pointed out that presidents of Transamerica, Lincoln National, Jackson National and Prudential all have called this proposal “unworkable.”  She commented on the self interest in their position, and the danger in permitting unwitting investors to be guided by non-fiduciaries in the context of their retirement investments.

Why would a rule that requires a financial advisor to act in their client’s best interest create such an uproar? One reason is that unlike Sherman Wealth Management, they are in a commission driven model, and therefore fear that the way they currently serve clients would not meet the standards of this new rule. We hope that because of the conflict a commission driven model creates, that eventually enough pressure from policy-makers like Senator Warren and Labor Secretary Perez will propel this proposed new rule beyond just retirement accounts. In the meantime, think to yourself why anyone would oppose this rule if not for purely selfish reasons?

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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 Diversified is your Diversification?

Eggs

In November yet another firm fell victim to the growing Valeant fallout as Tiger Ratan Capital Fund LP fell 33% over the past three months, wiping out gains for 2015.

Those losses stemmed from the fact that Valeant accounted for 20% of TRC’s U.S. holdings. But they weren’t alone. Many well-respected funds, including the mighty Sequoia Fund, and hedge fund manager Bill Ackman’s Pershing Capital also had extensive exposure to long time Wall Street darling Valeant and suffered losses not only of value – but of face as well.

The dramatic losses came as quite a shock to many of the investors who own these – and other affected – funds, and who assumed that the funds were diversified – when in fact they weren’t. By going out on a limb and investing too much of their allocation in what has been one of Wall Street’s hottest stocks for years, many respected “hedge” funds experienced huge capital losses that it will take years to recover from.

In fact, of the 1,000 hedge funds tracked by Symmetric.IO, approximately 12% had a position in Valeant. A startling 32% of Valeant’s shares were held by hedge funds.

When Diversification isn’t Diversification

Having 20% of your portfolio in one stock is a huge risk for anyone. You never know when the next Enron or Worldcom may be and, because of accusations of unorthodox practices, it may very well be Valeant.

On the other hand, Valeant could still turn out to be a home run and deliver big time. No one really knows, which is why diversification is so key.

Many investors diversify with ETFs and mutual funds. But how many investors are absolutely certain that the mutual funds they are counting on to provide diversification, are, in fact, properly diversified themselves?

When that Hot Stock is Too Much of a Good Thing

When a “hot stock” or fund keeps climbing, it’s tempting to want to jump on the bandwagon, and the same is true for a hot sector. That’s no doubt why so many otherwise experienced fund managers over-exposed themselves to Valeant and to the health sector in general.

But while a portfolio with correlated assets that tend to do well together, is also a portfolio with assets that can tend to do poorly together when the winds shift. As Ben Carlson put it in a recent blog post: “Diversification requires finding the right balance between eliminating unsystematic risk (risk that’s specific to single securities or industries) and di-worsification by adding too many overlapping funds.”

Put another way: it’s not enough to put your eggs in different baskets, the eggs themselves need to be diversified, some plain, some speckled, and the speckled ones should be speckled in different ways.

A properly diversified mutual fund or ETF allow you to invest in a sector or a “hot stock” while mitigating risk. Which is no doubt what the investors who held Tiger, Pershing, and Sequoia thought they were doing.

The Moral of the Story

Due diligence. While you and your financial advisor are most likely diversifying your holdings, make sure that your holdings are also diversifying their holdings. Review your mutual funds frequently to make sure that their strategies, risk tolerance, and diversification standards align with yours and that they are not over-weighted chasing impressive returns from a couple of current wall street darlings.

The jury is still out on Valeant and on the funds that held it. It may in fact recover, although it would have to recover quickly to make up for the loss of momentum for the funds and investors that held it.

Nonetheless, it’s an important lesson for individual investors. A truly diversified portfolio is made up of truly diversified assets.

 

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This analysis is provided for informational purposes only and is not to be considered investment advice. The securities mentioned herein are for illustration of the concepts discussed and are not a recommendation to buy or sell any security. Please see additional disclosures.

Navigating the Stock Market: Tips for Millennials

Understanding the Stockmarket

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

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

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

Here are some basic tips to help you get started.

7 Tips For The Long Term Investor

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

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

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

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

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

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

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

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

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

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

Related Reading:

What is Dollar Cost Averaging?

5 Things Investors Get Wrong

5 Big Picture Things Many Investors Don’t Do

Why and How to Get Started Investing Today

Mitigating Your Investment Volatility

The Psychology of Investing

Rebalance Your Portfolio to Stay on Track With Investments

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

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Financial Planning for Millennials: Overcoming the Fear Factor

financial planning for Millennials

What do you think of when you think of Millennials? The media loves to paint Millennials as “adventurous”, “risk takers,” and “thrill seekers.” But, surprisingly, when it comes to financial planning for Millennials, their behavior is anything but risky.

In fact, there is evidence that, while emotions and biases play a large part in Millennials’ investment decisions,  fear leads the list of behavioral influences.

We Millennials grew up during the Internet crash and have witnessed one of the most turbulent market cycles in recent U.S. history. With the financial crisis of 2008, and the housing bust leading to a recession, many of us have watched our parents struggle with financial security and worry about whether they’ll ever be able to retire. Many recent grads have experienced unemployment as a result of the crisis, and many are burdened with significant student loan debt. Good times? Not.

These experiences during their impressionable years have led many Millennials to take an emotionally driven approach to Financial Planning for Millennials and to adopt conservative money habits that analysts have compared to the investment behavior of young adults during the Great Depression.

They tend to be wary of investing in equities, for instance, resorting to a behavioral bias that favors peer narratives and unscientific anecdotes – such as stories of retirement-age people whose nest eggs were destroyed by the financial crisis – over careful data analysis.

In May 2013, Wells Fargo released the results of a study surveying more than 1,400 Millennials, that found that Millennials view the stock market, and most investments, as a risk not worth taking. More than half of Millennials are “not very confident” or “not at all confident” about the stock market and many of the Millennials who do consider investing in stocks see the market as a short-term investment. The survey also found that Millennials’ primary concerns were student loan debt and paying their monthly bills.

In fact, Millennials have not only taken on more student loan debt than any previous generation but they continue to struggle in a challenging job market. With many Millennials remaining unemployed or underemployed, and with bills and debt as their top priorities, they have very little disposable income for investing. Many, according to a Pew Research poll released in October 2013, did not even begin thinking about saving or establishing a 401(k) until about five years into their careers.

Additionally, a UBS Wealth Management survey report featured on Bankrate.com found that, more 39% of the Millennials surveyed – more than any other age group – said that cash is their preferred way to invest money that they don’t need for at least ten years. That’s three times the number who chose to invest in the stock market, despite the fact that the S&P 500 has gained 17% over the past year while most cash investment yields remain below 1%.

The Danger of Playing it Safe

The problem with short-term stock investment approaches and dipping in and out of the stock market is that it can work against investors, because short-term investments may be subject to a higher rate of volatility. Instead of looking at the long-term data, which shows that stocks typically outperform other more conservative asset classes over the long run, those young investors are fearful of the short-range volatility, clouding data about the positive potential of long-term investing.

That reluctance to get into the market can be problematic for long-term portfolio growth because, without the returns from stocks, it can be difficult to reach savings and retirement goals.

Bigger is Not Always Better…When Finding a Financial Advisor

With the crash of the big banks and the negative publicity surrounding Wall Street financial firms, Millennials became a generation that looked at financial professionals with mistrust. Instead, they rely more heavily on the Internet, social media, and personal networks for financial advice. Their experience with market volatility and lack of job security has had a significant impact on their attitudes and behaviors toward investing. With very little disposable income after bills and debt payment, Millennials want to feel a sense of security with their investments.

When it comes to working with a financial professional, ‘old school’, traditional banking services are of no interest to them. Bigger is not better in their minds; a smaller, more independent financial planning firm may be able to offer a more hands-on and collaborative approach to investing that Millennials feel more comfortable with.

It’s important to Millennials that they find someone they can trust and who can relate to their concerns and be open to new ideas and methods of investing. Sherman Wealth Management understands that being a part of the investing process is a must in financial planning for Millennials. We fill a role for clients who can no longer relate to, or trust, the large financial institutions that once held a stronghold in the marketplace. The professionals at Sherman Wealth Management provide a personalized plan for investing and help our clients navigate through the difficulty of prioritizing financial obligations.

Remember how it was the overconfidence of the large financial firms and irresponsible investors that brought us the financial crisis in the first place? That Millennial reluctance to let history blindly repeat itself may turn out to be a pretty good thing after all!

Learn more about Financial Planning for Millennials and our Financial Planning services.

Related Reading:

5 Planning Tips for New Parents

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5 Things Investors Get Wrong

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Humans have a tendency to behave irrationally when it comes to money. Here are the five things investors get wrong that can harm their returns.

Believing They Will Beat the Market

Study after study shows that investors, including professionals, continually under perform the S&P.

In their most recent SPIVA (S&P Indices vs. Active) report, released in September, McGraw Hill Financial found that more than 85% of all funds underperformed the S&P 500, the index found to represent the overall market. (1).

What’s scarier is the fact that individual investors do even worse. In a 20 year study conducted by Dalbar, a financial services research firm, the average investor has seen a return of just 2.1% compared with the S&P’s annualized return of 7.8% (2).

What causes this under performance?

According to Dalbar the biggest reason for this under performance by investors is due to irrational behavioral biases. These include panic selling, under-diversifying, and chasing momentum (3).

Chasing Hot Stocks 

In a study done by the University of California Berkley, as well as UC Davis, researchers found that investors are much more likely to purchase shares in companies that have recently been in the news (4), bidding the price of these stocks up.

Additionally many investors make the mistake of trying to chase performance by buying investments that have already risen significantly. A 2011 study by Baird, a wealth management firm, suggests that investors generally chase short-term performance by buying funds that have risen in the short run, and selling those that have performed poorly (5).

The same can be said about the market as a whole where investors tend to purchase stocks after they have seen a large rise, and subsequently sell into weakness (6).

In short, investors sell low, and buy high.

Ignoring Fees 

You probably know that fees are important, what you may not realize is just how important they are.

Take for example two 30-year-old investors who each contribute $5,500 annually to their IRAs. They both achieve 9% annualized returns, before fees, over the next 35 years. The only difference between them is that one investor pays annual fees of .5%, while the other investor pays 2.5% in total fees. Over the course of their working career, investor A will have accumulated $1,059,859.21 in their account while investor B will have $682,190.80.

This is a hypothetical illustration only and is not indicative of any particular investment or performance. Return and principal value may fluctuate, so when withdrawn, it may be worth more or less than the original cost. Past performance is no guarantee of future results.

In this example, Investor B’s IRA will be worth less than 65% of Investor’s A account as a result of a 2% difference in fees!

Not Re-balancing

While buy-and-hold is usually a good strategy for most people, it is sometimes necessary for individuals to make slight tweaks to their investments.

This is particularly important if you have had one asset class or investment rise or fall significantly more than the rest of your portfolio. In this case it is a good idea to re balance your portfolio in order to realign it with your target allocation. This ensures that you not only maintain diversity, but also that you buy low, and sell high, by buying assets that have fallen significantly and selling assets that have risen.

Turning to the Wrong People for Advice 

Financial advice and information has never been more accessible to the average investor than it is today. Between TV and the Internet, investors are bombarded with information on a daily basis. Unfortunately not all of this information is sound.

Investors should consider carefully the source of any advice they receive, watching out for potential conflicts of interest. Before making any investment decisions you should carefully consider all options, and consider speaking with a financial advisor.

Learn more about our Investment Management services.

Related Reading:

Tips for Millennials to Understanding the Stock Market

What is Dollar Cost Averaging?

5 Big Picture Things Many Investors Don’t Do

Why and How to Get Started Investing Today

Mitigating Your Investment Volatility

The Psychology of Investing

Rebalance Your Portfolio to Stay on Track With Investments

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

References:

1. http://us.spindices.com/resource-center/thought-leadership/spiva/

2. http://www.thestreet.com/story/11621555/1/average-investor-20-year-return-astoundingly-awful.html

3. http://www.advisorperspectives.com/commentaries/streettalk_100814.php

4. http://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/AllThatGlitters_RFS_2008.pdf

5. http://www.rwbaird.com/bolimages/Media/PDF/Whitepapers/Truth-About-Top-Performing-Money-Managers.pdf

6. http://theweek.com/articles/487000/sell-low-buy-high-are-investors-being-stupid-again

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5 Big Picture Things Many Investors Don’t Do

5 Big Picture Things

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.

Related Reading:

Tips for Millennials to Understanding the Stock Market

What is Dollar Cost Averaging?

5 Things Investors Get Wrong

Why and How to Get Started Investing Today

Mitigating Your Investment Volatility

The Psychology of Investing

Rebalance Your Portfolio to Stay on Track With Investments

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

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Mitigating Your Investment Volatility

Mitigating 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.

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Learn more about our Investment Management services.

Related Reading:

Tips for Millennials to Understanding the Stock Market

What is Dollar Cost Averaging?

5 Things Investors Get Wrong

5 Big Picture Things Many Investors Don’t Do

Why and How to Get Started Investing Today

The Psychology of Investing

Rebalance Your Portfolio to Stay on Track With Investments

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

Footnotes:
1. http://www.bankrate.com/cd.aspx and http://www.nerdwallet.com/rates/cds/best-cd-rates.
2. http://inflationdata.com/Inflation/Inflation_Rate/Long_Term_Inflation.asp
3. https://www.efficient.com/pdfs/A_Century_of_Evidence_on_Trend-Following_Investing.pdf
4. http://observationsandnotes.blogspot.com/2009/03/average-annual-stock-market-return.html
5. http://www.morningstar.com/InvGlossary/automatic_investment_plan.aspx

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

Behavioral Investing

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.

Women Risk Averse
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.

Ledbury Research

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.

Related Reading:

Tips for Millennials to Understanding the Stock Market

What is Dollar Cost Averaging?

5 Things Investors Get Wrong

5 Big Picture Things Many Investors Don’t Do

Why and How to Get Started Investing Today

Mitigating Your Investment Volatility

The Psychology of Investing

Rebalance Your Portfolio to Stay on Track With Investments

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YOLO (You Only Live Once) So You Need A Retirement Goal

Yolo Retirement Goal

When you read through blogs or scroll through hashtags and memes on social media, there is a recurrent theme among millennials regarding the live-for-today sentiment. Whether it’s the acronym, #YOLO (You only live once) or the older, maybe not-so-cool phrase, ‘Carpe Diem,’ we are constantly reminded that we should stop worrying about the future and focus on today. But when it comes to your finances, is society sending us a detrimental message?

When addressing one’s plans for retirement, it is sometimes difficult to find a happy medium between the avoidance of financial responsibilities and the overwhelming, anxiety-inducing worry over one’s financial future. Below are two very common thought processes that I see often.

1) I am not worried about the future now, I’ll deal with it later

Unfortunately, our day-to-day pressing needs and our live-for-today goals become the priority and we cannot focus on or visualize what is not right in front of us. We tell ourselves, ‘I’ll do it tomorrow.’ Whether it’s not participating in a 401K because the extra monthly money is needed for utility bills or prolonging the start of a college savings fund for your child because you have mortgage payments to make, you are setting yourself up for a worrisome retirement.

It is important that you stop and visualize, in vivid detail, a big retirement goal. Are you visualizing being able to enjoy the finer things in life or are you just hoping to maintain the lifestyle that you are living today? What details do you see when you make this visualization?

Consider these important factors while you are visualizing:

If I continue at today’s rate-of-saving, what will my savings be at retirement?

Do I have children? Do I plan to have more children?

Do I plan to send my children to college?/Can I afford college tuition?

Do I own a home? Do I have a mortgage?

Have I planned for rising health concerns as I get older?

If something should happen to me, will my family be taken care of?/What kind of debt will they incur?

2.) I worry so much about my future financial position, that I sacrifice my daily happiness

Studies have shown that intense worrying about money or financial situations can affect many aspects of your life from mental health, to relationships, to career. When consumed with worry over your finances, it can inflict on your ability to focus thus creating a distraction and inability to enjoy the present.

While it is important to plan for the future, it should not be so overwhelming that it interferes with one’s day-to-day abilities. Ask yourself:

What am I really worried about?

Is it something in my control? If so, am I taking the necessary steps?

If it is not in my control, what steps can I take to ease my anxiety?

Do I have a financial advisor that can help to address financial concerns and alleviate unnecessary worry?

Whether you identify more with the first or second way of approaching your finances, or possibly somewhere in the middle, it is important to address your financial concerns with a trusted financial advisor. Unnecessary worry can cause you to feel paralyzed, out of control, and unable to make the right financial decisions concerning your retirement. However, failing to address future financial responsibilities, and avoidance altogether, can prove to be counterintuitive, creating anxiety and worry at a later date. Suddenly financial responsibilities show up at your door and you no longer have the option to ignore or put off. In taking small steps along the way, you can gain control of both your finances and your worry.

Call Brad Sherman at Sherman Wealth Management today and set up a no-cost financial consultation.

Learn more about our Retirement Planning services.

Related Reading:

Four Things Entrepreneurs Can do Now to Save for Retirement 

Finding Financial Independence

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

How Much Money do you Need for Retirement These Days?

The Benefits of Saving Early for Retirement

Advantages of Participating in Your Workplace Retirement Plan

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