Sinking

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Imagine this: you are in a car and it is sinking.

You try pulling on the door handles but they won’t open because the pressure on the outside of the car is much greater than the pressure inside the car.  What do you do?  More likely than not, you are now panicking and you can’t think clearly.  If you were thinking clearly, you might remember the driver’s education 101 tip that says stay calm.  If you have patience and wait for the car to fully submerge, the pressure on the inside and outside of the car will be equal and you should be able to open the door.

A similar thing happens in the world of investing.  During times of crisis, our instincts cause us to panic and forget everything we have learned.  When a crisis arises, we tend to take the first action we can think of, even if it is not the best one.  It takes a lot of patience and mental discipline to be able to watch a market dropping without pulling out your cash, but there is a huge difference in your returns if you remain calm.  From November 1, 2015, through February 11, 2016, the global stock market fell about 15% before rallying 31% to today’s level.  If you had sold at this time out of fear, though, you would be up only 4% compared to the 20% cumulative you’d be up if you had remained steady.  

Source: data from Xignite, total returns data for ACWI ETF representing global stock markets, chart from Betterment

 

The best advice you can be given is: understand the level of risk that you are taking in your current portfolio and make sure that you are comfortable taking on that level of risk.  Your risk level is closely tied to your financial plan.  You should ask yourself if you are taking too much or too little risk to accomplish your goals.  Are you saving enough to achieve your goals?  Are you using unreasonable future growth assumptions to accomplish your goals?  If you are honest with yourself and realize you are taking on more risk than you are comfortable with, you should adjust your risk level and financial plan as soon as possible, not as a reactionary measure to a market downturn.  Additionally, regardless of your risk tolerance, everyone should have an emergency fund that is invested conservatively as a fallback.  

If you feel that you are taking a level of risk that you are comfortable with, but are still worried about your own panic getting in the way of your plans – draft a plan now for how you will deal with it.  If you can’t handle seeing the color red, logging into your portfolio every day is probably not recommended. Ask yourself where there is wiggle room in your financial plan.  Prioritizing your goals and figuring out what you would do differently if the need arose is a good way to feel more secure if things are not going well.  

If you think making changes to your portfolio is the right move, make sure get a second opinion from someone with a level-head.  At Sherman Wealth Management, we are committed to answering all of your questions, addressing your concerns and helping you to avoid common behavioral mistakes.  When you imagine yourself in a sinking car, rest assured that we are right there to coach you through it.

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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.

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.

Millennials – Time to Wake Up and Smell the Stock Market

Smell the Stock Market

On Monday, as things were heating up a bit, Cullen Roche tweeted “The stock market is the only market where things go on sale and all the customers run out of the store…”

The problem is, many Millennials weren’t even in the store.

Only 26 percent of people under age 30 own stocks, according to a CNBC story that same day. That means that, while not panicking, most Millennials may have been missing one of the biggest potential opportunities of the past 10 years.

Why Aren’t Millennials Investing?

There are many theories –from Millennials being shell-shocked by experiencing their families’ anxiety in 2008, to YOLO, the feeling that it’s better to spend and enjoy the money now because who knows what the future may bring. The problem is that the future is likely to bring a whole lot fewer opportunities if you haven’t planned properly!

Are You Even Beating Inflation?

Let’s say hypothetically that the stock market may rebound by 5%… Simple, common sense math shows that keeping your money in the bank at .05% interest means it would take you 100 years to make the same amount of money that investing it now could. And the cash you are saving under the mattress or in one of your vintage vinyl sleeves? That money is just losing value every second you leave it there, as the cost of blankets and concert tickets continues to climb with inflation.

Risk, Volatility, and Paper Losses

It’s important to know the difference between risk and volatility and many people get it wrong.

Volatility – stock prices moving up and down – is a normal part of the stock market and an opportunity for a disciplined saver to buy when the market is both up and down. When you have a solid plan in place you can capitalize on market price dislocations, like what happened this week. Risk is how likely you are to lose it all and it’s important to remember – while everyone has their own risk tolerance – price corrections and market volatility does not necessarily mean you are going to lose it all. As the chart below borrowed from The Irrelevant Investor’s excellent post on staying the course shows, the stock market has historically climbed in spite of dips. And paper losses are just that: it’s not real loss if you don’t sell.

stock market drops

As this chart by Deutsche Bank’s Torsten Slok shows, in spite of other times of great volatility, markets have always recovered. It’s just a question of timing.

 

torsten

Millennials: This is Your Wake-up Call

When I speak to fellow Millennials, they say that the real reasons they don’t invest are that 1) it’s daunting to get started and 2) they don’t know where to get help. The big companies aren’t interested in smaller investors with less than 250-500K and the robo solutions don’t understand what makes each smaller investor’s situation unique. There’s a whole new breed of financial advisors, however, who combine personalized service with targeted tech solutions for smaller investors. So no excuses – there are financial pros ready help you create an investment strategy that makes sense for your personal goals and financial situation. And volatility doesn’t disrupt what we do!

The Bottom Line

If you’ve got a solid financial plan, investing in the stock market does not affect your ability to pay your rent, take care of yourself or your family, or add to that rainy day emergency fund. The money you’re saving and investing is money that you’ve determined you don’t need now, it’s money you have set aside for the long haul. Assuming your planner has planned correctly, you’re not going to miss your car payment because the Chinese stock market is crashing.

And that huge correction that scared you in 2008? It eventually rebounded and the market continued to climb. As a Millennial you’ve got years on your side if you start investing now. And you’re losing the potential for growth and compounded interest every moment you wait.

Baron Rothschild, of the Rothschild banking family, is credited with saying “The time to buy is when there’s blood in the streets.”

Look around. If you’re not investing yet, this might just be the time to start.

 

 

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