Don't Mix Politics With Your Portfolio!

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2MuchCents is not a political blog, and it never will be. I hesitated to even write this post, but too many of my friends and clients have been wanting to invest based on their politics. You can’t be excited about the economy the night before the presidential election and want to liquidate all your investment accounts the next day. You can’t be conservatively invested the night before the presidential election and want to invest in all stocks the next day. Strike that. As I have experienced over the past ten months, evidently you can, but you shouldn’t.

In light of my trying to convince you that you shouldn’t let your side of the political aisle drive your investment philosophy, I did some research. Below, please find a graph illustrating my findings. On the vertical axis, you will see the cumulative returns of the Dow Jones Industrial Average (DJIA) during each presidential administration since 1901. On the horizontal axis, you will see C-SPAN’s 2017 presidential rankings of each presidential administration since 1901. These rankings are based on historians considering things like public persuasion, crisis leadership, economic management, international relations, pursuing equal justice for all, and performance within the context of the times.

What do you think?

Do you like the stock market returns during the time of Calvin Coolidge? With apologies to President Coolidge, do you remember any of his accomplishments (he lowered the national debt and cut taxes)?

Theodore Roosevelt, John F. Kennedy, and Woodrow Wilson were three of our most beloved presidents. Teddy Roosevelt was a “Rough Rider,” he stood up to monopolies, he facilitated the construction of the Panama Canal, and he had an awesome mustache! JFK was a decorated Naval hero, he cut taxes, he worked towards civil rights for African Americans, he was responsible for the Equal Pay Act, and he didn’t blink during the Cuban Missile Crisis. Woodrow Wilson led the United States to victory in the First World War, he created the Federal Trade Commission, he helped secure women the right to vote, and he established the eight-hour workday with additional pay for overtime. Do you find yourself wishing that one of these presidents was back at the helm, or do you find yourself wishing for better stock market returns?

When I look at this chart, I see two trends. First, Democratic presidents over the past 116 years tend to be highly ranked. Second, as the trend line shows, presidents who presided over periods of significant stock market growth tend to be remembered fondly and highly ranked. Now we could discuss whether significant stock market growth during an administration is due to a president’s policies, their predecessor’s policies, or just the luck of the draw, but that is for another day and another setting.

When I consider this chart, I see some blue dots (Democratic presidents) I like and some red dots (Republican presidents) I like. I see some blue dots I don’t like and some red dots I don’t like. I see some stock market returns I like and some stock market returns I don’t like. However, the blue and red dots I like don’t seem to always line up with the stock market returns I like. I bet that’s the case for you, too!

I don’t place wagers on sporting events for a lot of reasons. One of those reasons is that I was born and raised in metro Atlanta, so I unfortunately have a pretty good idea about how my local teams are going to do in big games. Another reason is that despite my fun superstitions and routines, I have come to accept that there is no real relationship between the love I have for my team and their performance. It’s one thing to bet $100 on the Braves, Falcons, or Bulldogs, but it’s an entirely different thing to bet your nest egg on your politics!

They say you shouldn’t mix business with pleasure. It would also be my counsel not to mix your politics with your portfolio!

-Tom

You Have to let it Simmer

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One of the questions I get most often is why investment advisors don’t jump in and out of the market. Most recently I was asked “Why don’t investment advisors drastically change their portfolios when something bad has clearly happened?”

The answer you have probably heard, and maybe even from me, is because frequently trading your portfolio begins to cease looking like investing and begins to resemble gambling. How many people do you know that often come back from Vegas with more money than they left with? You don’t jump in and out of the market because to do so effectively you have to correctly time the market twice; you have to have the insight to know when to sell high when most investors will be pouring in money in a euphoria and you have to have the insight to know when to buy low when most investors will be sprinting for the exits in temporary fear. Even if you do somehow manage to time the market correctly, you’ll be burdened with more transaction fees and taxes as a result of your more frequent trading. That’s why most professional investment advisors don’t jump in and out of the market, and as far as jumping in and out of the market after something bad has clearly happened, professional investment advisors don’t do that because the "bad event" has already occurred and some of the market’s biggest gains often come on the heels of something less than ideal.

After 9/11 did you want to be invested? Think back to 2008-2009 right after Lehman Brothers collapsed and the Great Recession began. Did you really want to be invested? What about in 2011 after the credit rating of the United States was downgraded? Did you want to be invested then? At the time of those events, my answer would have been no. When events like that happen in the future, my answer will be no again, but it has to be yes. You have to stay invested.

Check out the link below to visuals from Putnam Investments. I found these incredible statistics as I was researching and working on my correspondence with the individual who most recently inquired about market timing.

https://www.putnam.com/literature/pdf/II508.pdf

Two of the Dow Jones Industrial Average’s biggest days occurred within eleven months of 9/11! Seven of the Dow’s best days since 2001 occurred between October 2008 and March 2009! One of the Dow Jones’ biggest days in the last 15 years occurred within a week of the unprecedented US credit downgrade! If you had invested $10,000 in the Dow at the beginning of 2002 and stayed invested, you would have had around $28,700 by the end of 2016 and have averaged an investment return of around 7.3% per year. If you had jumped in and out of the market and missed those ten best days I just mentioned that were relatively right after 9/11, the Great Recession, and the US credit downgrade just happened, you would have only had around $14,700 by the end of 2016 and averaged an investment return of around 2.6% per year! If, instead of the ten best days, you missed the twenty best days, you would have only had $9,600. You would have lost money over a fifteen year period due to missing twenty days!

I love to cook. One of my specialties is spaghetti with a homemade meat sauce. It’s ground beef slowly cooked with salt, pepper, Worcestershire sauce, and hamburger seasoning. I carefully dry the cooked meat on some paper towels on top of a plate. The meat then joins my pot of tomato sauce and I add in garlic salt, pepper, and Italian seasonings. I then slowly melt in some parmesan cheese to make the sauce richer and a little thicker. Like my mother taught me, I always taste with a clean spoon, but I keep sampling and throwing in a little more of this and that until it’s just about right. Then I put a lid on the pot and let it simmer. It’s only after simmering with an occasional stirring that all the ingredients truly come together and I end up with my desired result. Long-term investing is similar. Add the proper ingredients, tweak a little as needed to taste, and prudently monitor, but you’ll only get your desired result if you let it simmer.

-Tom

Losses and Gains Are Not Equal!

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In economics and behavioral finance there is an idea called prospect theory. The idea is that most people seem to value losses and gains differently. Does the idea of losing $5,000 feel the same to you as gaining $5,000?

Some actually call prospect theory by a different name: loss aversion. This is because many studies seem to show that losses are about twice as psychologically impactful as gains. Now I’m no psychologist, but I must say, based on my experience in the financial industry, I tend to believe in this theory. When the Dow goes down 300 points in a day, I get more emails, more calls, and more app updates, and the stock market gets more coverage on the television and radio. When the Dow goes up 300 points in a day, I don’t get anywhere near the number of inquiries or hear anywhere near as much media coverage. Is this phenomenon because of fear? Is it because bad news sells? I don’t know, but I think it’s at least partially because of simple math.

Suppose you have $100,000 invested in the stock market and the next bear market hits and your portfolio goes down 30%. You’d be down $30,000 and your investments would now total $70,000. That would certainly stink, but a drop like that is by no means out of the question. Now what kind of bull market will you need to get your portfolio back to where it was? A 30% return? Wrong! You would need a return of 42.86% ($70,000 x 1.4286 = $100,000). Wait. It would take a 42.86% investment return to regain a $100,000 portfolio after the $100,000 portfolio was only down 30%? Precisely. Maybe losses aren’t always twice as mathematically impactful as gains, but losses are more impactful. I think this somewhat surprising and profound math may be part of the reason why losses are intuitively more impactful than gains.

A lot of people think all I do is manage investments. I manage a lot more than that. I manage goals, dreams, fears, and behavior. By having a proper financial plan and investment strategy in place that makes sure you have enough cash, bonds, and alternatives, you can withstand the downturns of the stock market. You can be positioned financially to have the confidence and courage not to sell your stocks low and permanently realize your temporary, paper losses. You can then wait for the next bull market to come, and when it does, when others are getting greedy and buying stocks high, you can rebalance your portfolio and recharge your cash, bonds, and alternatives so you will be prepared for the next market cycle.

I always tell my clients what I think is absolutely best for their unique financial strategy, but if anything, I must admit I err a little on the conservative side. It’s not that I’m chicken. It’s not that I’m pessimistic. I just know losses and gains are not equal psychologically, mathematically, or financially.

-Tom

The Best Piece of Financial Advice You’ve Ever Received

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Many of you who know me personally are familiar with my love of quotes and one-liners. What can I say? I like simple statements that can be remembered and candid statements that cut to the chase and don’t beat around the bush. That’s why I asked a number of friends, family members, and people I work with what the best single piece of financial advice was they had ever received. Here are some of the responses:

“Little pigs get fat, but hogs get slaughtered.” – This can have to do with greed or pressing your luck.
“Live below your means.” – This is the number one response for me personally because it’s so short, so powerful, and so true. If you spend less than you make, financial planning becomes a matter of determining the optimal order to go about achieving your financial goals, but if you spend more than you make, financial planning simply becomes a question of how best to take on water.
 “No one on their death bed has ever said they wished they had spent more time at the office.” – There are a lot of disenchanted former employees and retirees that can swear to this one. Then again, there are a lot of friends, spouses, and children who probably can, too.
“If you do something you love, you’ll never work a day in your life.” – There is much more to choosing an occupation than salary, bonus opportunities, vacation days, and benefits, and life moves pretty fast.
“Money often costs too much.” – Don’t let money cost you your happiness, your health, your friends, your family, or your faith. Don’t clinch your fist so tightly that you miss out on what really matters.
“An investment in knowledge pays the best interest.” – Especially right now given where today’s interest rates are!
“Wealth is the ability to fully experience life.” – I know some multi-millionaires who would be willing to admit they are poor and I know some people living paycheck to paycheck who seem to be quite rich.
“Never spend your money before you have it.” – This can lead to credit card debt and emotional disappointment. Don’t count on gifts, inheritances, bonuses, or equity awards tied to future performance until the money is in the bank!
“The stock market is designed to transfer money from the active to the patient.” Frequent action in a portfolio may feel good, but I firmly believe investing with a long-term approach gives you the best chance for investment success. Sure, make an occasional tactical move and rebalance your portfolio when there has been a sizable move in the markets, but be cognizant that transaction costs, fees, and taxes can kill investment returns.
“If you will live like no one else, later you can live like no one else.” You are going to have a finite amount of money pass through your hands during your life. It’s either more now or more later, and you’re going to need some later.
“Know what you own and why you own it.” I truly believe everyone wants a basic understanding of their finances. If you don’t know why you have something, you should find out why you do, or you probably shouldn’t have it. In practice I don’t ever suggest a technique, strategy, or investment to someone unless I can explain it.
“Try to be greedy when others are fearful and try to be fearful when others are greedy.” This is Buffettesque contrarian investment strategy at its core. It is usually "warmer" if you are in the herd with other investors, but it does often make sense to head in the opposite direction of the herd when it comes to investing. Buy low and sell high. Don’t buy high, sell low, and repeat until you are broke with the rest of the herd!
“Keep giving while you’re living so you’re knowing where it’s going.” – Giving to other people or even charitable causes can be quite fulfilling while you are still alive. It can also be a great way to test your potential beneficiaries and heirs with a little to see if they would be good stewards with a lot.
“Money is nothing more than a tool.” – If you can come to the realization that money is nothing more than a mechanism for peace of mind and a tool to purchase experiences, provide experiences, and further causes, your whole financial, social, and spiritual outlook could look a lot different.

It is my hope that these pieces of financial advice will be as valuable to you and your friends and loved ones as they are to me. If you have one that's not on the list please share!

-Tom

Insurance vs. Investments

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Not that long ago I had a meeting with a gentleman who candidly shared a frustration with me that I think is felt by many who interact with the insurance and brokerage worlds. The man told me that every time he expressed a desire to save a sizable amount of money for a new cause his insurance agent recommended a new life insurance policy and his broker recommended investing in new securities. The type of cause the man wanted to save up for and the timeframe never seemed to matter to the insurance agent or the broker. How could his insurance agent and his broker both be making the “right” recommendations?

What makes the feud between the insurance and investment industries so confusing is that neither side is necessarily wrong for trying to convince a consumer that they need what they are offering. There are plenty of really good life insurance agents out there. There are plenty of really good brokers out there. The thing is, there are times when what insurance agents are able to offer their clients may not be what is best for their clients versus investment accounts, and what brokers are able to offer their clients may not be what is best for their clients versus insurance policies. Essentially people have a “nail,” a desire to save money for a particular purpose, and they go to see two different types of “carpenters,” an insurance agent with an “insurance policy hammer” and a broker with an “investment hammer.” No matter the type of nail or the timeframe before the nail needs to be hammered in, each carpenter only knows to do one thing – use their particular hammer. As a Financial Advisor paid only by my clients, I don’t have any allegiance whatsoever to commission-based life insurance policies or commission-based investments, so I feel that puts me in the unique position of being able to serve as a neutral, third party for people such as the frustrated gentleman who find themselves caught in this age-old insurance versus investments fight. I believe that by focusing on the underlying reasons a person wants to save money and the relative timeframe before the person needs the money that I can determine whether it’s a job for life insurance or a job for investments.

Merriam-Webster defines insurance as “a means of guaranteeing protection or safety.” I tend to agree as I view life insurance as primarily a risk mitigation tool. If you are worried about your family having enough money to get by with a reasonable lifestyle, or you are trying to replace the loss of your future earnings if you prematurely pass away before your retirement years, a temporary risk mitigation tool commonly known as term life insurance is often the way to go. Because there is a temporary period of time when the insurance company might have to pay out benefits and it is relatively unlikely they will have to pay out benefits given most people’s life expectancies, this coverage tends to be relatively inexpensive. If you are worried about your heirs having enough liquidity to pay income or estate taxes after your death, or you are worried about having enough liquidity to buy out your deceased business partner’s share of the business from their heirs after their death, a permanent risk mitigation tool commonly known as whole life insurance is often the way to go. Because the insurance company is going to have to one day pay out benefits (as long as you keep covering the premium payments), this coverage tends to be pricier.

The issue of insurance versus investments usually arises when an insurance agent suggests that someone buy a whole life or universal life policy (essentially a whole life policy with a savings element) as a savings mechanism because part of your premiums can be invested and can later be borrowed tax-free and you aren’t just “throwing money away” like you might be doing if you go with a term policy and don’t happen to be “lucky enough” to die during the term. The problems with that typical pitch are that the money you invest is usually subject to very high fees (including investment management expenses and fees to the insurance company which can eat up the before-fee returns guaranteed by the financial solvency of the insurance company), and if you do decide to one day borrow from your policy, you will create a policy loan that starts charging you interest at usually a fairly high rate and can start eating away at your policy’s ability to remain in-force. Not throwing money away on a term policy you might never use really does sound appealing at first, but what about all that additional money you are using up year after year paying those higher whole life insurance premiums that could be invested, could appreciate, and could be used while you are actually alive?

Now to this point I’ve been pretty hard on insurance as an investment, but commission-based investments carry plenty of red flags in my book as well. How do you know a broker is investing in your best interest and not just to get their commission? How do you know they are not just trading or opening new accounts as frequently as they can to earn extra commissions at your expense? You are also going to be susceptible to the volatility and returns of the security or market you are invested in less the applicable investment management expenses, and if things don’t go well over a given time frame, that guaranteed investment return by the insurance company (even before all of their investment management expenses and fees to the insurance company) could end up looking pretty stable and pretty nice.

So what are you to do? Unless you have a real need for permanent life insurance, I typically recommend getting the less expensive term life insurance to mitigate the financial risk to your family of you dying before you reach your retirement years and investing the difference between the whole life insurance premiums and term life insurance premiums you saved with an investment advisor who is only paid by their clients. I’ve found this strategy often lets people get the most out of insurance and the most out of investing, at lower fees, while having more assets available for use during their lives.

I don’t see the complex debate surrounding the different saving strategies available to people through insurance and investments coming to an end any time soon, but before you decide which strategy is best for you, I’d definitely suggest you talk to somebody who has more than just one type of hammer in their toolbox.

-Tom

Is Your Investment Advisor Doing the Hokey Pokey?

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Over the last few months I have had numerous conversations with people regarding their investment advisor’s dance moves. It seems that over the past year there has been a lot of “dancing” going on in some people’s portfolios. Something along the lines of you put your money in the market, you pull your money out of the market, you put your money in the market and move your investment strategy all about. If that has been your investment advisor’s tune or you self-manage your investments and that’s your typical jam, I have one word for you: stop.

A strategy largely based on putting your money in and out of the market is essentially a market timing strategy, and imperfect timing is a very common cause of poor investment performance. The truth is, no one is smart enough or consistent enough to successfully invest with a money in and money out approach over a long period of time. Sure, you can be lucky and look brilliant over a short period of time, but, even so, the transaction fees and short term capital gains taxes generated by jumping in and out of the market time and time again will also diminish your investment returns.

Most people know they need to have a large portion of their assets invested to have a good shot at hitting their retirement goals and to protect their hard-earned assets against inflation. Investors need an overall investment strategy that is historically appropriate for their age and stage in life, withdrawal needs, and risk tolerance. Beyond that, it’s my professional opinion that relatively small tactical adjustments are appropriate when there are specific opportunities or risks in the market or world that you’re trying to navigate, but drastic investment strategy changes should be the exception - not the rule. Sometimes taking action and making a lot of changes in your portfolio can feel good, but “surgery by chainsaw” rarely works out best. Instead, considering things like the amount of U.S. versus international stocks, large cap versus small cap stocks, growth versus value stocks, corporate versus municipal bonds, and long-term versus short-term bonds can be a good idea. 

Consider this year for example. Who knew 2016 would get off to one of the worst starts for a calendar year in market history? What if you’d completely jumped out of the market in February because you thought it was the beginning of the next cyclical pullback and you missed the bounce back of March, April, and May and endured transaction fees and realized capital gains? How many people actually thought Great Britain would vote to leave the European Union? What if you’d completely jumped out of the market in June due to the surprise result, media barrage, and overreaction of other investors and you missed the swift recovery and positive market performance since then?

When investing you shouldn’t make too many one-way, all-in bets. You should view investing as a mechanism to give you a high probability of achieving your financial and life goals. Investing is a marathon, not a sprint. It’s not sexy and it’s not news, but I do firmly believe investing in a prudently diversified portfolio with a long-term outlook really does give you the best chance to accumulate and preserve wealth.

After all, isn’t that what it’s all about?

-Tom

Brexit: European Disunion

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Yesterday the United Kingdom (UK) held a highly publicized and anticipated referendum on whether Britain should leave or remain in the European Union (EU). After a voter turnout of nearly 72% with over 30 million ballots cast, Britain’s citizens voted to leave the EU. In light of this historic decision, I’d like to share a few thoughts.

• This change does not happen immediately, and it is not going to be over quickly. Now that the “Brexit” decision to leave the EU has been made, Britain will have to formally notify the European Union that they will be withdrawing. This is done by invoking Article 50 of the Lisbon Treaty which is the constitutional basis of the European Union. Once triggered, Article 50 starts a two-year clock running where the terms of Britain’s exit will be negotiated between Britain and the 27 other member states, all of which have veto power over the conditions. The two-year period can be extended, but if no agreement is reached, the treaties and agreements that govern European Union member states will simply no longer apply to the United Kingdom. Article 50 has never been used, and the specific rules for exit from the EU are few, so this untested process will likely be lengthy and difficult.
• The future of the EU may be more uncertain than the future of the UK. Despite all of the political, economic, and social uncertainties now facing the United Kingdom, at least they have chosen a path. The European Union has been riddled with one problem after another in recent years such as the European debt crisis with Greece and other member states, the Syrian, Afghani, and Iraqi refugee crisis, the uncertainty of what to do about Russia’s actions and posture in Ukraine, and now one of its very own member states choosing to leave. This has led to disagreements within the EU Parliament, within member states internally, and between member states. Italy, France, Holland, and Denmark are now all considering referendums of their own on whether they should leave or remain in the European Union, so the issue of whether the EU is beginning to disintegrate or whether it can reinvent itself to once again promote political, economic, and social harmony across Europe is the million-dollar question.
• London may be hit harder economically than the rest of the UK. Many companies that do business with EU member states have major operations or headquarters in London. This is by design for a variety of reasons, but if Britain is no longer a part of the EU, some companies will have to consider if it would be better for their business to relocate those facilities to countries that are still members of the EU. What could be London’s loss could be Berlin’s, Brussels', Dublin’s, or Paris’ gain.
• Scotland may want a do-over. In 2014 Scotland voted by a narrow margin of around 55% to 45% to remain part of the United Kingdom. Despite the overall UK voting to leave the EU yesterday, voters in Scotland wanted to remain part of the European Union to the tune of almost 62% to 38%. This division with most of the rest of the UK seems to already be feeding the fires for a second independence referendum from the United Kingdom. One has to wonder if Scotland became independent if they would try to rejoin the European Union.

The results of yesterday’s referendum were a surprise in most circles and create a tremendous amount of uncertainty. What will eventually happen to treaties? What will eventually happen to tariffs? What happens to EU member state citizens living and working in the UK? What happens to UK citizens living and working in EU member states? Surprise and uncertainty frequently cause volatility in investment markets, and we could very well be in for some turbulent times as the Brexit unfolds. Still, many international companies are going to keep selling their products in Europe, and people are going to keep needing them and buying them. European companies like Shell and BP are going to keep selling oil, Diamler, Fiat, and BMW are going to keep selling cars, Vodafone is going to keep selling telecommunication services, and Nestle is going to keep selling chocolate and consumer goods. In short, I certainly wouldn’t recommend someone be overly aggressive with European stock exposure at this time, but I also am not too worried about the entire continent sinking because Britain decided to return to complete independence as it had for hundreds of years before it joined the predecessor of the EU in 1973.

The next time you are at an airport, find an international flight coming in from a European Union member state and ask some passengers what they are. I bet you’ll hear things such as “French,” “German,” “Spanish,” and “Italian” as opposed to “A member of the European Union.” Yesterday, the United Kingdom did this very exercise and asked their citizens what they wanted to be. They voted “British.” I respect and understand the motivation behind the European Union and I believe it has done some good things in regards to keeping a lasting peace in Europe and allowing Europe to speak with a louder, collective voice. However, different countries with different cultures with different industries who probably still need different currencies does not necessarily sound like a lasting recipe to me.

Stay tuned.

-Tom

 

Money Mistakes We All Make

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So many of my posts are suggestions and recommendations to do what is financially right. Today I thought I’d head in a different direction and highlight some common financial wrongs. Here is a list of seven of the most common money mistakes I’ve run into, and I’m sad to say I’ve even committed a few of these myself!

• Not Considering the Financial Consequences of Student Loans: It’s so very easy to want to go to a certain college or institution or to get a specific degree, but will you really be able to get a job that pays enough to justify the expense? Far too many people sign up for mounds of student debt without considering the monthly debt payments and the length of those monthly debt payments versus their expected incomes when they are trying to decide what college to attend and what degree to obtain. It’s also important to make sure an advanced degree will equate to enough additional earnings to justify the expense.
• Postpone Saving: If ends are meeting, but there’s not much leftover, it’s easy to fall into the rut of saying that you’ll start saving just as soon as you can. This is dangerous because life magically seems to always be getting more expensive. No matter your income or lifestyle, finding a way to save a little each month is really the only sure-fire way to get ahead and make financial progress towards your goals.
• Too Much Car: Even after thoughtfully considering your finances and researching cars online, after taking a test drive at a dealership it is really easy to crave the better model with the premium wheels and entertainment package. Get what you need, not what you don’t. Additional money spent on a slightly nicer ride could go to a lot more critical financial goals such as establishing a rainy day fund or saving for retirement.
• Rush to Buy a House / Too Much House / Furnish Too Well Too Quickly: Buying a home too quickly can really strain a person’s finances. The goal should not be to live like you want to eventually live when you retire; the goal should be to live. Just like buying too much car, buying too much house is also really easy to do. Being a new homeowner brings a list of new expenses, large monthly mortgage payments can be daunting, and you can’t always count on the price of real estate going up. As you are furnishing a house it’s important to go at a reasonable pace and decorate things as you can, not just a bunch of junk all at once or a bunch of fancy things that torpedo your cash or create recurring credit card debt. A new house doesn’t have to look like Pinterest or Southern Living overnight!
• Children, but No Wills: Once you get married, you should probably have a will. Once you have kids, you should definitely have a will! A will is how you name guardians for your children, and even though it is the last thing you probably want to do between sleepless nights and sippy cups, it needs to be done. Wills also help make sure your spouse is looked after and your final wishes will actually be fulfilled.
• Being Too Risky / Getting Too Defensive: So much is written, and rightfully so, about investors who get too risky and end up losing large portions of their investment portfolios. I won’t pile on further to that rant today, but I will offer that I think there should probably be a little more written about investors who get too defensive and end up spending down their assets and losing their purchasing power because their portfolios don’t generate enough growth. Portfolio growth is a function of interest, dividends, and appreciation; interest and dividends alone may not be enough to help you maintain your lifestyle.
• Waiting Too Long To Move on Your Own Terms: Very few people want to move to the smaller house, the retirement center, or the skilled nursing facility, but there’s a lot to be said for moving when you can versus moving when you have to. Although often an emotional decision and process for the mover(s) and their family, doing so at your own pace and at your own accord is often a lot smoother and more dignified than waiting for a fall or other “triggering event.”

We all make mistakes, but now there’s no reason for you to make these!

-Tom

Best Financially or Best For You?

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Some people might think my job is to make my clients as much money as possible. Some people might think my job is to make my clients the highest rate of return on their investments as possible. Generating investment returns within a client-agreed-upon degree of risk is the job of an investment advisor, but as a wealth advisor, my job is two-fold. Not only do I serve as my client’s investment advisor, I’m also charged with being my client’s financial advisor. Of course, I’m always plenty focused on investment strategy, but I’m simultaneously focused on helping my clients get what they want out of their lives.

For example:

• How much cash should you hold? From a strictly financial perspective, conventional wisdom says three to six months’ worth of living expenses if you’re still working and one years’ worth of living expenses or more if you are retired. That is my baseline recommendation with my clients, too, but if you find yourself constantly worked up about what is going on in the world and holding a little more cash would lead to less stress during the day and better dreams at night, then go for it! It’s not necessarily best financially, but it may be best for you.
• How should your portfolio be allocated? Based on an investor’s age, stage in life, and withdrawal requirements, historical return patterns generally lead most good investment advisors to roughly the same recommended allocation, but what if bear markets cause you indigestion and angst to almost a medical level? Given current interest rates and bond yields, it is absolutely critical to have enough allocated to stocks to have a chance to sustain or grow a portfolio over the long-term and to have a shot at protecting your purchasing power against inflation, but within reason, if your indigestion and angst could be soothed by having a few more CDs and bonds and a few less stocks, then why not? It’s not necessarily best financially, but it may be best for you.
• How much should you withdraw? Financially speaking, it’s rarely advised to withdraw unnecessarily from your investment assets, but if you don’t, what is going to happen?  You may end up with some slightly happier heirs?  Your favorite charity may one day receive a bigger check? So often I see people do everything in their power not to withdraw money from their hard-earned assets because they are trying to keep their nest egg as big as possible. Now if a client’s financial stability or financial security is even remotely endangered by a potential withdrawal or their rate of withdrawals, I certainly raise the issue, but there are times after people have shared their dreams with me where my advice is for them to simply spend some of their money. You’ve always wanted that sports car? Get the car. You’ve always wanted to take your entire family on a beach vacation? Take the vacation. You want to help your family financially now when they need it versus later after your death when they potentially won’t? Help your family now. You want to give a substantial gift to a charity or cause you support so you can see the impact? Give the gift. It’s not necessarily best financially, but it may be best for you.

In my opinion there are two kinds of returns: your return on your investments and your return on your life. I would advise that you always be reasonably cautious when it comes to your financial situation, but when it comes to your comfort, confidence, happiness, satisfaction, and fulfillment, strongly consider that what may be best for you may not always be best for you financially. Return on investment is important, but so is return on life!

-Tom

When a Man Loves a Stock

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I was waiting to pick up a to-go order one night after work last week and I was still deep in thought about a recent client meeting. The tax planning and risk management portions of the meeting had gone very well, but I once again could not break through on the investment strategy piece. Despite repeated recommendations over numerous years to try and get this husband and wife to further diversify their portfolio, a vast majority of their net worth is still tied up in one particular stock. It was at that moment that an old song I happen to like came over the speakers: Percy Sledge’s “When a Man Loves a Woman.” Here is what I heard:

When a man loves a stock
Can't keep his mind on nothing else
He'll trade the world
For the good thing he's found

If holding the stock is bad he can't see it
The stock can do no wrong
Turn his back on his best friend
If he put the stock down

 

When a man loves a stock
Spend his very last dime
Trying to hold on to what he thinks he needs
He'd give up all his comforts
Sleep out in the rain
If things don’t turn out the way he thought it’d be

 

Well, this man loves a stock
He gave it almost everything he had
Trying to hold on to its precious dividend
I hope it don’t treat him bad!!!

 

When a man loves a stock
Down deep in his soul
The stock can bring him such misery
If the stock plays him for a fool
He's the last one to know
Loving eyes can't ever see…

 

Now with apologies to Percy, my thoughts and his lyrics got a little mixed up. Still, it is kind of uncanny how interchangeable “woman” and “stock” is, isn’t it?

Based on my experience I think it probably is safe to say that the degree of emotional attachment employees sometimes develop with their company’s stock, investors sometimes develop with the stock of companies headquartered in their state or region, and heirs sometimes develop with stocks they have inherited can only be rivaled by romantic crushes. No matter the stock, and no matter the consensus outlook on that particular stock, I always remind people with significant holdings in one or a couple of securities of companies like Enron, Wachovia, and General Motors. Anything can happen to the stock they love, and although concentration can sometimes lead to wealth accumulation, diversification certainly helps with wealth preservation.

Next time I will once again attempt to articulate the risk-adjusted advantages of a prudently diversified portfolio, but I may just have to make the next meeting a dinner meeting. Perhaps old Percy Sledge’s tune will come on again and resonate with my clients like it did for me. Here’s hoping, because loving eyes sometimes can’t see.

-Tom

Extra! Extra! Read All About It?

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I don’t know about you, but I prefer my sports teams winning versus losing, sunshine to rain, and the stock market trending upward as opposed to trending downward. I’m not sure the media does. Think about the coverage surrounding Mark Richt’s exit from UGA, the Braves’ rebuilding and relocating, and the Falcons’ collapse after starting 5-0. Think about the coverage every time we have tornadoes or, better yet, every time we might see a snowflake. Think about the coverage when the stock market is down a few hundred points in one trading day. There is so much more “breaking” news, so many more news alerts, smart phone notifications, and headlines that are shared when the news is bad. After one of the most volatile and negative months investors have experienced in several years, I’d like to ask you to briefly turn over your phone, mute your television, silence your radio, and turn off your computer for just a few minutes and look at the last ten bear markets with me.

A bear market is defined as a drop of at least 20% from the most recent market high. Below, is a pretty fascinating chart put together by J.P. Morgan showing the characteristics of the last ten bear markets (click on it).

As you can see, markets were down around 86% during the Great Depression. Markets were down 28% during the Cuban Missile Crisis. At a point during the 70s, and during the OPEC oil embargo, markets were down 48%. Markets were down 34% at a time in the 80s after Black Monday and the 1987 market crash. Markets were down 49% in the early 2000s when the tech bubble finally burst. Markets were down 57% during the Great Recession.

Folks, the S&P 500 was down about 5% in January and I’ve seen a whole host of headlines using phrases like “market crashes,” “market plummets,” and “investors robbed.” A catchy title or headline is obviously and purposefully trying to get you to buy a paper, watch the news show, or click a link, but I think it’s important to keep things in perspective.

On the right side of J.P. Morgan’s chart you may have also noticed some data on the bull markets or market recoveries. Markets roared back after the Great Depression, the Cold War, the inflation of the 70s, the Federal Reserve intervention in the 80s, the bursting of the tech bubble, and the Great Recession. On average, the last ten bear markets have been around a 45% pullback while the last eleven bull markets have been around a 151% pop!

Don’t get me wrong, I am concerned about a lot of things going on in the world, and I would not be surprised if market volatility continued. Inevitably, at some point, there is going to be another entry on the “bear side” of J.P. Morgan’s chart. Of course history also seems to offer there will then be another entry on the “bull side” of J.P. Morgan’s chart…

What am I telling people to do? The same things I’m always telling people to do! Make sure you have enough cash set aside to feel comfortable and for any large, upcoming expenses. Make sure that your portfolio is prudently diversified for your risk tolerance and age and stage in life. As hard as it is to accept, volatility is the friend of the long-term investor. The thing is, you have to stay buckled in during the down times in order to fully participate in the up times.

At the rate many media outlets are going, I really don’t know what phrases and terms they will use when we have our next bear market. I don’t know how far they’ll go to try and convince everyone that this time is different. I’ll continue to vigilantly monitor the markets, but don’t expect me to get caught up in some headline. I’m much more interested in focusing on the cataclysmic stinkage of my sports teams and the next allegedly imminent blizzard!

-Tom

Normal Investors - Familiarity

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Imagine you are just getting home after a very busy and stressful day at work. You just closed the door to the garage, dropped your bag on the couch, and are making your way up the stairs towards something you value deeply - comfortable clothes. Yep, there’s that old pair of jeans you wore yesterday. You know the ones with the slightly worn knee and the stretched out belt loop from where you like to rest your thumb? Best of all, they’re everso slightly stretched out from your wearing them yesterday. Don’t worry, I won’t tell anyone!

Of course there’s a similar feeling when you return home after travelling, whether for business or for pleasure. That moment after you’ve filled the laundry bin, returned your toothbrush to its normal spot, and have finally put up the suitcase. Oh it’s nice to see your shower, your couch, and most of all, your pillow! Wouldn’t you agree?

As you’ve undoubtedly gathered, I’m talking about familiarity. Whether a pair of comfortably worn jeans or your old friend of a pillow, familiarity feels good. It’s what you know. It’s what feels right. It’s what feels safe. Familiarity is also the third tendency that I present to you as a trait many normal investors have.

I would offer that many people go with what they know, especially when they are unsure of what is best. Consider some research done by Vanguard back in 2010 that found that Canadian investors were 65% invested in Canadian stocks, U.S. investors were 72% invested in U.S. stocks, and Australian investors were 74% invested in Australian stocks. Canadians, Americans, and Australians certainly have their differences, but do you really think the before mentioned investment allocations coincidentally showed that degree of “home bias?” I don’t. Investors were investing in what they felt they knew.

To take this a step further, let’s spend a moment on company stock. Regardless of the company, most people I come in contact with who work for publicly traded companies tend to own stock in their employers. Why? Do they think their company’s stock is going to really pop? Sometimes. And sometimes, they’re right, but sometimes they’re not. I’ve met many successful employees and successful investors who have a significant portion of their wealth in “their” company stock, and they desire to continue holding that stock even when they are no longer actively working for the company. Why? I think it’s because it’s easier for someone to feel safe investing in a company that they know a little about rather than the broader market which they may not know as well. Employers are aware of this, too, and that’s one reason employees are often incentivized with company stock in an attempt to align the employee’s financial success with the company’s future financial success and encourage hard and good work from employees.

(As an aside, I attended a lecture given by a professor from the Wharton Business School earlier this year, and he shared that a study was currently being done on what stocks were the hardest to get investors to diversify out of based on their location. #2 was supposedly getting a Seattle resident to sell some Microsoft stock (Microsoft is based in Seattle). Guess what #1 was? Getting stock in The Coca-Cola Company out of an Atlanta resident’s hands! Do any of my local readers here have any Coca-Cola stock? If you don’t, I bet you have friends and family who do!)

Familiarity feels good. Investing in companies that are based in your country is normal. Investing in the company you work for is normal. Investing in companies that are near and dear to your city or state is normal. However, you have to be careful when considering the investment risks of being overly concentrated in a single stock, a single sector, a single asset class, or a single country’s stocks. The risk-adjusted returns of a diversified portfolio are often still king. Going with what you know, what feels right, and what feels safe can be a crutch and a safety blanket, but what if your crutch was named Enron? What if you’re a Greek citizen and Greek companies are what you know? What if your paycheck was coming from Lehman Brothers, the pension benefit you were working for was guaranteed by Lehman Brothers, and most of the stock you owned was invested in Lehman Brothers stock? It’s normal to invest based on familiarity, but that may not always be best.

There’s nothing I hate more than when a grocery store I frequently visit decides to remodel. It’s frustrating. It doesn’t feel like it used to, I don’t understand the layout, and I don’t know where anything is, but I will get used to it. Eventually the new layout will feel familiar. Sort of like an investment portfolio that has recently been adequately and prudently diversified, eventually the new layout will feel familiar.

-Tom

Next up: overconfidence

Normal Investors – Overreaction and Underreaction

The second tendency that I would suggest many normal investors have would be the tendency to overreact and underreact. (If you missed out on the first part of my behavioral finance series on five of the characteristics most “normal” investors seem to have, you can catch up right here!) Of course, before I dive into how investors can, and often do, overreact, I must consider my own behavior this past weekend…

As many of you know, my wife and I are fairly avid UGA fans. Fine, fine, we’re full-fledged Georgia Bulldog fanatics! I mean I got up at 3:30 a.m., left my home at 4:00 a.m., and arrived in Athens at 5:38 a.m. to claim a small piece of generally lucky land between two curbs that my family, friends, and I have tailgated at for the last six years for a game that kicked off at 3:30 p.m. Who would do that? Well evidently me and several thousand more of my closest Georgia brethren considering “our spot” was already taken by someone even crazier than me! Oh the genuine rage I felt as my low beams displayed his silhouette on my very own game day island! That didn’t keep my group down though as we continued with our pregame festivities in the middle of what must have been a monsoon; festivities that included steak, seafood, a houndstooth cake and elephant ears (so we could eat the opposing mascot), and a crimson punch (so we could drink the opposing mascot). Then there was the wretched game where our beloved and favored Bulldogs were supposed to avenge our painful championship game defeat a few years ago only to be shellacked, annihilated, and otherwise dismantled by one of our hated rivals from the West.

A lot of pretty normal people are college football fans, but there is a good portion of that last paragraph that might lead you to believe that I'm a little bonkers. My point is that sports fans often overreact. They react with way more pride and celebration after victories and way more dismay and disgust after losses than they probably should. Many investors do the same thing. Investors can have a good experience with a product or service, and then they suddenly want to buy some stock in the company that made the product or delivered the service based solely on their positive experience. Investors can enjoy some decent growth and gains in a stock they have previously bought a little bit of, and they can develop an insatiable and blind appetite for more and more of that very same (and already appreciated) stock. Investors can get more and more excited about a roaring bull market (think the Dotcom Bubble) and want more and more stock exposure in their portfolios even though the investment return party has been going on quite a while. Of course, investors can also panic more than a Southerner in a snowstorm and completely sell out of a position based on the rampage of some talk show host who is trying to get ratings. A chain email about tax rates going up or a presidential or congressional proposal can also get an investor to sell out of everything just as if they’d seen a mouse, snake, or spider.

Overreacting as an investor can be dangerous. It can lead to one-way bets. It can lead to frequent trades which are costly and tax-inefficient. It can lead to dangerous concentration in one stock. It can lead to dangerous concentration in cash. There are certainly times as an investor where swift and substantial action is needed, but if you are investing prudently, that shouldn’t be very often. Part of my job is being the voice of reason, being the voice that isn’t that worried about the scary financial spider that man on the radio was yelling about, and being the voice that isn’t so sure that someone has really found that Fountain of Youth your neighbor confided in you about. Overreacting about football is one thing - it’s a game. Overreacting as an investor is another - it costs real dollars and cents.

The second part about normal investors reacting is actually underreacting. I like to illustrate this by considering Western Union’s lack of interest in Mr. Bell’s telephone patent, IBM’s lack of interest in the Xerox machine, and Kodak’s lack of concern with digital technology. In my own experience, I have found that investors rarely underreact when it comes to their investment portfolios, but instead they underreact when it comes to their own financial trajectory. I stand by that spending all that you are making is not a terribly successful retirement strategy, going into retirement with a large mortgage remaining is not a positive for your retirement cash flow, and that recurring credit card debt is one of the worst things since Brussels sprouts, but not everyone adequately reacts to those messages. Similar to ignoring a scratchy throat a few mornings in a row or that ant you saw in your kitchen the other day, underreacting to financial matters that could be nipped in the bud now can lead to some real serious financial problems in the future.

It’s normal and human to not always react in the optimum way, but financially, it’s important to try to. Maybe it’s all the children’s books I find myself reading now, but I kind of think of Goldilocks. Don’t overreact, don’t underreact, try to react juuuuuust right!

-Tom

Next up: familiarity

Why You Need to Rebalance



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Suppose you invested $100,000 on January 1st, 1995. You invested $50,000 in the Barclays U.S. Aggregate Bond Index and $50,000 in the S&P 500 (U.S. stocks). Between January 1st, 1995 and December 31st, 2002, you were in for quite a ride as the Dotcom Bubble expanded and eventually popped. Your bonds would have offered annual returns of 18.46%, 3.64%, 9.64%, 8.70%, -0.82%, 11.63%, 8.43%, and 10.26%. Your stocks would have offered annual returns of 37.58%, 22.96%, 33.36%, 28.58%, 21.04%, -9.11%, -11.89%, and -22.10%. Declining interest rates and the mania surrounding Internet-based companies fueled some really good returns during that period. In fact, if you didn’t touch your $100,000 portfolio at all during that period, I’d estimate you would have had around $206,000 by the end of 2002.

Do you notice how the last three years of S&P 500 returns from 2000 – 2002 were negative as the bubble popped and a recession began? Wouldn’t it have been nice to have liquidated your portfolio on December 31, 1999 and missed the stock market pullback? If you had, your portfolio would have been around $248,000 on December 31, 1999; $42,000 better than it would have been worth three years later!

By now I hope you know me well enough to know I’m not the type to ever advise you going all in or all out of the market. When it comes to market timing like that, I’m just not that smart, and I don’t think anyone else is, either. I believe in calculated tactical adjustments to a portfolio if you see a medium to long-term trend, but I do not believe in ultra-short-term trading and all-in / all-out investing. There's just too much uncertainty!

Some of you that were investing back in the late 1990s and early 2000s may be able to remember how hard it would have been to sell out of your high-flying stock portfolio on December 31, 1999. That was a time (like many times before) where the sky felt like the limit.

Great, Tom. You’ve told me this story about how I would have been better off selling my January 1st, 1995 portfolio on December 31st, 1999 versus holding it until December 31st, 2002, but then you told me no one can know exactly what the future holds and not to invest all-in or all-out. What can I do? You can rebalance.

Rebalancing your portfolio is something you should periodically do to bring your portfolio strategy back in line with your initial investment strategy. Sure, it can be a hassle, it can generate some capital gains taxes, and it can generate some trading fees, but oftentimes, it’s worth it. Hopping back to our 50% bonds and 50% stocks January 1st, 1995 portfolio example, did you know that by December 31st, 1999 your portfolio would have only had 29% bonds and would have swelled to 71% stocks? Would you be happy if the portfolio strategy you agreed to in 1995 drifted that much? I don’t know many investors who would be pleased with a divergence from their investment strategy of that magnitude. That’s why in the spirit of trying to more closely maintain your investment strategy and hedge your bets on the markets continuing to roar upward vs. correct downward, periodically rebalancing your portfolio is the way to go. Excluding taxes and fees, if you would have rebalanced your January 1st, 1995 portfolio at the end of every year back to a 50% bonds and 50% stocks portfolio, your portfolio would have had around $216,000 by then end of 2002; $10,000 better than if you had done nothing at all. Rebalancing your portfolio can generate taxes and transaction costs, but it also, and more importantly, allows you to not drift too far from your investment strategy. Rebalancing is a prudent way to hedge your bets on the market going up or down in the future.

I don’t often trade a portfolio, but when I do, I prefer to rebalance. Does that make me the most interesting wealth advisor in the world?

-Tom

Diversifying Your Life

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Do you know what I do when I’ve had a crappy day at work? I smile as I drive home.

Do you know what I do when one of my friends rubs me the wrong way? I get together with another one of my buddies.

Do you know what I do when my golf swing starts launching balls further to the right than straight ahead? I pick up my tennis racquet.

Why am I telling you all of this? Because since I’ve been in the financial services industry I’ve noticed a surprising and profound pattern. Diversification is good for your portfolio, and it is also good for you.

Unless you’re luckier than I am, it’s pretty rare for everything to be going well at once. I mean I’ve been very blessed, and compared to many in this world, I have absolutely nothing to complain about, but, even so, there is usually at least one area of my life that could be a little bit better. I think many of you feel the same way. From what I’ve heard from countless friends, family members, and clients, I think it’s pretty common for a spouse to occasionally get under your skin, a friendship to cool off, or a family member to make you seriously consider DNA testing. It’s fairly normal for a boss to act like a “Michael Scott,” a co-worker to make you over-utilize a stress ball, or to occasionally have a bad day at work due to your own actions or lack thereof. There are times when the beach is more fun than the mountains, when you are more excited about learning to play the guitar than your softball league, and when Atlanta Hawks games are more entertaining to you than Atlanta Braves games. None of these occurrences should make or break your life if they are part of your life. What is important is that they are part of your life.

Most investors diversify their portfolios because it reduces the overall risk of their portfolio. Everyday translation: by having your eggs in more than one basket, there’s less of a chance of them all breaking at once. By not being frighteningly obsessed with your job, by having friends outside of your spouse and kids, and by having more hobbies and interests than your weekly poker game with the same foursome, there’s less of a chance that all parts of your life will be going poorly at the same time! If you’re not happy at work, maybe you’re happy at home. If you’re not happy at home, maybe you’re happy at work. If you’re married to your job and are more of a father figure to your subordinates than your own children, and you don’t have a good day at work, what could possibly make you happy at home? If 100% of your friends seem to hang out with you Monday through Friday from about 9:00 – 5:00, who will your friends be when you or they stop working at the same company? If your hobbies are answering work e-mails after work or leaving voicemails at strange hours, what are you going to do when you retire? You know that most companies take your computer and disconnect your phone number when they take your key card, right?

As good as diversification can be for improving an investment portfolio’s risk-adjusted performance, diversification also follows the law of diminishing returns. What I mean is there comes a point after your portfolio is diversified where adding another position or fund in the mix really doesn’t add that much value anymore. To some extent, your investments can become so spread out that you can’t really be in something enough for a gain or loss to significantly move the needle. I think this holds true for life, too. You can be involved in too much. There can come a point where you are spread so thin with your own activities and social obligations that you really can’t take the time to excel in the activity or enjoy the obligation before you have to move on to the next one. Having too many acquaintances can prevent you from having genuine friends. Having too many time-consuming hobbies can hurt your family.

In the investment advisory arena there is a document called an Investment Policy Statement (IPS) that is often drafted between an advisor and a client. In essence, this document provides the general goals and objectives of a client and specifically states ranges of acceptable investment allocation (ex: % allowed in stocks vs. bonds). This allows the advisor to know how much he or she can change the makeup of the portfolio and gives the client the comfort of knowing there are limits to how much the makeup of a portfolio can be changed. Here again, based on my experiences as a normal, everyday person, I think it might be a good idea to apply the IPS mindset to our families, friends, and careers. If you have a busy week ahead at work and you need to rebalance your time to spend more hours at work than usual, that’s fine, but don’t adjust the allocation of work/life balance beyond the amount that is acceptable to your family. If your family is keeping you busy and you need to disappear from your friends for several weeks to do what you have to do, that’s fine, but don’t leave the allocation to your friends below what they expect for too long. If your new stamp collecting hobby has encroached on some of the allocation of your time normally set aside for your wife, that may be fine for a while, but it might not be the best long-term strategic allocation if you know what I mean.

Earlier in this post I said that there was usually at least one area of my life that could be a little better. That’s still true. However, it’s also true that there is usually at least one area or my life that is going pretty well. By diversifying my life, I can focus on what’s going well in the midst of whatever could be a little bit better, and I believe that makes me an overall happier person. On a given day I may not be as happy as an obsessed bird watcher who finally spots some sort of rare finch, but I also won’t ever be quite as sad as a total workaholic whose proposal wasn’t well received. Diversification can help your long term investment returns, but it can also help your return on life!

-Tom

A Variation on Buying Low and Selling High

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There are a lot of people out there who will tell you that the key to success in the stock market is buying low and selling high. From a strictly value investing strategy standpoint, I tend to agree. From an overall investment strategy standpoint, however, College GameDay’s Lee Corso comes to mind; "Not so fast my friend!"

The reason I’m a little cautious to blindly endorse buying low and selling high is because it can teeter right on the brink of an evil term called market timing. I say evil because market timing is often what gets investors in trouble when they repeatedly or completely buy into and sell out of the stock market. The problem with someone trying to time the market is that they are assuming that they know what direction the market is going in the short term, and, to be honest, I haven’t met many people who do. To make matters worse, if someone is going to buy low and sell high successfully and not leave any possible gains on the table, they will need to successfully time the market twice. Twice because they will need to know when a particular stock has gone as low as it is going to so they can buy it, and again when that same stock has hit its near-term peak so they can sell it. If a market timer is wrong, they can miss out on income and market movement, but they are also punished by incurring unnecessary transaction fees, expenses, and possibly taxes. Please believe me when I tell you that correct market timing is really hard once; it’s darn near impossible twice!

As I alluded to earlier, I really do like the idea of buying low and selling high, but within reason. So instead of making one-way, all-or-nothing bets that can be largely influenced by chance, I would propose you consider two, subtle but profound variations:

1. Stay invested and just periodically rebalance your investments by selling parts of your “winners” and reallocating the proceeds to other areas to bring your portfolio back in line with your long-term investment strategy.
2. Go ahead and try to time your withdrawals and deposits as best you can. In essence, deposit when the market is low and withdraw when the market is high.

Some of you may disagree with my tips, and that’s fine. There are times when there are tactical opportunities when it may make sense to totally enter and exit particular stocks, industries, and asset classes, but I believe that is more of an exception than a rule. I personally find comfort in thinking that I have about 60 – 70 years left in this crazy world, and I expect the stock market will be higher then, than it is now. Something about these historical stock market charts just gives me comfort…

 

A lot of investment managers I’m familiar with make money by buying low and selling high, but they do it by trimming their exposure as their holdings have gone up, not by timing the market. A lot of investors I know have made good financial decisions by sticking with their long-term, prudently diversified investment strategies and periodically rebalancing, not by timing the market.

 

Don’t try to time the market. Try to make your deposits and take your withdrawals strategically.

 

-Tom

Questions You Should Be Asking Your Financial Advisor

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A friend of mine posed an interesting question to me the other day. His parents are beginning to think about retiring in the next few years, and they didn’t leave their recent meeting with their financial advisor feeling overly confident that they were in good hands, so he asked me what questions they should be asking. I may get tarred and feathered by others in my line of work for sharing this, but today I offer you some of the questions I think you should be asking your current or prospective financial advisor.

• Do you feel my investments are appropriate (particularly if it has been a while since you met or your investment accounts were rebalanced/reallocated)? If the response you get is only a “Yes,” you should follow up with “Why?” I really think that having a general understanding of why you are invested the way you are is important. It gives you confidence through the market's ups and downs, and it ensures that your advisor’s strategy is in line with your goals and your objectives.
• What fees have I paid you? An advisor may not be able to rattle this off on the spot, but if they can’t get you a clear answer pretty quickly, this may be a red flag. Contrary to how some practice in the industry, fees and expenses don’t have to be hidden. It also doesn’t hurt to ask an advisor how they get paid based on the investments they recommend. If you hear the word “commission,” you need to at least consider the possibility that your advisor could have a conflict of interest.
• What licenses and credentials do you hold? There is so much alphabet soup out there that I don’t even know what some of the acronyms stand for! That being said, some licenses and credentials are impressive and should be confidence-inspiring, but some, not so much. You’re looking for things like CFP®, CFA®, and CIMA® from an investment advisor in addition to advanced degrees from respected business schools.
• How can I access my funds and my information? In today’s world, you should have the ability to view your account any time and withdraw money within a few days. If you don’t, you may want to see if your advisor has booked a one-way trip to the Caribbean…
• Who is your typical client? What’s good for one type of client is often good for another, but not always. If your advisor is used to working with people with backgrounds, needs, and amounts of money drastically different than your profile, you may want to find an advisor better suited to work with you. You want to be your advisor’s "bread and butter" and a client that is right in their wheelhouse!

 

I’ve been asked lots of crazy questions from clients including why I couldn’t guarantee an 8% return every year, why a particular beverage wasn’t for sale in their local grocery store, and if I was dating anyone (because their granddaughter liked blondes), so my proposed questions should be softballs for your current advisor. If your advisor's answers leave a lot to be desired, I’d suggest you ask these very same questions when you are interviewing candidates to be your new advisor.

 

-Tom

You Might Be Well Diversified If...

Credit: MR LIGHTMAN

You are probably familiar with comedian Jeff Foxworthy’s “You Might Be a Redneck” routine. If you’re not, you should be! His routine is hilarious, and since I was born and raised in the Southeast, I've seen some of what he is talking about. I’ve seen driveways where it doesn’t look like the boat has left the driveway in 15 years. I’ve seen people whose dog and wallet were both on a chain. I’ve seen yards where if someone mowed them, I believe they might just find a car! It’s funnier when he does it, but you get the point. Either way, it got me thinking about an idea for today’s post…

By now you’ve probably gotten the year-end statements for most of your investment accounts, and if you’ve looked at them closely, you might have noticed 2014 was kind of a weird year for stocks. I say it was a weird year for stocks because some of the classes of stocks had very different returns. U.S. stocks ended up having a pretty good year after some ups and downs, but international stocks finished the year down for the most part. If you took a closer look at U.S. stocks, you likely found that the stocks of large U.S. companies (“large cap stocks”) did pretty well, but the stocks of smaller U.S. companies (“small cap stocks”) were not up nearly as much as their larger counterparts. Small cap stocks were even negative for a good portion of the year!

Statistically speaking, the S&P 500 (an index that represents large cap stocks) was up between 13% and 14% for 2014. The Russell 2000 (an index that represents small cap stocks) was up around 5% for 2014. The MSCI EAFE (an index that represents international stocks) was down around 5% for 2014. Why do I tell you all of this? To share with you that, if you had a stock portfolio filled with large cap stocks, small cap stocks, and international stocks, you probably didn’t end up with the 13% to 14% return “the market” had in 2014 that the television pundits, radio hosts, and investment newsletter writers keep talking about! As Jeff Foxworthy might say, you might be well diversified if you did not end up with the S&P 500’s return!

I’ve also heard it said that you know you are well diversified if there is always part of your portfolio that you are “mad” at. I’m not sure that’s always the case, but there is definitely some merit to that statement. If you were mad at your bonds in 2013 when the stock market roared, I bet you were pretty pleased with them in 2008 and 2009 when the stock market took a dive. If you were mad at your stocks in 2008 and 2009, I bet you have been pretty pleased with them the last five years or so. So all in all, you might just be well diversified if there’s usually a part of your portfolio that you aren’t pleased with.

If what I’ve said so far hasn’t really applied to you because you only own one stock or a couple of stocks, I’d offer two things. First, concentration in a single stock is how you can accumulate and/or evaporate wealth - not preserve wealth. Second, you might be well diversified if you can’t name every holding in your portfolio from memory!

As your friend and someone who wants you to do well and make as much money as you can, I wish you were completely invested in the S&P 500 last year and got that 13% to 14%. However (and please read my next words very carefully), as your humble financial blogger and a financial advisor who believes in the long-term investment strategies of diversification and compounding, I certainly hope you didn’t!

-Tom