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