20 Years Financial Planning

Posted On February 1, 2024 By Scott Stratton, CFP(R), CFA In Behavioral Finance / No Comments

This month marks 20 years as a financial advisor for me. A lot has changed in that time. When I started, we had to hand-write trade tickets, on blue paper for Buy and salmon for Sell, and fax them to the back office. We would photocopy account applications for our file, fax it in to our custodian, and then mail the original signature.

But a lot has not changed. Markets are still volatile. Timing doesn’t work. Investors still have biases. And good habits build wealth over time.

I am happy to celebrate this milestone, and incredibly grateful for the clients who have trusted me with their finances. I’m excited to start a third decade of service. Markets still fascinate me, and I love getting to help families build and preserve their wealth. One of my early clients passed on years ago, but now I work with their children who are approaching retirement age. And we have accounts for the grandchildren, and we have started 529 college savings accounts for the great-grandchildren. Working with four generations of one family gives you a new perspective about the significance of planning.

Learning the Hard Way

I started buying individual stocks in 1998, right at the end of the tech bubble. I had some profitable investments and some that did poorly. By the time I became an advisor in 2004, I think I had already made every mistake possible with my own investments. You can learn from a book, but the pain of losing your own hard-earned money is a more effective lesson.

After 2000, there were three years of losses in the S&P 500 Index, with the back to back shocks of the tech bubble and then 9/11 in 2001. During this time, I was looking for market inefficiencies and they were still existent back then. There were 50% more stocks than today and stock trading was still done by people on the floor of the NYSE, not on computers.

I would find tiny, small cap regional banks which traded only a couple of thousand shares a day. These stocks had a very wide bid/ask spread. For example, the market might show a bid of $20.00 and an ask of $21.00. If you entered a buy order at the market, you would buy at $21. And if you entered a sell order, you would sell at $20. Sometimes the stock would trade in the middle at $20.50, but large trades could easily move the market, and they would either pay too much to buy or get too little when they sold. Wall Street couldn’t touch these stocks and they were too small to bother.

The spread was often 5%: a $1 spread on a $20 stock. And since the expected return of the whole market was only 10% a year, making 5% on a trade over a day or two seemed pretty attractive. So, I would set a buy limit order at the Bid price of $20 and be the ready buyer for anyone who wanted to sell. And once I had shares, I would set a limit order to sell at the Ask price of $21. When this worked, I could make 3-5% in a day or two. And then once I had sold, I would try to buy back again at $20 and repeat the whole process.

Man Plans, Market Laughs

It worked as planned about half of the time. Sometimes however, the stocks kept on going up. I bought at $20, sold at $21, and then the stock went up to $25. I realized a small gain and then missed out on a big gain. Then I had to decide if I wanted to buy the stock at a much higher price or hope it came back down.

Other times, the stock would drop – I bought at $20 and soon the stock is $18. If I had 100 shares at $20, I would buy another 100 shares at $18 and lower my average cost to $19. Now, I only need the stock to get back to $19 for me to sell and break even. I would set a limit order to sell at $19 and hope I can get my money back.

If the stock would recover to $19, I’d sell. But the stock might then go to $22 and I would again have missed out on gains. Other times, the stock would continue to fall to $16, and I would buy more shares at $16 to try to average down further. But I was only increasing my losses.

At the end of the year, I’d have a lot of successful, but small trades where I had gains of 3-5%. And I would have a couple of large losses of 20%-30%, which I had magnified by buying more shares.

Lessons

Did my trading work? Sort of. I had a profit. In fact, in 2003, I was up 35% in spite of being in cash for a large number of days that year. But here are some of the things I learned:

I made 35% in 2003, but the S&P 600 small cap index was up 37% that year. All the hours I spent researching stocks and following the market daily were not productive. I would have been better off using an index fund and spending my time elsewhere. Everyone thinks they’re a genius when the market is going up.
Costs and Taxes matter. All my gains were short-term capital gains, taxed as ordinary income. With an index fund, I could hold for longer and eventually get long-term capital gains tax at 15%. Back in 2003, each trade cost $19.99 and I paid thousands in commissions that year.
No one can predict individual stocks and speculation will humble you. Investing is better than trading: diversify and remain a buy and hold owner. Prices going up and down are noise.
Let your winners run and harvest your losses. Humans are wired to do the opposite. I cut my gains short and doubled down on the losers. This comes from two behavioral biases: loss aversion and anchoring bias. I was fixated on shares getting back to even.
Simple is usually more effective than complex. Focus on the long-term, not the short-term.

Today, markets are more liquid and most bid/ask spreads today are 1-5 cents. This is much better for investors. In spite of the prevalence of index funds, however, there is still a lot of speculation on individual stocks. Every morning, I read about stocks which were up 4% or down 7% in the previous day. It’s interesting, but not an opportunity. And of course, I have written many times about how managed funds under-perform index funds. I understand the allure of picking individual stocks, but today I have realized that stock picking is less beneficial than asset allocation. Investors don’t become wealthy because of stock picking, but through saving and time in the market.

The More Things Change

The past 20 years have seen some remarkable market events. The Global Financial Crisis of 2008-2009. The Lost Decade of stocks. Zero Interest Rate Policy. Coronavirus and then 9% inflation. Everything seems to have been a “never-seen-before” moment. And yet somehow, what has always worked, still works. I look back to every low point and think, wow, that was such a great buying opportunity!

I’m looking forward to the next 20 years of financial planning. I have no idea what we will see. How will we fix Social Security and Medicare? What is going to happen with the global debt levels? Will inflation remain elevated? Will AI save the economy and create a productivity boom, or destroy jobs?

What the last 20 years have reinforced for me is that we don’t have to know what is going to happen. We save, invest, diversify, rebalance, and keep costs and taxes low. That formula has built wealth for generations. We will continue to learn and improve, but the foundation of the financial planning process is timeless. We are awash in information today, but in spite of all the available knowledge, wisdom still requires experience.

My three month old daughter is asleep in the next room as I write this. Having a child is the ultimate form of optimism. We must have confidence, patience, and faith in a positive outcome. Along the way, there will be ups and downs, but ultimately growth is headed in the right direction. Our years are determined by our days. If we manage our days right (and weeks and months), the years take care of themselves. But we have to think about the years, when deciding how we use our days.

And so it is with money. I remain very optimistic about the work we do for clients and about the remarkable opportunity for Americans to achieve financial independence. There has never been a better time to be alive. Thank you to everyone I have met along the way for a great 20 years!

Performance Chasing Versus Diversification

Posted On January 25, 2024 By Admin In Behavioral Finance, Portfolio Management / No Comments

The chart below highlights the perils of performance chasing versus the benefits of diversification. This chart from JP Morgan shows the annual performance of major investment categories from 2008 through 2023. It includes US Stocks (large and small), Developed Markets, Emerging Markets, Fixed Income, Cash, Real Estate, and even Commodities.

The results are all over the place. What is often the best investment in one year turns out to be the worst investment the next year. Consider:

Commodities were the best category in 2022 and the worst in 2023.
Real Estate Investment Trusts (REITs) went from worst in 2020 to best in 2021, and back to worst in 2022.
Cash was the worst investment in 2016 and 2017, then the best in 2018, and back to the worst in 2019. It was however, positive, in each of these years!
Emerging Markets Stocks were the worst category in 2008 then the best in 2009. EM was the best in 2017 and then the worst in 2018.

Past Performance Is…

Today a lot of investors are experiencing FOMO because they didn’t own enough Tech stocks in 2023. A small number of stocks (seven, in fact) crushed the rest of the US stock market as well as the other categories. There is a palpable frustration to have a diversified portfolio and lag funds which are concentrated in a few growth names.

This January, investors are looking at their 401(k) or IRA statements and wondering if they should make a change. They see that the XYZ Growth fund was up 40% last year, and it is tempting to drop their diversified portfolio in favor of a fund that performed better last year.

This is performance chasing. It is abandoning the benefits of diversification in favor of betting on what has been hot recently. And it is hazardous to your wealth. Often, what is at the top one year will under-perform in the following years. If you chase performance, you will often buy a hot sector just as it is about to go cold. And then you find that you are switching funds every year because there is always a “better” fund. Just remember, past performance is no guarantee of future results!

Valuations Matter (Eventually)

Today’s market has some similarities with the Tech Bubble in 1999. People got very excited about a relatively small number of Tech companies and bid them up to expensive valuations. Those stocks became quite bloated and drove up the multiple of the entire US stock market. In the frenzy, there were a lot of people who bought tech funds at or near the top. They were late to the party and missed the big gains in 98 and 99, but were invested very aggressively when the bubble burst in 2000.

Stocks were so overvalued that we had three years of subsequent losses in the S&P 500: 2000, 2001, and 2002. That had never happened before. The amount of wealth that was wiped out in the Tech Bubble was truly staggering. The bubble seems pretty obvious in hindsight, but human nature has not improved since 1999. We are prone to make the same mistakes.

I don’t know that we are in a new Tech Bubble, but the lesson remains the same. We don’t chase performance, we invest based on valuation. Our portfolios are diversified across many categories, and rebalanced annually. We use index funds and focus on keeping costs and taxes low.

Our tilts towards areas of greater expected return actually means that we do the opposite of performance chasing. We prefer to buy what is on sale, cheap, and out of favor. We are looking for the categories in the lower half of the chart to return to being in favor. This is a disciplined, long-term process which has worked over time. (See: Our Investment Themes for 2024.)

Reversion To The Mean

In the short run, expensive stocks can still go up in price if there are enough buyers. That’s where we are today, but the party won’t last forever. US Growth stocks are expensive and have a lower expected return going forward. The expensive valuations are expected to gradually revert down towards historical levels. And the inexpensive categories have room to return to more normal valuations. The chart below shows Vanguard’s projected returns over the next 10 years.

Over the next decade, Vanguard forecasts US Equities to have an annualized return of 5.2%, versus 8.1% for International Equities. With performance chasing is investors are looking backwards. They project recent returns into the future (Google “recency bias“), rather than recognizing that returns average out over time. Instead of piling into the hot stocks, sectors, or categories, investors should stay diversified and also own the categories which have under-performed.

Performance Chasing is a constant temptation because a diversified portfolio will (by definition) always lag some small subset of the market. There is always a hot category. Unfortunately, no one has a crystal ball to predict what will be the next hot investment and jumping around is more likely to harm than help returns. Thankfully, investors are well-served by ignoring the noise and staying on course with a diversified portfolio designed for their needs and long-term goals.

5 Ways to Buy The Dip

Posted On March 15, 2022 By Scott Stratton, CFP(R), CFA In Behavioral Finance, Portfolio Management /

Right now, we are talking to investors about ways to buy the dip. From the highs of December, it is pretty remarkable how quickly markets have reversed. Stocks were already down in January as fears of inflation and rising interest rates took hold. The war in Ukraine has shocked the world and we are seeing tragic consequences of this inexcusable aggression. Inflation was reported at 7.9% for February and that was before we saw gas prices surge in March following the Russia sanctions.

This past Tuesday, we saw 52-week lows in international stock funds, such as the Vanguard Developed Markets Index (VEA) and the Vanguard Emerging Markets Index (VWO). Here at home, the tech-heavy NASDAQ is down 20%, the threshold used to describe a Bear Market. It’s ugly and there’s not a lot of good news to report.

Ah, but volatility is the fundamental reality of investing. Volatility is inevitable and profits are never guaranteed. In December, when the market was at or near all-time highs, everyone was piling into stocks. And now that many ETFs are near their 52-week lows, investors are wondering if they should sell.

Market timing doesn’t work

Unfortunately, our natural instinct is to do what is wrong and want sell the 52-week low rather than buy. Back in December, there were a lot of people hoping for a correction to make purchases. Now that a correction is here, it’s not so easy to pull the trigger on making purchases. The risks seem heightened today and nobody wants to try to catch a falling knife. Unfortunately, the market isn’t going to tell us when the bottom is in place and it is “safe” to invest.

Last week was the 13-year anniversary of the 2009 Lows. Most reporters say that the low was on March 9, 2009, because that was the lowest close. But I remember being at my desk when we saw the Intraday low of 666 on the S&P 500 Index on 3/06/09. Today, the S&P 500 is at 4,200 (down from a recent 4,800). Even with the 2022 drop, we have had a tremendous run for 13 years, up 530%.

A prospective client asked me this week what I had learned from being an Advisor back in 2008-2009. And I told her: First, you can’t time the market. Clients who decided to ride out the bear market did better than those who changed course. Second, individual companies can go out of business. You are better off in diversified funds or ETFs rather than trying to pick stocks.

Buying The Dip

While you shouldn’t try to time the market, we do know that “buying the dip” has worked well in the past. Since 1960, if you had bought the S&P 500 Index each time it had a 10% dip, you would have been up 12 months later 81% of the time. And you would have had an average gain of 12%. That’s a pretty good track record.

I feel especially confident about buying index funds on a dip. While some companies will inevitably become smaller or go out of business, an index like the S&P 500 holds hundreds of stocks. Over time, an index adds emerging leaders and drops companies on their way down. That turnover and diversification are an important part of managing an investment portfolio.

So with the caveat of buying funds, what are ways to buy the dip today? What if you don’t have a lot of cash on the sidelines? After all, if we don’t time the market, we are likely fully invested at all times already.

5 Purchase Strategies

Continue to Dollar Cost Average. If you participate in a 401(k), keep making your contributions and buying shares of high quality, low cost funds. If you are a young investor, you should love these market drops. You can accumulate shares while they are on sale!
Make your IRA contributions now. If you make annual contributions to an Traditional IRA, Roth IRA, 529 Plan, or other investment account, I would not hesitate to proceed. Make your contribution when the market is down.
Rebalance your portfolio. Do you have a target allocation, such as 70% stocks and 30% bonds? With the recent volatility, you may have shifted away from your desired allocation. If your stocks are down from 70% to 65%, sell some bonds and bring your stock level back to 70%. Rebalancing is a process of buying low and selling high.
Limit orders. If you do have cash, you could dollar cost average. Or, with your ETFs you can use limit orders to buy at specific prices.
Sell Puts. Rather than just use limit orders, I prefer to sell Puts for my clients. This is an options strategy where you get paid for your willingness to buy an ETF at a lower price. We have been doing this for larger accounts with cash to deploy, but this not something most investors would want to try on their own.

Uncertainty, Risk, and Sticking to the Plan

There is always risk as an investor. Whenever you buy, there is a possibility that you will be down and have a loss in a week, a month, or a year from now. Luckily, history has shown us that the longer we wait, the better chance of a positive return in a market allocation. We have to learn to accept volatility and be okay with holding during drops.

We can go one step further and seek ways to buy the dip. To me, Risk means opportunity, not just danger. So, which is riskier, buying at a 52-week high or at a 52-week low? Well, neither is a guarantee of success, but given a choice, I would rather buy at a low. And that is where we are today.

I think back to March of 2020, when the market crashed from the COVID shut-downs. And I recall the horrible markets in March of 2009. In both cases, we stuck to the plan. We held our funds and didn’t sell. We rebalanced and made new purchases with available funds. That is what I have been doing with my own portfolio this month and it’s what I have been recommending to clients. We don’t have a crystal ball to predict the future. But we do know what behavior was beneficial in the past. And that is the playbook I think we should follow.

Amazingly, I have had only a couple of calls and emails from clients concerned about the market. None have bailed. We are in it for the long-haul. Market dips are inevitable. It is smarter to ignore them than to panic and sell. And if we can make additional purchases during market dips, even better.

Past performance is no guarantee of future results. Investing includes risk of loss of principal and Dollar Cost Averaging may not protect you from declining prices or risk of loss.

When Can You Splurge?

Posted On May 2, 2021 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

We all have things we enjoy, and the question of when can you splurge has unique financial planning considerations. We probably think about these choices, consciously or subconsciously, every day. And while I don’t think there can be a hard and fast rule, there are some things to consider. Once we start peeling back the proverbial onion, there are many psychological layers to this question. We all have a relationship with money. It is based on our experiences, upbringing, and innate preferences. The question isn’t just When can you splurge? It is How can you have a better, more effective relationship with your money?

“Money makes a terrible master but an excellent servant”
P.T. Barnum

First, let’s define what we mean by splurge. Clearly, your normal living expenses should not count as a splurge. But, even this is problematic. There are many Americans who have adopted a lifestyle which they cannot afford. Their choice of housing, cars, vacations, clothes, etc. consumes all of their income. And then when an emergency does occur, it has to go on the credit card. They end up in debt and there is no way to pay off those debts with their current consumption. They don’t see that they are splurging already, and spending in an out of control manner. Read more: Machiavelli and Happiness in an Age of Materialism.

A definition of splurge as “to spend money freely or extravagantly, especially on something special as a way to make yourself feel good.” Most definitions imply wastefulness and vanity. But I also think that occasionally being able to spend money on things which you enjoy is a great freedom. We all may have interests which make no sense to others. Perhaps it is cars, or watches, or shoes, or a boat. To us, it is the realization of a dream. To someone else, it would be a waste of money. That’s okay. The blue car pictured above is my splurge from this March. Maybe that doesn’t do anything for you. For me, a lightweight sports car with a manual transmission is a joy.

When Not to Splurge

Let’s begin by laying down a few prerequisites for a splurge. Perhaps it is easiest to think of these as a checklist:

Can you pay in Cash? Or would this splurge be funded by credit card debt? If you don’t have the cash to purchase an item, maybe you should hold off until you can afford it.
Do you have an emergency fund with at least 3-6 months of living expenses?
Are you funding accounts for your long-term goals? For example, a 401(k) or IRA for retirement, a savings account for a house down payment, or a 529 plan for your kid’s college.

If you can pass these three prerequisites, then the splurge is not going to hurt you. After all, we don’t want to look back on our splurges with regret and be angry that we made a mistake. Number one, credit cards, also suggests that if you presently have a lot of credit card debt, you should not splurge. You should prioritize paying off your cards, first. How much should you save for number three? If you are in your 20’s and are currently saving at least 12% towards your 401(k), I think you are off to a good start. If you got a late start, you may need to save more than 12% to be prepared for retirement. Read more: What percentage should you save?

Start with a Plan

My purpose as a Financial Planner is to help you be smart with your money. Our ultimate goal is to make sure you achieve your financial goals. With that in mind, we are always looking to design long-term diversified investment strategies built within a planning process. We are always looking for the most cost-efficient, high-value ways to manage your money.

The beauty of the plan is that it creates awareness and a process for change. For some individuals, that may mean establishing automatic savings programs to fulfill your needs for retirement, debt management, house goals, college savings, etc. We can break down each goal into a monthly target and set it on auto-pilot. Read more: Do You Hate Saving Money?

For others, a plan can show them that they are on track. Because many people are afraid to splurge. And I am writing for them, too. Yes, there are people who need to splurge less. But there are also people who need to splurge more.

If your relationship to money is centered on fear, anxiety, and regret, you are carrying a terrible amount of stress with you at all times. This is a scarcity mentality, which is psychologically harmful. It impacts your behavior and hurts your satisfaction. In one study, adults who had a positive attitude about aging lived 7.5 years longer than those with a negative mindset. Your thoughts matter! Read more: 5 Ways to Go From A Scarcity to Abundance Mindset.

Your plan will let you know how much you can splurge and give you the confidence that you aren’t doing anything to hurt your future self. Maturity is often defined as the ability to delay gratification. We all need to save for the future. Still, splurging doesn’t require that we have already accomplished all our goals! Only that we are presently taking the steps necessary to get us there. If you want to feel more confident about your splurge, start with your financial plan. Otherwise, how do you know?

But Should You Splurge?

Still not sure if a splurge is a good idea? Afraid you will regret a big purchase? A few last thoughts.

Avoid impulse buys. Shopping as therapy for stress, boredom, or other problems is only a band-aid. Find a better solution. Talk to a friend, go for a walk, do something that makes you feel better and actually addresses the emotional need.
Could this be easily reversed? Some items hold their value. If you buy an item for $3,000 and could resell it in a couple of years for $3,000, it’s a fairly low risk proposition. And if it brings you joy, then why not.
Have you shopped around and done your research? Can you buy used or find an alternative? A splurge doesn’t have to be reckless; see if you can find a great deal.
Do you have a bucket list of experiences that you’d like to do and and see? A splurge can also be a trip or event, and it is healthy to spend on creating memories and not simply buying more things. We only get so many trips around the sun. Our time here will go quickly and it is finite. 10 years from now, you may still smile when you think about that epic vacation to Machu Picchu. You probably aren’t going to be thinking about what it cost because in the long run, it didn’t matter.
An itch needs to be scratched. Sometimes, an idea takes hold and we simply need to do something. If it doesn’t go away, maybe we will be richer as a person for having allowed ourselves to live a little more freely. What is the worst that will happen if you do this one splurge?

Intention, Choice, and Balance

Money is a great tool to lead a satisfying and interesting life. We all know that more things can’t bring you happiness. And we all know someone who spends too much and rationalizes it as “self-care”. How can you find a balance? At the one extreme, many Americans are not saving anything and are two paychecks away from being broke. At the other extreme, there are hoarders who are paralyzed with fear of spending and losing their money. I’m a frugal person, but this can be taken too far.

Choose what is truly important to your life. Don’t let others decide for you what is a good use of your money. But be smart. Start with a plan and cover your bases. When you have your savings plan established, be intentional with your spending so your choices align with your goals. By that I mean, don’t just spend blindly, splurge in ways that are meaningful to you. Maybe bonding on a family vacation is more important than upgrading your car this year. Maybe keeping your housing costs reasonable will allow you to spend on other priorities. The balance is deciding where to splurge and where to not spend your money. The right balance is to splurge neither too much, nor too little. Never splurge to keep up with the Joneses.

When can you splurge? I’m not going to show you the compound interest on a daily cup of Starbucks. I’m not interested in slapping people on the wrist to make them feel bad about how they spend their money. I believe you can align the head and the heart on your spending. When you have invested time and energy into your financial plan, you will have earned the confidence to know when you can splurge. Then, giving yourself permission to splurge will not be from weakness, but to help you live the life you truly want.

Investing During Coronavirus

Posted On June 21, 2020 By Scott Stratton, CFP(R), CFA In Behavioral Finance, Portfolio Management /

Investing during Coronavirus has exposed many flaws in portfolios, investor behavior, and advisor services. There’s a saying that everyone is a genius in bull market. Unfortunately, the previous 10 glorious years in the stock market masked a lot of risks for investors.

Since the March stock market crash, investors are discovering these problems and realizing that their portfolios may need a tune-up. Here are 9 investment pitfalls which were exposed by the Coronavirus.

9 Investment Pitfalls

No Risk Analysis. Don’t wait until a Bear Market to assess what level of risk is appropriate for you and your goals.
No target asset allocation. You can not rebalance if you do not begin with an objective such as a 60/40 or 70/30 allocation.
Not diversified. Being concentrated in individual stocks or sectors can create wildly different results than the overall market. Diversification is valuable.
Changing Direction. In March, investors wanted to sell at the low. However, in hindsight, they should have been buying. Stick with your plan and resist the temptation to time the market.
Performance Chasing. We want to believe that the best strategies in the recent years will remain winners. Evidence, however, suggests that top active funds are unlikely to continue to outperform.
Not using Index Funds. Everytime there is a crisis, I hear the argument that active fund managers can be more defensive than an index fund. However, when I look at industry data, such as SPIVA, the majority of active funds still have worse long-term results than their benchmark.
Ignoring expenses and taxes. We can often create significant savings in expenses and taxes with good planning.
Only focusing on investment returns. Investing is important, but your financial plan should address more. What about your savings rate, debt management, emergency fund, employee benefits, life insurance, estate planning, or college savings goals?
Bad service from an advisor. Are you getting rebalancing, monitoring, and adjustments to your portfolio? Are you receiving timely financial planning advice? Is your advisor available to meet and able to add value?

Financial Planning Process

What investors need to understand about investing during Coronavirus are the benefits of a financial planning process. There is a science to financial planning and portfolio management. That is to say, there are best practices and important steps which individual investors often miss on their own. We can’t avoid market volatility, but having a disciplined process can make sure you are well prepared to avoid these nine problems.

Why Good Life Wealth Management?

Fiduciary: our obligation is to place client interests first.
Fees, not commissions. Transparent costs means you know exactly what and how we are paid. As a result, we think this better aligns our interests, reduces conflicts of interest, and benefits clients with independent ideas.
CFP(R) Professional. Only about 25% of advisors in the industry hold the Certified Financial Planner designation. For more than 30 years, CERTIFIED FINANCIAL PLANNER™ certification has been the standard of excellence for financial planners. CFP® professionals have met extensive training and experience requirements, and commit to CFP Board’s ethical standards that require them to put their clients’ interests first. That’s why partnering with a CFP® professional gives consumers confidence today and a more secure tomorrow.
CFA, Chartered Financial Analyst. The CFA Program provides a strong foundation in advanced investment analysis and real-world portfolio management skills. CFA charterholders occupy a range of investment decision-making roles, typically as a research analyst or portfolio manager.

When you have an important need, you seek professional advice. Our process is designed to help you achieve your financial goals and avoid the pitfalls that are often not seen until a crisis occurs. Did March reveal some problems with your portfolio and your financial plan? If so, give me a call and we can help you get back on track.

2020 Stock Market Crash

Posted On March 8, 2020 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

This month will likely be called the 2020 Stock Market Crash in the years ahead. Investopedia defines a crash as a double digit drop over a few days as the result of a crisis or catastrophic event. A crash typically occurs after a period of speculation which drives stock prices to above average valuations. Panic is a hallmark of a crash, versus a Bear Market. Certainly, we have met the definition of a crash.

Risk is perceived as danger when it occurs, but only in hindsight do we see another definition of risk: opportunity. If you look at the purchases you made in your 401(k) back in 2008 and 2009, you may be astonished by the gains you made at those low prices!

Your emotional response to a crash may be to ask if you should sell. But then you might miss out on today’s opportunities. Even if you are fully invested today, consider these five actions instead of selling.

Five Opportunities

Keep buying. Dollar cost average in your 401(k), IRA or other accounts. The shares you buy at a low price could be your largest future gains. If you have not made your IRA contribution for 2019 or 2020, this might be a good time.
Roth Conversion. Thinking about converting part of your IRA to a Roth? If so, you would now pay 11% less in taxes versus last month. After that, your gains will be tax-free in the Roth.
Rebalance. Hopefully you started with a defined allocation, like 60/40 or 70/30. If that has subsequently gotten off-target, now may be an opportune moment to make rebalancing trades.
Replace low yielding bonds. Look at the SEC Yield of your bond funds. The SEC Yield measures the yield to maturity of a fund’s bonds and subtracts the expense ratio. It is the best measure of expected returns for a bond fund. Bonds can work as portfolio ballast: a way to offset the risk of stocks. If that is your objective, stay safe. Unfortunately, the actual contribution of bonds to your portfolio return is terrible, maybe 2%, or even less than 1% if you own short-term treasuries. Instead, what I find attractive after this crash is Preferred Stocks, non-callable CDs (versus Treasuries of the same duration), and Fixed Annuities. If your SEC Yields are unacceptable consider changes, but proceed with great caution. Above all, avoid trading down from a safe bond to a risky bond just for a higher yield.
Do nothing. Markets go up and down. You have the choice of just ignoring it. Selling on today’s panic is the worst type of market timing, giving into fear. So, take a deep breath and realize that after the crash it is often best to hold.

Work on Your Financial Plan

There’s more to your financial success than just whether the stock market is up or down. Ask yourself the following questions:

Am I on track for retirement?
Do I have an Estate Plan?
Am I prepared for my children’s college education expenses?
Have I protected my family with a term life insurance policy? Additionally, are there risks to my career, business, health, or family which I need to address?
Do I have a disability and long-term care plan?
How am I addressing my charitable goals?
Are there additional ways to save on taxes?
Should I refinance my mortgage?
Am I eligible for a Health Savings Account or Flexible Spending Account?
Have I calculated the optimal age to begin Social Security for myself and my spouse?

Don’t let investing in the stock market consume all your attention, because it is only one piece of your financial plan!

Think Long Term

Risk is danger and risk is opportunity. Instead of worrying about this month, imagine that it is 2021 or 2022 and the market has recovered. What would you have wished you had done in the 2020 Stock Market Crash?

Ignoring the panic of the day isn’t easy. Thankfully, a good investor doesn’t have to make predictions about the market going up or down. We can’t control that. The key is managing how you respond when the market is at its worst. Finally, if you know you need work on your financial plan or would benefit from professional advice on managing your portfolio, I am here to help.

Past performance is no guarantee of future results. Stock market investing involves risk of loss of principal. Dollar cost averaging does not guarantee a gain.

Coronavirus Stock Market Damage

Posted On February 29, 2020 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

Welcome to the Coronavirus Stock Market. After setting an all-time high on February 19, the market plummeted last week, and is down nearly 15% from its highs. As the virus spreads, the economic impact is growing. Companies are sending employees home, shuttering manufacturing, leading to less travel, less restaurant meals, and lower consumer spending.

As an investor, what should you do, given that we don’t know how much worse the contagion will grow? I don’t know. No one knows. No one has a crystal ball to know how the disease will spread or how the economies or markets will be impacted. Recognizing that this is unknowable information is the key to understanding what to do.

A history lesson may help. Big drops of 3.5% in a day are somewhat rare and they are felt as being quite shocking. We had a couple of days like that this week. Over the past 33 years, there have been 55 days of a 3.5%+ drop. In 45 of those instances, the market was higher 12 months later. Much higher, on average 20% higher. In only 10 of 55 drops was the market lower a year later. (Source: Barrons) Those aren’t bad odds, and the reward for staying invested could be worthwhile.

What I did this week

If it helps, let me share what I did in my own portfolio this week. I did not sell anything. However, I did have a couple of bonds which were called. With the new cash in my account, I revisited my asset allocation. Since equities are down, I was presently underweight to my target percentage of stocks. So, I purchased more shares of stock Exchange Traded Funds (ETFs) that I own.

Sure, it’s possible that the purchases I made this week will be even lower next week. But I’m not trying to time the market. No one can tell you when the Coronavirus stock market carnage will cease and it will be safe to invest again. We are stuck with uncertainty no matter when we make a decision. So the optimal decision, I think, is to stick to a disciplined process. Create a diversified target asset allocation and hold that portfolio regardless of epidemics, elections, wars, or any other human events. Rebalance your portfolio periodically, when you have cash to add, or when your allocation has shifted.

If you made any recent purchases in taxable accounts, consider harvesting your losses. Immediately repurchase another fund to maintain your target allocation. This is solely to lock in a capital loss for tax purposes, so be careful to not change your asset allocation.

The Pain of Losses

There’s an old saying on Wall Street that stocks take the stairs up but the elevator down. Gains are slow and plodding, but losses are straight down. That’s definitely what happened this week. From a psychological perspective, the pain of a 10% loss is more acute than the thrill of a 10% gain. This increases likelihood of making investment errors.

Everyone agrees that we shouldn’t try to time the market when the market is rising. But when the market is down, we have to really resist the urge to go to cash, when our amygdala is screaming Run! Hide! Get out of the market before you lose everything! That biological mechanism may have helped our ancestors avoid being eaten by a saber-toothed tiger, but is a detriment to long-term investing.

Bonds and Alternatives

While stocks have been falling, investors seem to be buying bonds no matter how low the yield. As money floods into bonds, prices go up and yields go down. The 10-Year Treasury reached an all-time low yield on Friday of 1.09%. Unbelievable, and yet this didn’t even make any headlines this week. With low rates, expect virtually all of your callable corporate and municipal bonds to get called. And then good luck finding a replacement – I’m seeing 2% yields at 10+ years. That’s terrible for a BBB-rated credit.

This is a good time to refinance your mortgage. If you can save 1 percent or more, it is probably going to be worth the change. That’s just about the only benefit of the low interest rates.

Today’s yields make bonds quite unappealing and dividend stocks more attractive. Some good companies are down significantly (why is Chevron down 25% this year?). We were buying stocks at higher prices last month, and if you like those companies, you should like them even better when they are on sale. Bonds won’t even keep up with inflation and the low interest rates will push more investors into stocks.

Stocks have much higher risks than bonds, and it is simply unacceptable for most investors to be 100% in stocks. Fixed, multi-year guaranteed annuities have better yields than treasury, corporate, and municipal bonds and are also guaranteed. We can get over 3% on a 5-year annuity, versus 0.87% for a 5Y Treasury or 1.6% on a 5Y CD. Annuities remain very unpopular, but I think they are a better fixed income investment than bonds if you do not need liquidity. I suggest laddering fixed annuities over a 5-year maturity, 20% into five sleeves.

Our Alternative Investment in Preferred Stocks were down a couple of percent this week, but nothing like the bloodbath in stocks. Some preferreds that were trading near $26 are now trading near $25. With a $25 par price, this is an excellent entry point for investors.

The Coronavirus stock market impact has been shocking. Investors are not going to be happy when they open their February statements. Realizing that we cannot predict the future, we need to avoid the “flight” response. The challenge for an investor remains to keep the discipline to stick to their plan of a diversified allocation. Rebalance and hold.

Five Wealth Building Habits

Posted On November 10, 2019 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

“We are what we repeatedly do. Excellence, then, is not an act, but a habit.”
– Aristotle

Accumulating wealth and developing financial independence does not happen overnight, but it’s not nearly as complicated as most people think. Good habits create results when consistently applied over time. Today, we are going to talk about how to get on track and create new wealth building habits.

Frankly, most of my clients are already doing these things. That’s why they have money to invest with me. So, I’m not really writing this for them. I meet a lot of people who have a similar level of income, who are intelligent and successful in their own field, but unfortunately, their habits are never going to lead them to become wealthy.

This past week, I gave four presentations at different companies around Dallas about personal financial planning and estate planning. One of the most common questions was about saving money and creating wealth. I think there are a lot of myths about building wealth that are holding people back from success. We need to dispel those myths and replace old habits with a new habits that create wealth.

Myth 1: You don’t make enough money to become wealthy.

I’ve seen families who become millionaires with incomes under $100,000, and I’ve seen people go bankrupt who make over $300,000. Stop thinking that the problem is that you don’t have enough income. Until you have a savings plan, you are probably going to end up spending everything you earn. Without a savings plan, a raise will only stimulate additional spending.

To be a better saver, look at your biggest expenses. When you make smart choices about your home and car choices, everything else in your budget will fall into place nicely. If you have reached a bit too high for your budget, there is no magic way to save money when your fixed expenses consume all of your income. If you are in over your head with these costs, you need to find a way out. Don’t focus on how much you make, focus on how much you can save.

Habit 1: Wealth Builders are frugal about their two biggest expenses: their house (or rent) and their cars. They view these as expenses, not as investments or as “lifestyle” choices they deserve.
Read more: Rethink Your Car Expenses

Myth 2: You can’t save right now.

You’ve got student loans. You’ve got young children. You need to save for a down payment. You need to pay down your mortgage first. You’ve got a kid about to start college.

There’s always an excuse why people aren’t saving and investing today. But there’s never going to be a “green light” where you will feel that it is easy to invest.

Habit 2: Wealth Builders put their investing on autopilot.

First: establish an emergency fund with at least three months of living expenses. Pay off your credit cards so you do not carry a balance or pay any interest expenses. Then establish automatic monthly deposits into an account for each of your financial goals:

a 401(k) or IRA for Retirement
a bank account for your next car purchase
a 529 Plan for your child’s college education

It doesn’t matter if you start small. If all you can afford today is $50 or $100 a month, just get started and don’t wait. When the money comes out automatically, you won’t miss it. As you are able, increase your monthly contributions. Your eventual goal is to save at least 15% of your income. Can you get there in a year or two? Calculate how much this is and get started. If you have to adjust later, that’s okay. Don’t wait another day, because that day could turn into years. Wealth building habits need to be easy, and it doesn’t get any easier than automatic.

Myth 3: Things will take care of themselves.

You’re not worried. Time is on your side. You’ve got other things to deal with. It can wait.

Yikes. Get your head out of the sand. You can do this. Educate yourself about investing.

While I encounter an attitude of denial sometimes with younger investors, it is not just Millennials who think this way. In fact, I think a lot of Millennials are proving to be much smarter than previous generations about materialism, credit card usage, and their life goals.

What scares me more are older entrepreneurs who tell me that their business is their retirement plan and that their company is the best investment. Great, how many times have you built and sold a company for over a million dollars? Never done that? What is your exit strategy? It’s not a good idea to put all your eggs in one basket, and the successful entrepreneurs I know build a positive cash flow business which creates personal wealth in addition to their ownership value of the company.

Habit 3: Wealth builders educate themselves about their finances, are organized, and track their net worth.

Read more: buy this book, it’s the best investment primer I have read.

The Cost of Waiting from 25 to 35

Myth 4: You have to become an expert in the stock market to be successful.

Day trading. Penny stocks. Cryptocurrency. Stock options. Commodity futures. Hedge funds.

You don’t need any of these things to become wealthy. You don’t have to read the Wall Street Journal everyday, watch CNBC for hours, or spend your weekends pouring over spreadsheets or stock reports. In fact, trying to beat the stock market is not only exceedingly difficult and unlikely to achieve, it often creates unnecessary risk in the process. The antidote is simple:

Habit 4: Wealth Builders buy Index Funds.

Buying the whole market gives you diversification, low cost, and tax efficiency. Evidence consistently shows the benefits of using an index approach. And you don’t have to be an expert, or become a stock trader, to use Index Funds.

Myth 5: Your best bet is to do it yourself.

We can all agree that no one cares more about your money than yourself. Unfortunately, there are reasons to distrust the financial services industry and to question whether they are putting their own interests ahead of yours. And it costs money to get professional advice. Those are the three main reasons why people want to manage their finances on their own.

Over the past 15 years, working at three different firms, I’ve had the pleasure to serve some incredibly successful people. There was a retired surgeon who served as a chairman of a major University. The president of an S&P 500 company. The co-founder of an oil and gas company who sold his company for $300 million. A Harvard educated software engineer. An engineering PhD who speaks five languages.

These people are way smarter and more successful than I am. They could do it themselves if they wanted. But they all decided to hire a financial advisor, develop that relationship, and out-source their financial planning.

Why Get Professional Help?

You cannot be an expert in all fields. Successful people rely on professionals who have specialized training, knowledge, and experience, including accountants, lawyers, and financial planners.
Time. They have more valuable uses of their time, not just for work, but also to spend with their family, hobbies, or other interests.
You don’t know what you don’t know. An advisor can help you avoid costly mistakes as well as to identify any behavioral biases or blindspots you might not be thinking about. Laws and regulations change all the time.
Accountability. An advisor will help you set goals, coach you to make good decisions, and proactively keep you on track even when you are busy thinking about other things.
Family: knowing they have planned for their family if something should happen to them and that the professional management of their financial affairs would continue.

If the most successful people you know have a financial advisor, maybe it’s time you stop trying to do it on your own.

Habit 5: Wealth Builders value and seek professional help.

New wealth building habits take time to establish. In an age of instant gratification, recognizing that today’s steps might take years to pay off takes particular maturity. It won’t happen overnight, but I can assure you, you don’t have to be a rocket scientist to build wealth – just keep good habits. Apply your habits consistently, with patience and perseverance, and you won’t be surprised when someday you open an account statement and see a seven-figure number.

Or you could keep doing what you are doing, and you will stay right where you are. Everyone believes that they are rational and logical, but in reality, we all naturally resist change even if that change is in our own best interest. We have to look in the mirror and be honest with ourselves if our actions are truly in line with our goals. That can be painful to acknowledge, but the reward of radical honesty could be the realization that you need to create new, better habits.

Unless you receive an inheritance or win the lottery, wealth is not an event, but a habit. Thankfully, even small changes in your habits can pay big rewards over time.

Volatility and Saving

Posted On March 31, 2019 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

We talk about saving for “retirement”, but what we really want is to create financial independence where you can work if you want to, but not because you have to. We create that wealth by saving.

When the market does well, people want to save and invest. It feels good when it is working! When there is volatility like in December 2018 (the worst December since 1931 according to Barrons), people don’t want to invest and saving becomes a lower priority. If they do save, it is either just going into checking or paying down debt. Both of those are part of a good financial plan, but that’s not the path to becoming a millionaire.

I think most Americans have a hard time imagining that they could become a millionaire, but one million dollars is not a vast amount of wealth in 2019. At a standard 4% withdrawal rate, a $1 million nest egg only provides $3,333 a month in distributions. And that is pre-tax! Take out 20% for taxes and you’re left with $2,666 a month net.

With inflation of just 2-3%, one million dollars will have less than half the purchasing power when today’s 30-somethings reach retirement age. If you think you need $1 million in today’s dollars, you might need $2 million or more when you are 65 to maintain the same lifestyle.

I’m glad that the market has rebounded nicely in the first quarter of 2019. Looking ahead, there remains a great deal of uncertainty: rising inflation, falling corporate profits, an inverted yield curve, and so on. It’s easy to feel uneasy today. No one knows what will happen in 2019. In spite of Q1, it looks like a rough road ahead.

But it doesn’t matter. At least not to a long-term investor. And most of us are long-term investors. I don’t just mean people in their twenties – even if you are in your sixties and retiring soon, you’re not going to be pulling all your money out in the next two years. You still have an investment horizon of 20, 30, or more years.

We can’t let market volatility – or the fear of any one year – impact our commitment to saving and investing. Don’t try to time the market with your savings strategy. I have no idea what will happen in 2019 or even for the next five years, but I’m going to keep on saving and adding to my diversified portfolio. (I follow our Growth Model.)

I have been thinking recently about 10 years ago, March 2009. It was a terrible time in the market. The S&P 500 had been cut in half. It felt like every day was a new disaster. 2% drops were the norm, and there were the really bad days when the market would fall by 5% or more. As a financial advisor, I talked with people who were afraid, upset, and angry. My own account was down $200,000 at one point. I remember thinking that I could have paid off my mortgage if I had sold (at the top), and I’d still have more money left over than I had right then. Lots of would-a, could-a, should-a regrets.

I told people to stay the course, and that’s what I did. Thankfully, most followed my advice. Looking back with the gift of hindsight, it was an incredible buying opportunity and would have been a terrible mistake to sell. But it didn’t feel so obvious at the time! I didn’t get any calls from people who wanted to buy in February or March 2009.

Fast forward to 2019: if you had purchased the S&P 500 Index ETF (ticker IVV), your ten year annualized return to February 1, 2019 would have been 14.95% (source: Morningstar). Incredible!

Now, that is cherry-picking the bottom of the market. So to be fair, let’s take a longer look. If you had invested 15 years ago, even with riding it all the way down in 2009, your 15-year annualized return of IVV still would have been 8.13%. Even with the biggest financial disaster since the Great Depression, investors in a basic stock index fund still have earned an 8% annual return over 15 years. That’s the sort of time horizon we should be thinking about.

At a hypothetical 8% return, you would double your money every nine years, with no additional contributions. If you had invested $100,000 into a fund and received 8.13% for 15 years, you’d end with $322,993. This is why we should keep saving and investing, despite whatever fear we may have about the market, politics, global risk, or whatever we may face in 2019 or in any single year.

How much should you save? IRA contribution limits have been increased in 2019 to $6,000 (or $7,000 if age 50 or older). That’s $500 a month, which is a lot for many Americans, but very doable and certainly a good place to start.

If you can earn 8% on your $500 a month, you will have $745,000 after 30 years. You will break $1 million in less than 34 years. For a couple, you can both invest in an IRA, so you could double these amounts. Most studies of retirement planning assume 30 years of accumulation. The question facing each of us is when to start. If you can start saving at 22, you could (potentially) have a million in your IRA by your mid-fifties. If you don’t start saving until age 40, it would take until your mid-seventies to reach the same level.

Some of you reading this have household incomes over $200,000. Can you save $5,000 a month? It’s possible, especially if you both have 410(k)’s with matching contributions. If you save $5,000 a month for 30 years, at 8%, you’d have $7,451,000. With that size nest egg, and a 4% withdrawal rate, you’d have nearly $300,000 in annual income. That’s actually more than your previous income.

Save early, save often, save as much as you can. No one has a crystal ball about what the market is going to do, but thankfully, accumulation has not been dependent on market timing. What has been successful in the past has been having a well-diversified asset allocation, using index strategies, and keeping expenses and taxes low.

Maybe instead of focusing on what the S&P 500 did in 2018 or your portfolio return over 12-months, we ought to track our savings rate. How much did you save in 2018? Are you increasing your savings in 2019? Are you saving enough to meet your goals? At your current savings rate, how long might it take to become financially independent?

If you are concerned about low rates of return in the years ahead, we may need to save more. But there’s no intelligent process for becoming financially independent, becoming a millionaire, that doesn’t include regular savings. We are always happy to talk about our investment strategy and why we invest how we do, but the conversation that more of us should be having is how to save more.

Past performance is no promise of future results. Historical returns are not guaranteed.

Skin In The Game

Posted On May 18, 2018 By Scott Stratton, CFP(R), CFA In Behavioral Finance / 1 Comment

Leading up to the last financial crisis, bankers made hundreds of millions by packaging together mortgages and selling them. They were paid upfront and had no repercussions when those mortgages went into foreclosure and both the homeowners and investors lost money. The asymmetry that bankers had an enormous upside to sell something but shared none of the downside risk led to catastrophic losses.

This is the subject of Skin In The Game, a new book by Nassim Nicholas Taleb, perhaps the foremost writer on risk and the practical application of the mathematics of probability. I’ve just finished the book and while it was not an easy read, its ideas are relevant to investors.

Skin in the game – having shared risks and rewards – is essential for investors to achieve better outcomes with their advisors and investment managers. Taleb points out interesting and not always obvious situations where these asymmetries present potential pitfalls in investing, politics, economics, and everyday life.

Investors would be well-served to think about whether their advisors have skin in the game and aligned interests, or if they are like the bankers who win regardless of whether their clients profit or not.

Before starting my own firm, I worked at two companies for 10 years. I had one colleague, who in spite of making a lot of money over many years, actually had less than $50,000 in investments. His top priority was paying down his mortgage. He talked about investments all day long yet had almost no interest in putting his own money in what he recommended to clients.

Another colleague invested significant sums every month and became one of the three largest clients of the firm. And every purchase was into the exact same funds as our clients. Which of those Financial Advisors would you prefer to manage your money? One who didn’t want to invest or one who couldn’t get enough of the funds we bought for clients?

Strangely, to me at least, clients rarely ask questions about Skin In The Game. I became a Financial Advisor because I was fascinated with investing and found myself spending all my evenings and weekends reading everything I could find and investing every dime I could scrape together. I opened my firm with one purpose: to treat every client as I would want to be treated.

That’s why I’d encourage investors to think and ask about Skin In The Game. Here are some ways to do that:

1. Doing not Saying. If you really want to know what people believe, find out what they do, rather than what they say. Understanding the difference is a BS-detector. Do you invest in this fund? How much of your net worth is in this strategy? Have you bought this investment for your mother’s account? Those answers, if you can get an honest one, are more telling than any pitch. In other words, don’t buy a Ford from someone who drives a Toyota.

2. Appearances. Taleb is trying to choose between two surgeons: one has an Ivy League undergraduate diploma, and wears immaculate bespoke suits. The other wore rumpled clothes, was a bit slovenly, and came from a middle class background. Taleb suggests choosing the latter surgeon, because he had to work much harder to achieve his career and is therefore likely more skilled. The first was more successful in looking like a surgeon rather than being the best possible surgeon.

(Thank you to all the clients who have hired a former music teacher to manage millions of their dollars. I used to get up at 5 am for years to study for the CFP and then CFA exams before going to work. It hasn’t been an easy road.)

3. Simple is better than complex. Complex solutions are sometimes created as a hook to sell something. Often, a simple, well-tried approach is more effective. Convoluted structures conceal many flaws, hidden fees, and conflicts of interest. If something seems unnecessarily complex, that’s a red flag.

4. “Scientism”. Facts and book knowledge can be bent to your point of view. Consider for example: “homeowners have 30-times the wealth of renters”. I heard this statement this week, along with the conclusion that buying a house therefore causes wealth. Correlation is not causation! You could also reach the opposite conclusion: you have to be very wealthy to afford a house in America.

Both are flawed because the thought process of going from the fact to the conclusion is biased. If I got an apartment, would I become poor? No, of course not. Taleb calls this “Scientism”, dangerous ideas which sound scientific, but don’t actually follow the objective hypothesis-testing process demanded by real science.

You cannot become wealthy without taking risks. The best way of ensuring a good outcome is through the fairness of symmetry and shared risks. That means both sides have an upside and a downside.

I don’t have a crystal ball about what the market will do, but I do invest in the same ETFs and Funds as my clients (I use our Growth Portfolio Model). By having Skin In The Game, I think it does provide an important motivation to spend extra time on due diligence, think carefully about risks, and follow our positions closely.