Investing During Coronavirus

Investing During Coronavirus

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

  1. No Risk Analysis. Don’t wait until a Bear Market to assess what level of risk is appropriate for you and your goals.
  2. 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.
  3. Not diversified. Being concentrated in individual stocks or sectors can create wildly different results than the overall market. Diversification is valuable.
  4. 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.
  5. 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.
  6. 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.
  7. Ignoring expenses and taxes. We can often create significant savings in expenses and taxes with good planning.
  8. 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?
  9. 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.

Read more: Good Life Wealth Management Financial Planning Process

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

2020 Stock Market Crash

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

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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

Coronavirus Stock Market Damage

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

“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 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. If 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.

Read more: Don’t Budget, Focus on Saving

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.

Read more: Manager Risk: Avoidable and Unnecessary

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?

  • You cannot be an expert in all fields. Successful people want to have team members 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. A qualified professional might 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 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

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

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.

Vanguard’s Measure of Our Value

We create value for you through holistic financial planning, looking at your entire financial picture to create a comprehensive approach to investing your money, gaining financial independence, and safeguarding you from risks. This sounds great, but let’s face it, it’s pretty vague. The numerical benefits of hiring a financial advisor can be difficult to evaluate. Since 2001, Vanguard has spent considerable resources in measuring how I can add value for investors like you.

Their study is called Vanguard Advisor’s Alpha and they have identified areas where financial advisors create tangible value. Their aim is to quantify how much a client might benefit from each process a financial advisor could offer. Vanguard’s conclusion is that an advisor like me can add 3% a year in benefits through effective Portfolio Construction, Behavioral Coaching, and Wealth Management.

Their recommended approach in these areas very much reflects what I do for each client. Not all advisors use these steps with their clients. If your advisor isn’t talking about these actions, you could be missing out. Vanguard has analyzed how much a client might gain from each step in our financial planning process. Benefits, below, are measured in basis points (bps), where 1 bp equals 0.01% in annual benefits.

1. Portfolio Construction

  • Suitable Asset Allocation / Diversification >0 bps
  • Cost Savings (Expense Ratios) 40 bps
  • Annual Rebalancing 35 bps

Our approach is to create long-term, diversified investment strategies for each client. We start with a top-down asset allocation and use ultra low-cost ETFs and institutional-class mutual funds to implement our allocation. Portfolios are rebalanced annually.

2. Behavioral Coaching

  • Estimated Benefit 150 bps

There is a huge benefit to coaching and that’s why we prefer to write about behavioral finance topics than giving you “weekly market updates”. You can’t control what the market does, but you can control how you respond. And how you respond ends up being one of the biggest determinants of your long-term results.

We take the time to create a solid plan, educate you on our approach, and reinforce the importance of sticking with the plan. There are real risks to having a knee-jerk reaction to a bear market, chasing performance, or buying into bitcoin or whatever fad is currently making the headlines. Based on Vanguard’s calculations, the value of Behavioral Coaching is actually greater than investing steps like asset location or rebalancing.

3. Wealth Management

  • Asset Location 0 to 75 bps
  • Spending Strategies (withdrawal order) 0 to 110 bps
  • Total Return versus income approach >0 bps

Asset location is creating tax savings by placing certain investments in retirement accounts and certain investments in taxable accounts. Spending Strategies, for retirement typically, are another area of considerable attention here at Good Life Wealth. Go to our Blog and you can find all of our past articles (currently 197). In the upper right, use the Search bar and you can find several articles explaining these concepts and how we implement them.

Vanguard lists some of these benefits as 0 bps with the explanation that the value can be “significant” but is too individual to quantify accurately. When they do add up the benefits we can achieve in Portfolio Management, Behavioral Coaching, and Wealth Management, Vanguard believes we are adding 3% a year in potential benefits for many clients.

We hope this may help those who are on the fence, wondering if it is worth it to hire us as your financial advisor. There is a value to what we offer or I wouldn’t be in this profession. The Vanguard study doesn’t consider our benefits in helping you with tax planning, risk management, estate planning, college funding, or other areas. They also don’t consider intangible benefits, such as peace of mind, saving time by hiring an expert versus trying to do it yourself, or the fact that investors who create a retirement plan with an advisor save 50% more than those who do not.

We offer two distinct programs to meet you where you are today and help you get to where you want to be. We are welcoming new clients for 2018. Do you have questions about how we might add value for you? Let’s talk.

Premiere Wealth Management
Comprehensive financial planning and portfolio management
Cost is 1% annually, for clients with $250,000 or more to invest

Wealth Builder Program
Subscription program to build your net worth with expert financial planning in the areas you need
Cost is $99/month, for clients with $0 to $249,999

Putting February in Perspective

2017 was not only a great year in the market, but an anomaly of historic proportions for its extremely low volatility. There were no large daily swings in 2017, and no big drops or corrections regardless of the economic data, corporate earnings, or political turmoil. The market never fell below the January 1st level in 2017, so the year-to-date numbers were positive for the entire year.

This January continued 2017’s winning streak, but February was another story altogether. The market plunged roughly 10% in a week, including the largest single day point drop in the history of the Dow Jones Industrial Average. The market regained much of its loss, but has sold off by 3% or so in the past week. Investors are wondering is whether this is the end of the bull market and what to do next.

Here is the frustrating reality about being an investor: No one can predict the future. Forget about Wall Street forecasts – their track record of accuracy is horrible. The market doesn’t care what we think, positive or negative. The old saying that “the market climbs a wall of worry” has certainly been true the past year or two.

If you would have asked me at the start of 2017 if I thought the S&P 500 Index would go up 22% that year, I would have said no way. The prices were relatively high, we faced rising interest rates, and the political climate was a mess. Uncertainty is not supposed to be the backdrop for a 20%+ year.

Thankfully, I did not act on my opinions in January of 2017 and get out of the market, because we would have missed a tremendous year of investment returns. We should recognize that even when we think our feelings about the market are based on a rational examination of facts, there is no guarantee that the outcome will be as we expect. We are too easily influenced by recent performance and allow our fear or greed to drive investment decisions about what should be a decades-long plan.

For those who are disturbed by February’s action, I’d suggest taking a 30,000 foot view. Although the market did correct by 10%, we basically only gave up the gains from a few weeks and put accounts back at the level they were in December. The market pulled back towards the 200-day moving average, a key level of support, but did not cross or violate those levels. In other words, the overall trend upwards has not been broken. Perhaps the market just needed a correction and chance for profit-taking. That’s healthy and not necessarily a bad thing.

The US economy looks strong, and while the stock market could diverge from the economy, I think we can take comfort in knowing that wages are rising, unemployment is very low, earnings are growing, and many companies are robust and profitable. The tax cuts going to corporate America will increase earnings. Although we’ve gone nine years without a bear market, we are in unprecedented times, so it is possible that the market continues up for a while longer.

I share this not because I think my job is to be bullish or to convince people to buy stocks. Rather my objective is to educate investors, moderate our behavior, and encourage consistency. When fear starts to pick up, that’s the time when it becomes challenging to stick to the plan. Our focus should be on looking out 10 or 20 years. That’s the sort of time frame we really need to have in mind as an investor.

Just like the seasons, there will be a bear market – a drop of 20% or more – in the future. But investors would be better served by worrying less about the inevitability of market cycles and instead focusing on what they can control: how much they save, diversifying, keeping costs and taxes to a minimum, and having a long-term strategy.

We will continue to watch the market closely and evaluate whether a temporary correction threatens to become a more prolonged decline. If that were to occur, we would take action. For some investors, we may choose to become more defensive. For those with a longer time horizon, I think you want to buy when the market is on sale. This decision would be based on technical indicators – what the actual price movement of the stock market suggests – rather than a decision influenced by news, market sentiment, forecasts, or opinions. (We will explore this topic in more detail in an upcoming post.)

Presently, there is little from February to indicate that we’ve had anything more than a garden variety correction. Volatility is a normal part of investing, something we need to remind ourselves after 2017. If you’re not currently investing with us, let’s talk about how you are currently positioned and see if we might be able to recommend some ways to improve your investment strategy.

The Seven Deadly Sins of Investing

Successful investing is as much about managing our personal tendencies and behaviors as it is about picking funds. You don’t have to be a financial whiz to be a thriving investor, but you do have to avoid making mistakes. Investing errors do not mark you as a novice or as unintelligent; even professionals can easily fall into these traps. Mistakes are easier to see in hindsight, but in the present moment, the choices we face may not be so obvious.

Here are what I consider to be the Seven Deadly Sins of Investing. I firmly believe that if we can avoid these errors, we will have a much higher chance of success as long-term investors.

1. Not Accepting Losses (Pride)
If you’ve made a losing investment, sell it and move on. Too many investors are unwilling to do this, hoping that if they wait long enough, they will be proven correct or at least get their money back. Unfortunately, this may not occur, and even if it does, there may be an opportunity cost in waiting. With today’s strong markets, you might not have losses, but if you have high-expense funds that are under-performing the market, you should recognize that this too is a mistake and move on.

2. Market Timing (Greed)
Speculating to make as much profit as possible and trying to avoid temporary market drops drives many people to move in and out of the market in a largely futile attempt to improve returns. Neither individual investors nor professionals have demonstrated any success in market timing, although great time and effort are spent in the process. The reality is that market returns are a good return, but when investors say “I want more, I need more”, they are very often rewarded with lower returns rather than higher returns.

3. No Asset Allocation (Lust)
Did you pick the funds for your 401(k) by selecting the options with the best one-year performance? If so, you likely will end up with a poor investment plan, because you are investing based solely on past performance. Don’t fall in love with today’s hot funds, those are the ones that will break your heart at the next downturn, when you discover how much risk they were taking. At any given point in time, one or two categories may dominate returns, fooling investors to think that owning 10 different technology funds makes you diversified. Start with a globally diversified asset allocation and then pick funds that represent each category. Yes, even buy those segments which are out of favor and under-performing today. That’s how you build a better portfolio.

4. Performance Chasing (Envy)
With thousands of mutual funds and ETFs at our disposal, it takes only a few clicks to find a “better performing” fund than the ones currently in your portfolio. There are hundreds of funds which have outperformed their benchmark over the past year. Of course, that number will fall dramatically over time, and typically 80% or more of funds fail to match their benchmark over five or more years. But even still, that means some funds have beaten the index. Unfortunately, there is no predictive power in past returns of actively managed funds, so even those that beat the mark over the last five years are unlikely to continue their streak over the next five years.

Perhaps even more dangerous is when investors “discover” that a sector or country is outperforming. Maybe it’s a technology fund, or Argentina ETF, which has rocketed up in the past six months, and they switch from a diversified fund to a narrow investment. Performance chasing creates a lot of risk which may go unnoticed until it’s too late. We avoid single sector and country funds; almost every argument for these funds is some version of performance chasing.

5. Single Security Risk (Gluttony)
Most of the heart-breaking investing stories I’ve heard from the past 20 years were caused by investors having a large investment in a single company. The 55-year old Nortel employee who had his whole retirement account in his company stock and rode it down from $1 million to $100,000. The Cisco employee who exercised $600,000 in stock options, but kept the shares to try for long-term capital gains; the shares tanked, and he didn’t know he would owe AMT on the original $600,000. The IRS had a lien on his house while he paid them $200,000 over five  years.

Diversification is the only free lunch in investing. The average stock will return about the same as the index by definition, but you take on tremendous risk when you have a concentrated position in one stock. The best choice is to not have too much in any one stock, including that of your employer.

6. Breaking Your Plan (Wrath)
Anger, frustration, and despair were what investors felt in 2008 and 2009, and we will undoubtedly feel the same way when the next bear market occurs. Some investors threw in the towel near the bottom and missed out on much of the rebound. The best way to prevent future frustration is to make sure you have the right asset allocation and understand how your portfolio might perform in up and down years. When you begin with a smart plan and take the time to educate yourself, it is much easier to understand the importance of staying invested rather than allowing emotions to get the best of us.

7. Failing to Monitor (Sloth)
Even for passive investors, you still need to do some work monitoring and managing your portfolio on a regular basis. Rebalancing annually or when funds move a large amount is important to maintain your target risk levels and to create a process to “buy low and sell high”. Additionally, too many investors have stayed with poorly performing active funds and variable annuities they don’t understand, paying high expense ratios, unnecessary 12-b1 fees and sales loads, without having any idea about how they are doing. You only have three or four decades of work and investing, you can’t let 5 or 10 years go by without knowing if your plans are on track. It’s your money, surely you can spend a handful of hours every quarter to analyze your situation and make changes when they are needed.

Successful investing is not complicated, but it can be difficult to have the patience with how boring it can be most of the time and how unpredictable it can be other times. Establish a diversified asset allocation that will help you achieve your long-term goals, then invest in low-cost, tax-efficient vehicles with a good track record. Focus on what you can control: your allocation, costs, and diversification, and don’t worry about the short-term movements of the market.

We all face the temptation of these seven investing sins. Maybe the greatest attribute for an investor is faith. Do what is right, do what is smart, but then to let go of the worry about what will happen today or tomorrow. Market returns will be whatever the market returns. We have no control over the market, but we can focus on our own saving (frugality), patience, and positive thoughts. In the end, the true measure of wealth is more about our faith and gratitude than it is about the dollars and cents.

How Exercise Can Make You a Better Investor

There are a lot of parallels between getting in shape and being a successful investor. Both take time and consistent effort to achieve results. We’d love to have overnight, instant results, but that isn’t how life works!

Here are five key factors to an effective exercise program that you can apply directly to helping you achieve your financial goals. If you are already doing great with your workout program, why not apply that same process to getting your finances in shape?

1. One pound at a time. Your goal may be to lose 30 pounds, but you can’t lose 30 pounds at once. You have to take it one day at a time and lose the first pound, then the second, and so on. In investing, everyone wants to be a millionaire, but you have to save that first thousand dollars, then the next thousand and so on. You can’t just wish for it, you have to work for it.

2. Set a goal. Having a specific goal such as “lose 20 pounds by March 1” or “achieve a BMI of 15 by January 1” is better than a vague goal such as “get in better shape”. Otherwise, how will you know if you achieve your goal? How will you know if you are on track? What is your motivation and sense of urgency?

A long-term goal creates short-term steps. If you want to lose X pounds in X weeks, you might use an app like myfitnesspal to calculate how much you need to workout and how many calories you can eat in a day. Your goal determines a path and mileposts. For investing, if your goal is to have $500,000 in your 401(k) at retirement, how much would you need to save from each paycheck to make that happen?

3. Make good choices. When you have a fitness goal, some decisions, like eating half of a cheesecake for dinner, will put you further away from your goals and negate all the hard work you have been doing. Similarly, if you have a financial goal, spending $15,000 on a European vacation may be inconsistent with that goal. When your goal is more important than the eating or spending, you learn to make better choices.

That’s not to say that you can’t indulge from time to time, but you can’t let those choices derail your progress. If you view these choices as a sacrifice or as deprivation, you will resent your fitness or financial goals. You may find it easier to stick to the plan when you observe and celebrate the positive results you are achieving.

4. Create new habits. For a workout program to get results, you have to stick to it and have it become an unchangeable part of your routine. Maybe you workout Monday through Friday at 7:30 am before work. Or maybe you spend your lunch hour on Tuesday and Thursdays at the Gym and then workout on Saturday and Sunday mornings. Maybe you learn to watch TV without eating food at the same time!

The point is that you create new habits that will help achieve your goals. For investors, people are more likely to be successful when they put their saving on autopilot. Have that money come directly out of your paycheck into your 401(k). Start a Roth IRA and establish a monthly draw of $400 from your checking account. Set up a 529 college savings plan and even if you only start with $50 a month, get going today!

5. Human support. You are more likely to succeed in your fitness goals if you are part of a group or have a coach to make sure you actually get to the gym! They can motivate you, applaud your progress, and help you regroup after the inevitable frustration of temporary set-backs. When you go it alone, your weekend choices may not be as good as someone who has a weigh-in on Monday morning with their trainer. Having someone who supports you, who can lend an ear, and can also provide objective guidance will help you get there faster.

When it comes to investing, many people make the same excuses as they have for fitness: I am too busy, exercise is too expensive, it’s so boring, my career/family/hobby is takes all my time… And yet, many of the busiest, most successful people I know manage to find time to workout and stay in shape. When it is an important priority, you figure out how to make it happen.

If you want to get in better shape financially, apply what you know works for exercise. We can help you identify realistic goals and put into motion new habits to help you achieve your objectives. You will learn about finances and you might even find that you enjoy yourself! But most of all, you will know that you are doing the right thing today and that your future self will thank you for not waiting another year to get started. You can schedule your call online here.