Declutter Your Space, Declutter Your Mind

Posted On April 15, 2017 By Scott Stratton, CFP(R), CFA In Behavioral Finance / 1 Comment

There are remarkable benefits to tackling clutter, whether that clutter is physical, mental, or financial. Clutter creates added stress and tends to freeze people from taking action and doing what is important and in their best interest. Some of the key benefits of working with a financial planner include getting organized, consolidating accounts, and having a coherent strategy for your financial life. It’s not rocket science, yet somehow, it can be so difficult for people to do what they know they should do. We aim for simplicity in everything we do.

We all can benefit from decluttering. But where to start? It can be a daunting task. It’s so daunting in fact, that most people don’t even want to bother. But clutter can represent fear, self-doubt, fatigue, and guilt. If you’re a perfectionist, clutter is a reminder of your failures and lack of control.

Do we need all this stuff? Many of us have hoarding tendencies, a love of material items, and a feeling that we “need” more things to be happy. We were raised this way. Our grandparents lived through the Great Depression, and they learned to never throw anything away in case they needed it later. That scarcity mentality is fear-based and was passed down from generation to generation. We have to unlearn that more is always better.

When you are able to reduce clutter, it feels wonderful. How can you get started?

1) Start small. Just fill one box or one trash bag with stuff you can get rid of. Maybe this will be easy for you. But for many of us it’s tough to decide that you don’t need something. Ask your self these questions:

– When was the last time I needed this, used this item, or wore this clothing? Was it this month, or was it years ago?
– What would happen if I did not have this item? Would I miss it? Would I need it? If it’s rarely used, could I borrow one from a friend?
– Would I buy this again today?

2) Give with a purpose. Maybe there is someone else who would benefit from your unneeded item, who would appreciate it, and give it a new life. Why keep it in your closet, if it could be helping someone else?

There are many local charities that will accept your used items. Since I foster for Operation Kindness, let me share this: You can donate your unwanted clothes, shoes, books, toys, and small appliances to Operation Kindness. They will even pick up your items at your house! Just schedule a pick-up at www.DonateForKindness.org. And be sure to keep a list of your items for tax time, so you can take a deduction for a non-cash charitable donation.

Or donate to another charity of your choice. Or sell your stuff on Craigslist, or on eBay, or at your neighborhood yard sale, and make a few bucks. Some people have made thousands selling extra things in their house.

3) Set a timer for 30 minutes. When confronted with a large and unpleasant task, it’s easy to feel overwhelmed. Who knows how long it will take? This causes us to procrastinate getting started.

Here’s what I do: just set a timer for 30 minutes and GO. You don’t have to have a plan, just attack whatever seems to be the area of greatest need and keep moving for 30 minutes. I often find that I actually clean the room or rooms in less than 30 minutes. When the bell rings, I stop and move on with my day.

You can do anything for 30 minutes, and psychologically, it is easier to say “I am going to clean for 30 minutes” than to leave it open-ended, “I am going to clean this clutter.” Even when I don’t finish in 30 minutes, I have often made a significant dent – 50%, 75%, even 90% complete. Don’t let Great be the enemy of Good. If we can just spend 30 minutes, we may find that we achieved the result we needed, and often that is good enough.

The next day, you can always go for another 30 minutes. You don’t have to declutter all at once. We only have so much time, attention span, and energy. Give yourself permission to take small bites. It’s okay – you are moving in the right direction.

4) Stop digging. As the saying goes, if you are in a hole, the first step is to stop digging. Step back a figure out why you are accumulating so much stuff. Is shopping a hobby? Do you buy stuff when you are bored, or stressed, or tired? Do you buy things you regret, that you don’t need?

Become more aware of your feelings about things. Acknowledge those feelings, those triggers, and find an alternative action. Take up a new hobby, go to the gym, find something else to fill those feelings other than shopping.

5) Outsource. Hire a personal assistant or a housekeeper or someone to do the work you hate doing. No need to feel guilty, there are only so many hours in the week. And if you hate doing some type of work, why do it? You can spend your time more productively elsewhere.

Decluttering creates a feeling of empowerment. I am in charge. I am organized. I am ready to make decisions and remove any obstacles in my way. Getting rid of clutter is like taking a weight off your shoulders. You aren’t even aware of how much it is a burden until you get rid of it.

There are benefits to your house, to your stress levels, and even to your relationship with your spouse and children. Decluttering is not just about stuff, it’s about your mindset.

If you can tackle decluttering your house, you can apply many of the same steps to your financial clutter:
1) Start small, just do one thing.
2) Set aside 30 minutes to organize your finances tonight. Don’t keep putting it off!
3) Change behavior that isn’t in line with your goals.
4) Outsource to a professional, to a Certified Financial Planner professional like me.

10 Ways to Wreck Your Portfolio

Posted On March 19, 2017 By Scott Stratton, CFP(R), CFA In Behavioral Finance, Portfolio Management /

Over the years, I’ve seen hundreds of portfolios and 401(k) accounts, and observed investors make tons of mistakes. Admittedly, I have made many of these errors on my own as well, just to double check! Here’s your chance to learn from others’ losses. But, if you still insist that you want to ruin your rate of return, go ahead and make these 10 mistakes…

1) Rely on Past Performance. You invest with winners, not losers! Just find the top performing fund offered by your 401(k) and put all your money in there. That’s why they say past performance is a guarantee of future returns, or something like that.

2) Don’t diversify. Have you seen that Chinese Small-Cap BioTech fund? Why invest in the whole market when you can bet on one tiny, minuscule sliver?

3) Ignore the fact that 80% of actively managed funds under perform their benchmark over five years. You’re going to pick funds from the other 20%. Indexing is for people who are willing to settle for average.

4) Put as much money as possible into your company stock. It’s beat the S&P 500 for X number of years, therefore you’d be stupid to ever take your money out of company stock or to cash in your options. And since you work there, you know more about this investment than anyone. Just like the employees at Nortel, Worldcom, and Enron.

5) To avoid paying taxes, don’t sell your winners. Don’t rebalance or sell overvalued shares. Later, if the stock is down 40% you can pat yourself on the back: “Thank God I didn’t sell when it was up and have to pay 15% tax on my gains. I dodged that bullet!”

6) Never sell your losers either. The loss isn’t real until you sell, and the most important thing is to protect your ego. If you hold on, eventually, you should get your money back. So what if another fund returns 60% while you are waiting for yours to rebound 30%? (Says the guy who has old General Motors shares that are worthless from when the company filed for bankruptcy and wiped out their stockholders.)

7) Do it yourself. Don’t use funds or ETFs, pick individual stocks yourself! It will be fun and easy. Just look at all those smiling people on the commercials for online brokers, they’re getting rich from their kitchen tables! Anyone can beat those fancy investment managers with their extensive training, huge research departments, and decades of experience. And if you spend all day watching your portfolio, it magically grows faster!

8) You know when to get in and out of the market. It’s not market timing if you know what you’re doing. When the market is down, it’s a bad market, so don’t buy then. Wait until the market goes back up before you make your purchases. You should toss out a detailed 20-year financial plan if your gut tells you. And by gut, of course, we mean CNBC, Fox News, or whatever you watched in the preceding 48 hours.

9) When the market is down, your funds are horrible, the managers incompetent, and the market is rigged. When your portfolio is up, it’s because of your brilliant mind for finance. You are investing for decades, but if your portfolio doesn’t go up every single quarter something is horribly wrong with your approach. Change everything you own when this happens.

10) All the good investments are reserved for the wealthy. You can only become rich by investing in complicated, non-transparent private placements or limited partnerships in oil, real estate, leasing, or something you cannot explain in less than three minutes. And it’s rude to ask how much these programs charge, that’s so gauche. On a related note, you should always buy penny stocks that you hear about through an email.

I know no one really wants to wreck their portfolio, but from my vantage point, a lot of our investment pains appear self-inflicted. I can help you avoid these ten mistakes and many, many others. Even more important than avoiding errors, together we can create a financial plan and investment program that will be tailored to your goals, rather than focusing on what the market might do this month or this year.

Professional advice. Comprehensive financial planning. Evidence-based investment management. Ongoing evaluation, monitoring, and adjustment. Those are our tools to help investors succeed. That doesn’t mean that there won’t be years when the market is down, but it does mean we will be better prepared and much less likely to make the mistakes which can make things worse.

Diversification and Regret

Posted On February 6, 2017 By Scott Stratton, CFP(R), CFA In Behavioral Finance, Portfolio Management / 1 Comment

Diversification is one of the key principles of portfolio management. It can reduce idiosyncratic risks of individual stocks or sectors and can give a smoother performance trajectory, or as financial analysts prefer to say, a “superior risk-adjusted return” over time. Everyone sees the wisdom of not putting all your eggs in one basket, but the reality is that diversification can sometimes be frustrating, too.

Being diversified means holding many different types of investments: stocks and bonds, domestic and international stocks, large cap and small cap, traditional and alternative assets. Not all of those assets are going to perform well at the same time. This leads to a behavioral phenomenon called Tracking Error Regret, which some investors may be feeling today.

When their portfolio lags a popular benchmark, such as the Dow Jones Industrials or the S&P 500, Investors often regret being diversified and think that they should get out of their poorly performing funds and concentrate in those funds which have done better. (Learn about the benchmarks we use here.)

It’s understandable to want to boost performance, but we have to remember that past performance is no guarantee of future results. Many people receive a snapshot from their 401(k) listing their available funds with columns showing annualized performance. Consider these two funds:

	3-year	5-year	10-year	Expense Ratio
S&P 500 ETF (SPY)	11.10%	13.55%	6.88%	0.10%
Emerging Markets ETF (VWO)	2.83%	-0.07%	2.24%	0.15%

Source: Morningstar, as of 2/06/2017

Looking at the performance, there is a clear hands-down winner, right? And if you have owned the Emerging Markets fund, wouldn’t you want to switch to the “better” fund?

These types of charts are so dangerous to investors because they reinforce Performance Chasing and for diversified investors, cause Tracking Error Regret. Instead of looking backwards at what worked over the past 10 years, let’s look at the Fundamentals, at how much these stocks cost today. The same two funds:

	Price/Earnings	Price/Book	Dividend Yield	Cash Flow Growth
S&P 500 ETF (SPY)	18.66	2.65	2.21%	0.33%
Emerging Markets ETF (VWO)	12.34	1.51	3.37%	5.09%

Source: Morningstar, as of 2/06/2017

Now this chart tells a very different story. Emerging Market Stocks (EM) cost about one-third less than US stocks, based on earnings or book value. EM has a 50% higher dividend yield and these companies are growing their cash flow by 5% a year, versus only 0.33% a year for US companies.

I look at the fundamentals when determining portfolio weightings, not past performance. If you only looked at the performance chart, you’d miss seeing that EM stocks are cheap today and US stocks are more expensive. That is no guarantee that EM will beat the S&P 500 over the next 12 months, but it is a pretty good reason to stay diversified and not think that today’s winners are bound to continue their streak forever.

Performance chasing often means buying something which has become expensive, frequently near the top. That’s why I almost never recommend sector funds or single country funds (think Biotech or Korea); the investment decision is too often based on recent performance and those types of funds tend to make us less diversified rather than more diversified.

Staying diversified means that you will own some positions which are not performing as well as others in your portfolio. When the S&P 500 is having a great year, a diversified portfolio often lags that benchmark. But, when the S&P 500 is down 37% like it was in 2008, you may be glad that you own some bonds and other assets.

We use broadly diversified ETFs and mutual funds, with a willingness to rebalance and buy those positions when they are down. We have a value bent to our weightings and are willing to own assets like Emerging Markets, even if they haven’t been among the top performers in recent years. Staying diversified and focusing on the long-term plan means that you have to ignore Tracking Error Regret and Performance Chasing. Just remember that you can’t drive a car forward by looking in the rear-view mirror.

Forget 2017, Think Longer

Posted On December 26, 2016 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

A few weeks ago, I brought my car to the dealership for some routine maintenance and they gave me a brand new 2017 model as a loaner for the day. As part of the car’s “infotainment system”, you could enter stock tickers and get price quotes right there on the screen of the car.

Aside from the obvious danger of distracted driving, does the outcome of my retirement plan actually hinge on having this information available 24-7? Will I be wealthier if make trades from my phone while stuck in rush-hour traffic?

Unfortunately, increasing our access to information does not guarantee we can use that information profitably. In fact, I believe that the more we focus on short-term issues, the more we endanger the long-term outcomes. Be careful of missing the forest for the trees.

The field of behavioral finance has identified many seemingly innate, but irrational, behaviors which can be hazardous to our wealth. The more information we have, the more frequently we are compelled to “do something” in terms of our investment allocation. Unfortunately, the more investors trade, the worse they do, on average, because of these behavioral tendencies.

Here are four behavioral patterns which can become a problem for all investors:

1) Overconfidence
The more information we have, the more strongly we believe that we can predict the outcome. Closely related is confirmation bias, which is where we place more weight on information which supports our existing point of view, and tend to ignore evidence which is contrary.

2) Disposition Effect
Many investors are willing to sell their winning trades but are very reluctant to sell their losing positions. “The loss isn’t real until you sell – it has to come back eventually!” What we should do is to ignore what we paid for a position and look objectively at how we expect it to perform going forward. If there are better opportunities elsewhere, we should not hold on to losers.

3) Home Bias
Investors prefer to invest in domestic companies, when left to their own devices. They miss the benefits of investing globally. See How a Benchmark Can Reduce Home Bias.

4) Naive Diversification
If a 401(k) plan offers five choices, many investors will simply put 20% into each of the five funds, regardless of category or their own risk tolerance. I’ve also seen portfolios that have multiple holdings in the same category, most often US Large Cap. When the market drops, having seven large cap funds will not offer any more defense than having one fund.

I mention these behavioral faults because you are inevitably going to see many articles over the next two weeks predicting what is likely to occur in the year ahead. Reading these is a waste of your time. The reality is that no one has a crystal ball and can predict the future.

Forecasters’ abilities to predict the stock market has been so poor and inconsistent, that if you actually look at a large number of past predictions, you will immediately recognize that their investment value is non-existent. There is often a great deal of group think and a Bullish bias from firms who get paid to manage investments. Others seem to be permanently Bearish, but still get press coverage in spite of being wrong for years at a time.

The good news is that you don’t have to know what 2017 has in store to accomplish your long-term goals. We need to think bigger than just one year at a time, so here’s a reminder of what we do:

Create a financial plan to lay out the steps to achieve your long-term goals.
Invest in a disciplined, diversified asset allocation based on your needs, risk tolerance, and risk capacity.
Pay attention to risks, taxes, and our returns.
Monitor, adjust, and rebalance to stay on course.

The more we allow short-term noise to dictate our long-term investment strategy, the greater risk we are to our own success. If your car offers stock quotes, may I suggest you instead set it to weather or sports? Your portfolio will thank you for it.

The 9 Profiles of Wealth

Posted On September 5, 2016 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

Based on interviews and surveys of nearly 900 families, Russ Alan Prince found that their attitudes toward investing could be broken into nine distinct psychological categories. These brief descriptions really do describe most of the investors I have met in my career. Just from looking at this list, do you identify with one of these types?

Here are the 9 Profiles of Wealth, in order of largest to smallest percentage of the study’s results.
1) Family Stewards (20.7% of the sample)
Successful investing allows them to provide for their family, relieve financial worry, and fulfill personal obligations.
2) Investment Phobics (17.0%)
Dislike discussing investments and dislike having to make investment decisions.
3) Independents (12.9%)
Investing provides personal freedom and eliminates worries. Not excited by investing, it’s a necessary evil.
4) The Anonymous (11.8%)
Prize confidentiality and privacy. Concerned about losing money, but view investments as crucial for personal comfort.
5) Moguls (10.1%)
Wealth is a way of keeping score, becoming influential and powerful.
6) VIPs (8.4%)
Successful investing results in prestige and being well known.
7) Accumulators (7.6%)
Solely focused on making money. A person can never be too rich.
8) Gamblers (6.0%)
Enjoy investing, it’s their passion and hobby. Derive pleasure from speculating.
9) Innovators (5.5%)
Investing is an intellectual challenge that requires staying up to date on new opportunities and the latest technologies.

Owning nice things – as a measure of affluence – tends to be most important to Accumulators, VIPs, and Independents. Family Stewards, Investment Phobics, and Gamblers are the least interested in material things and may even view spending as contrary to their goals. The other categories fall in the middle of consumption attitudes.

Most of these nine profiles are going to greatly appreciate the benefits of our financial planning program and wealth management services. Depending on your profile and risk tolerance, we can custom tailor your plan for you. Whatever your needs, you can expect:

Confidence. A plan designed to achieve your goals, which enables you to feel optimistic about your financial future.
Competence. Evidence-based analysis is the basis our financial planning steps and investment processes. We stay abreast of current regulations, research, and best practices. Our experience, knowledge, and professional insight are in service of your needs.
Caring. Clients come first. Our fiduciary promise is to do what is in your best interest. Your long-term success is our one and only mission.

Learn more about Our Financial Planning Services.

Do You Hate Saving Money?

Posted On July 25, 2016 By Scott Stratton, CFP(R), CFA In Behavioral Finance / 1 Comment

Take your medicine. Make some sacrifices. Prepare for a rainy day. Tighten your belt.

Does this describe how you feel about saving and investing? Is it some sort of cruel punishment? Do you begrudgingly invest just enough dollars to get the company match and say that you “have a 401k”? You’re not alone. A lot of Americans feel the same. We are a nation of spenders, not savers.

The US household savings rate was 5.057% for 2015, according to the latest data from the Organization for Economic Development and Co-operation. Compare this to other developed countries: 8.563% in Australia, 9.668% for Germany, or 20.130% for Switzerland. The savings rate is estimated to be over 25% in China.

While the “average” household savings rate is 5.057% in the US, that average consists of a small number of people who save a significant amount of their income, and the majority of Americans who are living from paycheck to paycheck and save exactly zero. According to one study, 62% of Americans don’t have the ability to cover an unexpected $500 bill today.

I wish I could change people’s attitudes about savings. For some, saving money means buying an $80 sweater when it’s on sale for $40. But that is still spending money, not saving! Saving is setting money aside and having it grow. When you view saving as a negative – a chore that keeps you from having fun – your attitude may be the biggest roadblock to your own prosperity.

Saving and investing is the path to financial independence. Even if you don’t want to retire, we should still aim for financial independence, so you can work because you want to and not because you have to. Saving isn’t just for retirement planning, it’s developing a plan for financial security to free you from worry.

How can we make saving easier? What steps make you more likely to succeed?

1) Put your saving on autopilot through automatic monthly contributions. Whether it is establishing an emergency fund, contributing to a 401(k) or IRA, or creating a 529 college savings plan, making it automatic is the way to go.

2) Set goals. If you don’t have a finish line – a target amount for your nest egg – it’s hard to feel any sense of urgency to saving. When I was 30, I knew where I wanted to be at 50, which also meant I could determine where I needed to be at 35, 40, and 45. Those specific goals have helped me stay on track through the years. Without long-term goals, short-term actions often lack direction and a clear purpose.

3) Think big, not small. How many times have you read that you can fund your IRA by giving up your daily coffee fix. Forget that! If you get the big decisions right, the small stuff takes care of itself. Instead, be very smart, calculating, and objective on just two things: housing and cars. Those are the biggest expenses for almost everyone, and we have tremendous discretion in choosing how much we spend on these two categories.

If you want to jump start your saving, take a close look at all your recurring monthly costs: insurance, utilities, cell phone, cable TV, and memberships. Comparison shop, look for savings, and drop items you don’t use or won’t miss.

4) Focus on maximum saving. There is an oft-repeated rule of thumb that you should save 10% of your income. I am guilty of saying this one, too, especially as a “realistic” goal for new savers. However, there is nothing magical about the number 10%, and there is no guarantee that if you start saving 10% today that you will have enough money to accomplish all your financial goals. Instead, try to contribute the maximum to your 401(k): $18,000 or $24,000 if over age 50. And if you are also eligible for an IRA, fund a Traditional, Roth, or Backdoor Roth IRA. If you have self-employment or 1099 income, you may also be eligible for a SEP-IRA.

If it helps you to increase your saving, then let’s calculate each need separately and contribute to:
– Employer retirement accounts
– IRAs
– Health Savings Accounts
– 529 College Savings Plans
– Term life insurance policy
– Taxable brokerage account
– Savings for a first or second home down payment

Regardless of whether the market is up or down in 2016, I will have done my part by funding my accounts and accumulating more shares of my funds and ETFs. Over time, the returns will average out, but I accept that I have absolutely zero control over what the market does this year. What I do have control over is how much I save, and that’s more important.

I know a lot of millionaires who were great savers and invested in generic, plain mutual funds. But I have yet to meet anyone who has turned $5,000 into a million through their brilliant investing. Investing decisions matter, but you are likely to reach your goals faster if you can figure out how to save 50% more rather than spending your time trying to increase your returns by 50%, because it is not possible over any meaningful measure of time.

I feel great about saving and you should, too. It is empowering to see planning pay off when you have been diligent and consistent about saving. There is a lot of uncertainty and fear right now, and even as the market makes new highs, investors are very wary. If you want to become wealthy, divorce your feelings about today’s market from your feelings about saving. If you’re serious about getting to your goals sooner than planned, save more today!

Boost Confidence, Improve Your Finances

Posted On April 18, 2016 By Admin In Behavioral Finance /

Which comes first, confidence or success? I believe that in most facets of life, confidence is a prerequisite for success. This is true whether you are a business executive, athlete, musician, teacher, or any other profession. Of course, there is a virtuous cycle where success reinforces confidence, but it has to begin with confidence in the first place.

Five Things To Do When The Market Is Down

Posted On February 15, 2016 By Admin In Behavioral Finance, Portfolio Management /

When the market is down, it hurts to look at your portfolio and see your account values dropping. And when we experience pain, we feel the need to do something. Unfortunately, the knee-jerk reaction to sell everything almost always ends up being the wrong move, a fact which although obvious in hindsight, is nevertheless a very tempting idea when we feel panicked.

Even when we know that market cycles are an inevitable part of being a long-term investor, it is still frustrating to just sit there and not do anything when we have a drop. What should you do when the market is down? Most of the time, the best answer is to do nothing. However, if you are looking for ways to capitalize on the current downturn, here are five things you can do today.

1) Put cash to work. The market is on sale, so if you have cash on the sidelines, I wouldn’t hesitate to make some purchases. Stick with high quality, low-cost ETFs or mutual funds, and avoid taking a flyer on individual stocks. If you’ve been waiting to fund your IRA contributions for 2015 or 2016, do it now. Continue to dollar cost average in your 401k or other automatic investment account.

2) If you are fully invested, rebalance now; sell some of your fixed income and use the proceeds to buy more stocks to get back to your target asset allocation. Of course, most investors who do it themselves don’t have a target allocation, which is their first mistake. If you don’t have a pre-determined asset allocation, now is a good time to diversify.

3) Harvest losses. In your taxable account, look for positions with losses and exchange those for a different ETF in the same category. For example, if you have a loss on a small cap mutual fund, you could sell it to harvest the loss, and immediately replace it with a different small cap ETF or fund.

By doing an immediate swap, you maintain your overall allocation and remain invested for any subsequent rally. The loss you generate can be used to offset any capital gains distributions that may occur later in the year. If the realized losses exceed your gains for the year, you can apply $3,000 of the losses against ordinary income, and the remaining unused losses will carry forward to future years indefinitely. My favorite thing about harvesting losses: being able to use long-term losses (taxed at 15%) to offset short-term gains (taxed as ordinary income, which could be as high as 43.4%).

4) Trade your under-performing, high expense mutual funds for a low cost ETF. This is a great time to clean up your portfolio. I often see individual investors who have 8, 10, or more different mutual funds, but when we look at them, they’re all US large cap funds. That’s not diversification, that’s being a fund collector! While you are getting rid of the dogs in your portfolio, make sure you are going into a truly diversified, global allocation.

5) Roth Conversion. If positions in your IRA are down significantly, and you plan to hold on to them, consider converting those assets to a Roth IRA. That means paying tax on the conversion amount today, but once in the Roth, all future growth and distributions will be tax-free. For example, if you had $10,000 invested in a stock, and it has dropped to $6,000, you could convert the IRA position to a Roth, pay taxes on the $6,000, and then it will be in a tax-free account.

Before making a Roth Conversion, talk with your financial planner and CPA to make sure you understand all the tax ramifications that will apply to your individual situation. I am not necessarily recommending everyone do a Roth Conversion, but if you want to do one, the best time is when the market is down.

What many investors say to me is that they don’t want to do anything right now, because if they hold on, those positions might come back. If they don’t sell, the loss isn’t real. This is a cognitive trap, called “loss aversion”. Investors are much more willing to sell stocks that have a gain than stocks that are at a loss. And unfortunately, this mindset can prevent investors from efficiently managing their assets.

Hopefully, now, you will realize that there are ways to help your portfolio when the market is down, through putting cash to work, rebalancing, harvesting losses for tax purposes, upgrading your funds to low-cost ETFs, or doing a Roth Conversion. Remember that market volatility creates opportunities. It may be painful to see losses today, but experiencing the ups and downs of the market cycle is an inevitable part of being a long-term investor.

The Investor and Market Fluctuations

Posted On January 18, 2016 By Admin In Behavioral Finance, Portfolio Management /

In 1934, Benjamin Graham first published his treatise “The Intelligent Investor”. Graham is considered by many to be the father of Value Investing and was a teacher of Warren Buffett. He wrote about the difference between investing and speculating, and devoted a whole chapter to “The Investor and Market Fluctuations.” I can do no better than to share this excerpt and to note that his advice is as true today as it was 80 years ago.

“The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high prices at which he certainly should refrain from buying and probably would be wise to sell.

It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks…

Aside from forecasting the movements of the general market, much effort and ability are directed on Wall Street toward selecting stocks or industrial groups that in matter of price will “do better” than the rest over a fairly short period in the future. Logical as this endeavor may seem, we do not believe it is suited to the needs or temperament of the true investor… As in all other activities that emphasize price movements first and underlying values second, the work of many intelligent minds constantly engaged in this field tends to be self-neutralizing and self-defeating over the years.

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances.”*

As much as markets have changed over the past century, what has not changed is human nature. That’s why Graham’s advice to never sell a stock just because it has gone down remains so relevant today. Be an investor and not a speculator; don’t think that you can predict what stock prices are going to do next. If you’re in it for the long-term, use market volatility as an opportunity to put money to work.

*The Intelligent Investor, Benjamin Graham, `Revised Edition, 2006, pp. 205-206.

The Psychology of Volatility

Posted On January 11, 2016 By Admin In Behavioral Finance /

We’ve had a rough start to 2016, with stocks dropping across the board. Today, we are within a couple of percentage points of retesting the lows of last August. You can’t pick up a newspaper or tune into a business show on TV without being bombarded with the “reasons” why the market is down.

The key to success for investors, I would argue, is not in understanding the economy, interest rates, or corporate earnings. Rather, it is knowing what to do in volatile times.

There are two types of losses: a temporary drop and a permanent loss. Enron was a permanent loss. Single securities (stocks or bonds) can go to zero, and this does happen from time to time, especially in high risk situations. However, if you are investing in a diversified fund, such as the Russell 1000 Index ETF, the impact of a single stock going bankrupt is very, very small.

Volatility is the reality that security prices do not move up in a straight line, but fluctuate up and down over the short to medium term. The challenge is that it is difficult for our brain to distinguish between a temporary drop (market volatility) and a permanent loss.

The anxiety from a loss can cause not just emotional stress, but actually trigger a physical response in our body chemistry. The evolutionary response to danger is to flee, which for investors, means the strong urge to get out of the market, protect our capital, and stop the pain we are experiencing.

Unfortunately, selling during a period of market volatility has the tragic consequence of turning a temporary drop into a permanent loss. Most investors under perform the overall market precisely because they sell during times of stress. It is essential to recognize that market volatility is just a temporary drop for a long-term investor and be willing to stay the course during these periods.

Here’s how we can use this behavioral understanding to our benefit:

1) Many investors would say that the past 15 years have been horrible in the stock market. The reality is not so bad; if you had invested in the S&P 500 Index ETF (SPY), you would have had a 4.97% annualized return over this period. That equates to a 107% total return, a little more than a double. That’s better than most would assume, because the agony of the losses we’ve experienced is much more intense and memorable than the gains we have actually received. This phenomenon is called loss aversion.

2) If we reframe market volatility as “opportunity” rather than “danger”, then we can profit by being willing to buy when the market is down. People love buying their holiday presents when stores have a 20% sale, but when the market drops 20%, no one wants to invest. If you view a drop as a great chance to buy stocks on sale, then you will realize that the past 15 years have given investors incredible opportunities to profit. And while we shouldn’t try to time the market, we can dollar cost average by making regular contributions to our accounts to take advantage of volatility.

3) We have each client complete a risk tolerance questionnaire before investing. Our goal is to choose an asset allocation which we can stick with, through the inevitable ups and downs that will follow. It’s easy to be aggressive when the market is moving up, but it’s better to invest with an understanding of how you will feel when the market does have a correction.

4) Many investors will create a long-term investment strategy and then proceed to evaluate their portfolio performance on a very frequent basis, such as monthly, daily, or even hourly. The more often you look at your portfolio, the more often you will be tempted by the thought of “Don’t just sit there, do something!” This is where we have to recognize that the emotional, physical urge to react is at odds with the rational process of sticking to a plan. If you want to act in a long-term manner, you cannot think in terms of short-term results. For many of us, it is better to look at your accounts less often, rather than more often.

No matter what you’re feeling about the current market volatility, remember that I am just a phone call away and happy to listen to your concerns, talk strategy, and share the opportunities available in today’s market.

Data from Morningstar, as of 12/31/2015