Shocked by the Market’s Drop? Chalk it Up to Recency Bias

Whether you realize it or not, chances are good that you are prone to something called Recency Bias, which is the common tendency to think that what has been happening recently will continue to happen in the near future.

If you, like many investors, are shocked and concerned about February’s sudden market volatility, it’s probably a result of Recency Bias. The last 18 months of smooth sailing without market volatility got many investors lulled into thinking that that trend would continue indefinitely.

We all know that markets experience volatility and, until 18 months ago, it was considered reasonably normal, but no one likes the thought of taking a loss. It’s hard not to panic if your oldest child is in college and her 529 just took a hit or if you’re a year away from retirement and your IRA just lost 15% of it’s paper value.

Although you no doubt know that impulsive trading is one of the least efficient ways to reach your true long-term investment potential, emotions are powerful drivers. In fact, in Robert Shiller’s book “Irrational Exuberance,” he states that the emotional state of investors “is no doubt one of the most important factors causing the bull market” we just recently experienced.

The chart below shows that investor sentiment dropped 30% in the beginning of the year, suggesting that investors’ overall attitude may have been veering from bullish to bearish, although it did bounce back this week.  What it also suggests is that Recency Bias caused investors’ to react more strongly to typical market volatility because it was a-typical during the long period of calm we just experienced.

The key in times of volatility is to keep your eye on your long-term goals rather than reacting impulsively to temporary trends. In Taking The Sting Out Of Investment Loss, Brian Boch advises: “The golden rule is to differentiate between [decisions] based on rational and prudent trading strategies on the one hand and emotionally-based, panicky decisions on the other. The former generally leads to success over time, while the latter tends to lead to failure.”

Here at Sherman Wealth Management we believe there is productivity and security in planning for the unknown by defining what it is you already do know. Knowing yourself, your emotions, and the risk you are willing to take is the first step. The second is creating a long-term financial plan with a conflict-free, Fiduciary advisor.

In a recent post, Ben Carlson wrote:

“The prep time for a market correction or crash comes well before it actually happens by:

  • Setting realistic expectations.
  • Mapping out a course of attack for when losses occur.
  • Making decisions ahead of time about what moves (if any) to make and when depending on what happens.
  • Deciding on the correct level of risk to be taken.
  • Building behaviorally-aware portfolios.”

The best solution to financial and emotional volatility is to work with a financial planner on a plan that will make you feel comfortable through the market’s natural ups and downs. You may not be able to control outside factors but you can control your reactions by recognizing how bias works and by preparing both emotionally and financially to reach the long-term goals that matter to you.

And, as always, if you’d like to review your plan and how your allocations conform to your own risk tolerance and response to volatility, please let me know and we’ll schedule a call.

The Problem with “Buy Low, Sell High” Advice

Buy Low Sell High

Of the many common sayings in the finance industry, the most popular is undoubtedly “buy low and sell high.” While it sounds simple enough, it’s actually significantly more complex than it seems.

Not Following the Herd

Buying low comes from an investment philosophy known as value investing. The basic concept of value investing is to buy investment instruments when they are “on sale.” That means buying when everyone else is selling (and prices are down) and vice versa. A bargain-hunting value investor looks for what they consider to be healthy companies that are – for whatever reason – severely undervalued. A smart value investor buys low, then patiently waits for the “herd” to catch up. Unfortunately, most investors tend to do the exact opposite. We tend to chase trends and follow the herd. (For more, see: Don’t Let Emotions Hinder Your Investing Goals.)

Sounds Easy. So Why is it Hard?

A huge part of smart investing is psychological and this chart illustrates of one of the many psychological roadblocks we have as investors.

We may want to buy low and sell high, but that goes against our instincts and biases. When a stock is falling, we dump it. When a stock is rising, we buy it. We sell a company when the price is falling because we are afraid of losing more money; we buy a stock when it is rising because we have a fear of missing out. To compound the problem, most investors are not experts at realizing when something high or low “enough.”

At times, investing can feel like quicksand: the more you do and the harder you try, the more you sink. It requires effort to overcome the psychological biases that often prevent us from acting in our own best interest. It is human nature, for instance, to continue to make the same mistake over and over again, or to not let go of stocks when we should through either familiarity bias or disposition effect.

Goals and Risk Tolerance

So what can you do to avoid to avoid the pitfalls of trying to buy low and sell high?

  1. Understand your goals and risk tolerance: before you get started investing, it is critically important to understand what it is you are trying to accomplish and how much risk you are comfortable taking. Once you have that figured out, you can create an investment plan that is appropriate for you and comfortable enough to keep you from impulse buying high and panic selling low.
  2. Avoid market timing: instead of trying to time investments perfectly and squeeze every last cent out of each one, focus on building a diversified portfolio of stocks and bonds that give you the greatest chance to succeed over the long term.
  3. Leverage your resources: having a great financial plan and a diversified portfolio is irrelevant if you don’t follow through and stick to it. Becoming self-aware of the pitfalls is a great first step. Having a good financial advisor is a good step too. Just make sure that they are a fee-only fiduciary, so that they have your best interests in mind at all times.

Think about it: if it were easy – if everyone bought low and sold high – there would be no high or low because the market prices would be continually correcting. Bargains do exist and sometimes the wisest choice is to lock in earnings. The safest financial plan for the long run, however, is to understand your goals and risk tolerance, then work to create an investment plan that builds on gains over the long term, rather than continually outguess the market.

(For more, see: Which Investor Personality Best Describes You?)

This article was originally published on Investopedia.com

***

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions, please Contact Us.

Election Volatility Had You Spooked? Think of Your Goals

election volatility

Were you keeping an anxious eye on your investment accounts leading up to last nights’ election? Are you relieved they seem to be climbing again?

In spite of the plunge in the futures market last night as it became apparent that Donald Trump would beat favored Hillary Clinton to become America’s 45th President, much of the market has now climbed back even higher than it was yesterday and are close to their all time highs.

That’s important to note for several reasons.

As our friend Josh Brown put it, “it starts with understanding why you’re investing in the first place—a detailed financial plan with hard objectives and goals.” To do that, we work with our clients to focus on short-, medium- and long-term goals so that you can understand what your time frame is and what is needed to achieve it.

The short-term nature of much of the volatility that characterizes the markets is exactly why dollar-cost averaging is such a smart way to invest. If you stick to a plan of investing in new shares on a regular basis—no matter what the current cost is—you will be buying during dips as well as peaks.

The volatility we’re experiencing now—similar to the volatility we experienced earlier in the year during “brexit“—are also great litmus tests to determine whether you have a properly diversified portfolio and whether or not it’s an accurate match for your risk tolerance.

If you know your true risk tolerance and have already planned effectively, you’ll have a balanced portfolio that contains the right balance of stocks and other less volatile instruments before volatility sets in. With a fully diversified asset allocation strategy, there will be parts of your portfolio that go up, as well as other parts that go down, during times of stress. That way you’ll be comfortable sticking to your investment strategy and plan through peaks and dips. Not only that, but you will have purchased those less volatile instruments before pundits start shouting and everyone starts panic-purchasing, driving the costs up. (For more from Brad Sherman, see: Don’t Let Emotions Hinder Your Investing Goals.)

Volatility is what makes the stock market the stock market.

The one thing that is certain about the markets is that there will always be volatility and uncertainty.

Even if we are currently experiencing a bit more than just normal market volatility, remember that the markets have historically rebounded extremely well after corrections (drops of at least 10%).

If current market conditions or any paper losses you may be experiencing are making you feel uncomfortable—or keeping you up at night—please give me a call and let’s talk about re-allocating your assets

If not, just remember that dollar-cost averaging is a great long term strategy for your investments.

 

This article was originally published on Investopedia.com

***

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Why Playing It Safe Could Hurt Your Retirement

playing it safe

A new survey from Bankrate indicates that many Americans hold quite a low view of the stock market. In answering what was the best way to invest money unneeded for at least 10 years, real estate (25%) and cash (23%) took the top spots, followed by the stock market and gold (16% each) in a tie for third. This comes on the heels of Bank of America finding that cash levels in portfolios are at their highest since November 2001.

In a time of volatility in the market, many Americans, particularly those who are young and/or without a huge amount of money to invest, are hesitant. They prefer the certainty of a house or even cash under the mattress to the unpredictability and seeming inaccessibility of the public markets. On the surface, this seems like the safer option, and we understand why many people feel this way. Loss aversion is countered by having a tangible stack of cash that will always be there.

Unfortunately, it’s wrong and can be dangerous in the long term.

What many cash-focused savers don’t realize is that because of inflation, the value of cash fluctuates over time—just like a stock. As Alex Gurevich, CIO of HonTE Investments, points out, that means that cash is subject to bubbles similar to tech in 2000 or the mortgage crisis. Moreover, saving only cash eliminates access to the market’s long-term returns; $10,000 invested in the S&P 500 in 1980 would yield $166,600 at year-end 2015, adjusted for inflation. Even with the ups and downs, in the long run the stock market remains the best place to invest for retirement. (For related reading, see: Why Investors Can Be Their Own Worst Enemy)

Saving cash is still important for short-term emergency funds. But if simply stockpiling cash is your long-term plan for retirement, you probably have no shot unless you’re very wealthy.

Many people may avoid the stock market out of a fear of the bad days when the market tumbles. Some people panic when the market dips (for example, in the event of a major world event like Brexit) and sell most or even all of their stock. Besides the fallacy of panic-selling at play here (you’d be selling low rather than buying low and selling high), by withdrawing from the stock market you miss out on the good days as the price of shielding yourself from the bad. Reporter Spencer Jakab points out in the Wall Street Journal that a couple good days a year produce the entire year’s returns, on average. (For related reading, see: Behavioral Finance: 8 Common Investor Biases That Impact Investment Decisions)

“Investors sit out on some really good days by trying to avoid bad ones,” Jakab writes. “Nearly all of those happen around scary episodes such as October 1929, October 1987 and in 2008 following the collapse of Lehman Brothers. Pretend, for example, that you took your money out of the market following the choppiest episodes over the last 20 years and wound up missing the epic rebounds that made up the 40 best days. You actually would lose money.”

The stock market can be threatening and, sometimes, punishing. But the solution isn’t total withdrawal; on the contrary, find an advisor you trust and create a plan that makes you more comfortable about investing. As Ben Carlson writes, “The alternative for stepping out into the unknown is the known of never building your wealth.”

This article was originally published on Investopedia.com

***

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Don’t Expect to Win With Actively Managed Funds

actively managed

This article was originally published on NerdWallet.com

Trying to pick individual stocks is a losing game, and this doesn’t just apply to individual investors. It’s also true for professionally run, actively managed mutual funds.

Actively managed funds are tasked with picking a collection of stocks and bonds that will outperform market indices, or benchmarks, such as the S&P 500 or the Dow. They’re armed with Ph.D. analysts, hundreds of interns, and tools and research to which very few of us have access — but they can’t consistently beat their benchmarks by enough to justify their costs.

Long-term underperformance

Eighty-six percent of actively managed funds failed to beat their benchmarks in 2014, according to the S&P Dow Jones Indices scorecard. “So what?” you may say, “That’s only one year.” But 89% of funds failed to beat their benchmarks during the past five years; 82% failed to do so during the last decade.

The following data help illustrate how unlikely it is for active managers to beat the market over longer periods. During a one-year period, a high percentage of active managers in some categories may outperform their benchmarks. But over five- and 10-year periods, fewer active managers outperform.

Percentage of Actively Managed Funds That Outperform Benchmarks

1 YEAR 5 YEARS 10 YEARS
Source: 2015 Morningstar data
Large-cap value 36.5 19.6 33.7
Large-cap core 28.7 16.7 16.6
Large-cap growth 49.3 11.9 12.2
Mid-cap value 53.5 22.7 42.3
Mid-cap core 42.1 27.7 11.0
Mid-cap growth 41.6 26.0 32.4
Small-cap value 66.7 38.0 38.3
Small-cap core 44.7 32.8 23.1
Small-cap growth 22.2 20.5 23.1

Some managers do outperform the market, but picking a winning manager is as tricky as picking winning stocks. If you still think you can find “a good manager” who is the exception, consider this widely accepted Wall Street rule of thumb: Past performance doesn’t guarantee future performance. A manager who outperformed last year may not do it again this year.

Reasons for underperformance

There are a few main reasons actively managed funds underperform, aside from picking the wrong investments:

FEES

Many actively managed funds charge 1% to 2% per year in management fees, while a passively managed exchange-traded fund could charge as little as 0.1% to 0.2% per year. And many actively managed mutual funds are loaded funds, which means you’ll pay a sales charge, typically between 4% to 8% of your investment, when you buy or sell the fund — though the fee may decrease the longer you stay invested. Compounded over time, these higher fees can eat up a lot of gain, reducing overall returns.

TAXES

Because actively managed funds try to time the market and pick winners, they buy and sell positions frequently. These transaction costs reduce the fund’s returns, and all the buying and selling can also create taxable gain. Fund managers have no incentive to avoid this because they simply pass those taxable gains on to you, the shareholder.

MARKET EFFICIENCY

Some argue that markets are becoming more efficient, making it difficult to identify overvalued or undervalued stocks. The efficient market hypothesis states that stocks are constantly adjusting to news and information, and thus their share prices reflect their “fair value.” In simpler language, other than in the very short term, there are no undervalued stocks to buy or inflated stocks to sell. This makes it virtually impossible to outperform the market through individual stock selection and market timing.

An unsustainable approach

Whether active management can outperform is a controversial topic. Many experts dismiss the science and say that they can indeed beat the market. Some of them may even do so for a year or two, or even five, but what about over the long run? It’s simply not sustainable, and to think otherwise is dangerous.

If the data shows that the vast majority of the brightest and most well-equipped professional investors can’t beat their benchmarks, why should you believe anyone who says they can?

This story also appears on Nasdaq.

***

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

When A Storm Hits Are Investors Still Gluten-Free?

Empty Shelves

More snow coming?

Get ready for Instagrams and TV reports about empty bread shelves!

Here’s one from my local store before the blizzard a couple of weeks ago:

BreadShelvesNo matter how many people have resolved to stick to a gluten-free diet, that gluten seems much more appealing when a storm is on the horizon and gluten-free bread may get harder to find.

The same thing happens to investors. When the market is stormy, anxious investors often disregard their financial plans and start switching to what they perceive as “staples,’ sometimes at surge prices.

The trick with smart investing, as well smart shopping, is to make sure you’ve got enough of what you need – and want – before the storm hits, not during a run on the shelves. If you’re gluten-free, that means having a pantry already stocked with gluten-free pasta and a gluten-free loaf of bread in the freezer – not to mention beans, rice and tomato sauce – to tide you through the blizzard. It also means sticking to what you know has made sense for you in the past and realizing that two days without bread is not the end of the world – the bread will return to the shelves once the storm has passed.

Likewise, if you know your risk tolerance and have already planned effectively, you’ll have a balanced portfolio that contains the right balance of stocks and other less volatile instruments before a storm hits. With a fully diversified asset allocation strategy, there will be parts of your portfolio that go up, as well as other parts that go down, during times of stress. That way you’ll be comfortable sticking to your investment strategy and plan when the market is stormy. Plus, you’ll have purchased those less volatile instruments before pundits start shouting and everyone starts panic-purchasing.

A good financial advisor will help you build a portfolio strategy that truly for reflects your risk tolerance and, importantly, helps you understand exactly where the risk is in your portfolio. Your advisor will help you understand if, when and why to own bonds, Munis, Treasuries, and CDs, and how much of a cash component makes sense for your particular situation and need for liquidity.

The volatility we’re experiencing, current geopolitical uncertainty (like Japanese negative interest rates), and Federal Reserve uncertainty are all great litmus tests to determine whether you have a properly diversified portfolio and whether or not it’s an accurate match for your true risk tolerance.  If current market conditions or any paper losses you may be experiencing make you feel uncomfortable – or keeps you up at night – it’s likely that your investment strategy does not match your actual risk tolerance and needs to be re-balanced.

If, however, you’ve worked with your financial advisor and are comfortable with where you, then you’re best bet is probably to ignore the noise, ignore the panicking pundits, and stick to your saving and investing plan. Remember, if your investments made sense to you a couple of weeks ago, they probably continue to make sense for you, even during market volatility.

Just like a diversified pantry will help you stick to your nutritional goals when there’s a run on the supermarket, a good fee-only financial advisor can help you create a portfolio that is truly diversified, risk appropriate, and with the exact amount of liquidity that makes sense for your long-term goals, so you can sit back and weather the storm with confidence.

Photo Source: Reuters/Shannon Stapleton

***

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

My Response To a Millennial’s Open Letter To CNBC

84e07cac-3dcd-4106-9f25-402b305db2bc

After the markets took an incredibly volatile ride on August 24th, zerohedge.com published this letter to CNBC from a millennial named Ryan, who wrote:

“I’ve dipped my toes in the stock market this past year but after today’s action, I have to say I’m done. Forever. Gone. Don’t count on another dime of mine in the market.”

Ryan isn’t alone. A surprising 74% of Millennials surveyed said they do not own stocks. And that’s unfortunate for Ryan and his fellow GenY-ers.

Ryan’s letter is worth a read – and he’s makes a couple of good points – but he’s also misses a very important point: none of this should really matter to a Millennial.

Here’s why.

“I’m sure countless little guys had their stocks absolutely steamrolled this morning only to see the big guys scoop up the shares on a discount.”  

There is obviously a wide range of ways to experience the market: as a small investor, as a large investor, and as a robot.  Are other people going to do better than you sometimes? Sure. They’re also going to do better than you at sudoko, finding parking spaces, and – unfortunately in my case – Fantasy Football as well. But that shouldn’t matter to you, and shouldn’t keep you from investing in your own financial independence.

The stock market is volatile and, sure, some investors may make impressive bets while others experience much too impressive losses (all investing involves risk, including the risk of the loss of principal.) But, historically, the S&P 500 averaged a 7-8% return (after inflation)* each year and that’s value you’re missing out on if you’re not invested.

 “The only “people” who can react to those pricing distortions in real time are computers. This isn’t a place for small time people like me.”

Nothing beats human guidance and judgment to prevent panic selling or override a previous decision when a drop in a price is anomalous and not due to a fundamental loss in value. Having a plan and sticking to it is usually the best approach and there are great Financial Advisors ready to help you or sharing their insight on the web.

“The only reasonable thing that any little guy can do is sit back and say, “Wow there is a lot of distortion going on and I can’t even guess at these prices.”

Investing shouldn’t be guesswork and doesn’t have to be. A good financial advisor – or your own research – can help you select a diversified group of financial instruments tailored to your own financial goals and risk tolerance. With that in place, along with a well-thought-out plan for steady saving and investing, market price fluctuations should not disrupt your plan. If you’ve got a solid financial plan, investing in the stock market does not affect your ability to pay your rent, take care of yourself or your family, or add to that rainy day emergency fund.

I hope you reconsider, Ryan.

As Millennials, we’re in it for the long haul, we have years of disciplined savings ahead of us with interest that will continue to compound if we avoid reacting emotionally to the markets.

Once the uneasiness of August 24th has worn off (and much of that day’s paper losses have already been recovered,) I hope you and the millions of Millennials who are not yet investing, take advantage of the opportunity to invest while you are young, to maximize your options for reaching your own financial goals, whatever they may be.

 

LFS-1307532-092215 

*http://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

Straight Talk about Volatility and Compound Interest – the Snowball Effect

84e07cac-3dcd-4106-9f25-402b305db2bc

Compound interest is, simply put, the interest you earn on the sum of both your initial investment and the interest that investment has already earned.

Why is it important? Because your two potential advantages when it comes to maximizing potential earnings over time are:

  • The power of compound interest
  • Investing regularly through market highs and lows

Let’s break this dynamic duo down:

 

The Power of Compounding

 

Compound interest is often compared to a snowball. If a 2-inch snowball starts rolling, it picks up more snow, enough to cover its tiny circumference. As it keeps rolling, its surface grows, so it picks up more snow with each revolution.

If you invest $1000 in a fund that pays 8% annual interest compounded yearly, in 10 years you’ll have $2158.93, in 20 years that will be $4660.96, in 30 years it will be $10,062.66, and in 40 years it will be $21,724.52. All it takes is patience to turn $1000 – the price of one ski weekend – into $21,724.52.

That’s why it’s so important to start saving early.

chart25

The above chart is hypothetical and assumes an 8% rate of return compounded annually. It is for illustrative purposes only and is not indicative of the performance of any specific investment.   Investment return and principal values will fluctuate so that your investment when redeemed may be worth more or less than its original cost. Rates of return do not include fees and charges, which are inherent to other investment products. Past performance is no guarantee of future results.

 

Volatility – Market Highs and Lows

 

But what happens if the market dips and your investment loses value?

Volatility – when market value fluctuates up and down – can be an opportunity for disciplined savers who contribute regularly to their investments, regardless of share price. When prices are low, you’re able to buy more shares. When prices are high you’re able to buy fewer shares for the same amount but those shares earn more interest, which is called Dollar Cost Averaging (Dollar cost averaging does not protect against a loss in declining markets. Since such a plan involves continuous investments in securities regardless of the fluctuating price levels, the investor should consider his or her financial ability to continue such purchases through period of low price levels.)

Imagine that snowball again, rolling down a hill, acquiring more and more snow as it goes. What happens when it hits a bare patch with no snow? Often it picks up rocks and pebbles, which add even more surface volume. So, when it hits the snow again, it picks up even more because it’s larger.

That’s how compound interest, coupled with regular investments, may work too: the “rough patches” produce more volume, which then allows you to acquire more compounded interest. So if you buy more shares during a dip, when the market recovers you could hypothetically not only earn compound interest on more shares, you earn more interest. So long as the price of your particular investment recovers, of course.

As Josh Brown points out in his recent blog post about Warren Buffett and David Tepper, both these legendary investors have gotten to where they are today because they’ve successfully ridden out volatility. In 1998 Warren Buffets own Berkshire Hathaway’s “A” shares had dropped in price from approximately $80,000 to $59,000 but Buffet didn’t sell. Those shares just hit a high of $229,000 this year.

If you see volatility – like what we experienced in August – as a tool and keep contributing regularly to your investments, you’ll potentially maximize the effect of compounded interest and watch your investments snowball over time!

 

LFS-1174145-041515

 

******

 

Additional Reading:

http://awealthofcommonsense.com/did-investors-just-experience-the-best-risk-adjusted-returns-ever/

http://www.bls.gov/data/inflation_calculator.htm

http://www.moneychimp.com/features/market_cagr.htm

http://investor.gov/tools/calculators/compound-interest-calculator

Millennials – Time to Wake Up and Smell the Stock Market

Smell the Stock Market

On Monday, as things were heating up a bit, Cullen Roche tweeted “The stock market is the only market where things go on sale and all the customers run out of the store…”

The problem is, many Millennials weren’t even in the store.

Only 26 percent of people under age 30 own stocks, according to a CNBC story that same day. That means that, while not panicking, most Millennials may have been missing one of the biggest potential opportunities of the past 10 years.

Why Aren’t Millennials Investing?

There are many theories –from Millennials being shell-shocked by experiencing their families’ anxiety in 2008, to YOLO, the feeling that it’s better to spend and enjoy the money now because who knows what the future may bring. The problem is that the future is likely to bring a whole lot fewer opportunities if you haven’t planned properly!

Are You Even Beating Inflation?

Let’s say hypothetically that the stock market may rebound by 5%… Simple, common sense math shows that keeping your money in the bank at .05% interest means it would take you 100 years to make the same amount of money that investing it now could. And the cash you are saving under the mattress or in one of your vintage vinyl sleeves? That money is just losing value every second you leave it there, as the cost of blankets and concert tickets continues to climb with inflation.

Risk, Volatility, and Paper Losses

It’s important to know the difference between risk and volatility and many people get it wrong.

Volatility – stock prices moving up and down – is a normal part of the stock market and an opportunity for a disciplined saver to buy when the market is both up and down. When you have a solid plan in place you can capitalize on market price dislocations, like what happened this week. Risk is how likely you are to lose it all and it’s important to remember – while everyone has their own risk tolerance – price corrections and market volatility does not necessarily mean you are going to lose it all. As the chart below borrowed from The Irrelevant Investor’s excellent post on staying the course shows, the stock market has historically climbed in spite of dips. And paper losses are just that: it’s not real loss if you don’t sell.

stock market drops

As this chart by Deutsche Bank’s Torsten Slok shows, in spite of other times of great volatility, markets have always recovered. It’s just a question of timing.

 

torsten

Millennials: This is Your Wake-up Call

When I speak to fellow Millennials, they say that the real reasons they don’t invest are that 1) it’s daunting to get started and 2) they don’t know where to get help. The big companies aren’t interested in smaller investors with less than 250-500K and the robo solutions don’t understand what makes each smaller investor’s situation unique. There’s a whole new breed of financial advisors, however, who combine personalized service with targeted tech solutions for smaller investors. So no excuses – there are financial pros ready help you create an investment strategy that makes sense for your personal goals and financial situation. And volatility doesn’t disrupt what we do!

The Bottom Line

If you’ve got a solid financial plan, investing in the stock market does not affect your ability to pay your rent, take care of yourself or your family, or add to that rainy day emergency fund. The money you’re saving and investing is money that you’ve determined you don’t need now, it’s money you have set aside for the long haul. Assuming your planner has planned correctly, you’re not going to miss your car payment because the Chinese stock market is crashing.

And that huge correction that scared you in 2008? It eventually rebounded and the market continued to climb. As a Millennial you’ve got years on your side if you start investing now. And you’re losing the potential for growth and compounded interest every moment you wait.

Baron Rothschild, of the Rothschild banking family, is credited with saying “The time to buy is when there’s blood in the streets.”

Look around. If you’re not investing yet, this might just be the time to start.

 

 

LFS-1283981-082715