Investing Archives

Money Mistakes You Might Make in a Recession

It’s very common to make mistakes when it comes to your finances and managing your money. We read a Wall Street Journal article discussing the biggest money mistakes people tend to make during an economic downturn and we want to bring light to a few of them and talk about ways to avoid them.

By reading and addressing financial mistakes people make, hopefully you can avoid them in the future. Below we will discuss some common financial mistakes people often times make.

Refusing to Tap the Emergency Fund
Avoiding Credit Score
Avoiding Savings For Retirement
Ignoring Money Conversations

As mentioned above, an economic recession is the perfect opportunity to take a step back and discuss and organize your finances. Saving for the future, talking to someone about your investments, and organizing your portfolio are all smart moves when setting yourself up for financial success and the ability to navigate an economic recession. If you have any questions or want to talk about your personal finances, please reach out to us at info@shermanwealth.com. To read some of our other blogs, check it out here!

Top 5 Pieces of Financial Advice

As we are all adjusting to the new norm that the coronavirus pandemic has created in our world, we are also learning pieces of advice that we could share from this experience. When going through an economic crisis, it’s important to keep some tips at top-of-mind to help you navigate the bumpy waters. In a CNBC Select Article, we found 5 great pieces of financial advice that we want to share with you to put in your financial repertoire.

First and foremost, try not to accumulate credit card debt. Racking up credit card debt can have very negative long term consequences, so it’s important that you pay the full balance on time. When you do not pay the full balance on time, your card will quickly accumulate interest, which often can get so high that it’s hard to pay off.

According to recent Federal Reserve data released in September, the average interest rate for all credit card accounts is 14.87%. Among accounts assessed interest, or accounts with outstanding finance charges, the average interest rate rises to 16.88%. But for consumers with credit scores below 670, interest rates can near 30%, CNBC Select reports.

Next, make sure you don’t buy things you can’t afford. Although this one seems obvious, it’s much more common than you think. Avoid overspending and spending on things you can live without. Start putting that extra money into savings accounts where you can be accruing interest and earning money.

Third, invest the year’s expenses or anything saved after you have the year’s expenses saved? Before the pandemic, many people were saying how you should have several months of rent and expenses in a savings account for a rainy day, but as we have seen the economic hardships the coronavirus has inflicted upon our society, we are suggesting to save about a year’s worth of expenses before investing it elsewhere.

Fourth, start to think like a savvy businessman or woman. Learn to negotiate. Especially in the world we are living in today, make sure you are constantly looking for deals and inquiring about credit card versus cash options. Oftentimes, places will charge you less if you pay in cash. So, before swiping that card, make sure you think about all your options.

Lastly, buy in bulk. With Amazon becoming increasingly popular and making it possible to get what you need in a matter of hours, take advantage of deals and places you can buy in bulk. If you can save a few dollars here and there, take advantage of it. It’s important to be a smart shopper, especially when buying something pricey, such as groceries for a large family.

By implementing some of these basic money management tips into your daily routine, you will find yourself becoming a more savvy shopper and saving more money. It is especially important during an economic recession to take these concepts into consideration and make the most of your finances. If you have any questions on other ways you can maximize your financial portfolio and find places in your budget where you can save money, please reach out to us at info@shermanwealth.com or visit our site at www.shermanwealth.com. Check out our other blog posts for more financial advice and tips!

Here’s How The Pandemic Has Upended The Financial Lives Of Average Americans: CNBC + Acorns Survey

The coronavirus pandemic has upended many Americans’ financial lives. While millions are unemployed and sufferings, there is actually more positive financial data than you would think.

According to CNBC and an Acorns Survey, many are saving more and spending less. In fact, 46% of the respondents said they are “more of a saver now” compared to before the pandemic. Additionally, 60% consider themselves “savers,” up from 54% last year. The poll, conducted by SurveyMonkey Aug. 13-20, surveyed 5,401 U.S. adults and has a margin of error of +/-2%.

About half, or 49%, said their monthly spending has decreased, compared to 33% last year. Some of those savings can be attributed to the fact that people stayed home and didn’t do things like dining out, said personal finance expert Jean Chatzky, co-founder of HerMoney.

While many have been struggling these last few months, others have picked up on some financial skills, learning how to save dollars here and there, cutting out old subscriptions, and being smarter spenders. By prioritizing wants versus needs and taking a look at how much money is going out each month, people have picked up better spending habits that will help them navigate these bumpy waters ahead.

With extra cash and savings in the bank, it’s important to talk with an advisor about options and investing that makes the most sense for you, whether it be saving for retirement, college tuition, or something else. If you have any questions for us, please reach out at info@shermanwealth.com and we would be happy to set up a time to discuss a financial plan for your future.

Here’s The Importance of Financial Literacy

Sherman Wealth has long been advocates of promoting financial literacy and empowering our world to become more educated on how to manage all aspects of their financial lives. We want to highlight an interesting article we saw on www.evidenceinvestor.com, discussing several reasons why “high flying professionals fail at investing”. This piece highlights the lack of financial literacy in our country, regardless of occupation or socio-economic upbringing. According to the article, “the best investors often times aren’t those with the highest IQs or who’ve read the most books, it isn’t knowledge, but SELF-knowledge, that really sets them apart.”

Often, high-earning professionals think they are saving enough but countless financial complexities exist within a professional services career track. Biases or mental errors are some of the biggest things standing in the way of financial success, mainly because they’re not easy to recognize in ourselves. Additionally, people are naturally resistant to change and most people are hesitant to pay small costs even for big gains.

Failure to rebalance is also something that many people struggle with and contributes to financial literacy. People are reluctant to take action to rebalance a portfolio. It’s too much fun to let winners run. It’s also psychologically difficult to sell winners to buy losers. But failure to rebalance quickly causes the client to be dangerously exposed to a downward turn in the markets.

People also tend to overestimate the significance of recent events and irrationally discount longer-term trends. Those of us over a certain age remember Black Monday on October 19th, 1987. The stock market lost a quarter of its value in a single day. That spooked a lot of people – and many got out of the market right after. Looking back at it now, Black Monday barely registers as a blip on the graph. This is an example of recency bias. Recent losses play havoc on our emotions and cause us to lose perspective. The long-term trend of the stock market makes any single day’s volatility look insignificant in comparison, so when we look back at a single day like Black Monday on a chart, we wonder how we could have panicked. Furthermore, given the current climate with COVID-19, it’s important to consider this idea, as people may have panicked back in March, selling assets in their portfolio, instead of holding onto them as the economy recovers. While it often seems natural to panic during an economic downturn, it’s important to remember that these dips recover naturally over time.

These are just a few examples of how society and perception can lead us to make poor financial decisions. Given the current climate we are living in today, it is crucial to make sure you fully understand the decisions you make within your portfolio and that they are long-term, strategic moves. With a lack of financial literacy amongst all career fields and economic classes in our society, we realize the importance of being financially educated and would love to help you to make smarter decisions. If you have any questions or would like to set up a time to talk about your finances, please feel free to reach out at info@shermanwealth.com. Check out more of our blogs that discuss the importance of financial literacy.

New Fed Strategy Means Cheaper Loans For A Long time — Here’s How You Can Benefit

As we’ve all been waiting to hear about the outcome and policy changes from the Jackson Hole symposium, there’ve been some updates that you should know. The Federal Reserve has said that it will let inflation run “hotter than normal” to help the economy bounce back from the coronavirus crisis, according to a CNBC article. According to some commentary, it seems as though this policy change is meant as a stimulus, to get people to spend more.

Since the central bank lowered its benchmark rate to near zero in March, credit card rates have hit a low of 16.03%, on average, according to Bankrate.com. The average interest rate on personal loans is currently about 12.07% and home equity lines of credit are as low as 4.79%, according to Bankrate, both notably less than the APR on a credit card.

On the flipside, “Low inflation has helped suppress mortgage rates,” said Tendayi Kapfidze, chief economist at LendingTree, an online loan marketplace. “If you let inflation go up, mortgage rates will also go higher.”

Given this new economic data, and with these cheaper loans for a longer period of time, it’s important to take a look at where you can lock in those lower rates, such as through credit card balance transfers or refinancing your mortgage. If you have any questions about this new policy, and want to see how this could be an advantage for your portfolio, please reach out to us at info@shermanwealth.com and we would be happy to discuss with you.

How Much Longer Until The US Economy Is Back To Normal? This New Index Shows We Have A Long Way To Go

As we approach the six month mark from when COVID-19 turned our world upside down, we are beginning to adjust our lives to this new “normal”. As we continue to adapt to this different way of life, some things are seeming back to the way they were before, but much remains new and strange. We are going about our days wearing masks and social distancing, watching our favorite sports teams play in “bubbles”, empty stadiums and arenas, and spending our work day in sweats and from the comfort of our homes.

As we begin to normalize some of these news ways of living, it raises the question of how far we really are from our old way of life? How much progress are we making towards this new “normal” that will be our future? As of right now, we’re seeing what’s called a “K” shape recovery, which is that the stock market is recovered, but the economy and mainstreet remains suffering. People are wondering if there will be a double dip recession potentially in the fall and winter months if the virus comes back.

We’ve been thinking about how to tackle these difficult and unknown questions and found an interesting article by CNN Business and Moody’s Analytics, which raises some of these questions as they relate to the economy.

According to their analytics team, the U.S. economy remains far from normal. Based on the back-to-normal Index that they constructed, which takes into account 37 indicators, including traditional government stats and metrics from a host of private firms to capture economic trends in real time, the U.S. economy was operating at only 78% of normal as of August 19th. They are using the economic data from prior to when the pandemic struck in early March as a baseline as “normal”. They are saying that the “economic activity nationwide is down by almost one-fourth from its pre-pandemic level-far from normal”.

Even though that data is not so promising, it’s important to note that it is substantially better than the darkest days of the pandemic in mid-April, when we were unsure of how dangerous this virus could be. As business re-opened between mid-April and mid-June, according to their back-to-normal index, the economy opened too quickly, with many surges in coronavirus cases throughout the summer leading to states halting their reopening plans.

While our country is recovering slowly but surely from this deadly pandemic that has swept our world, we still have ways to go to reach our pre-pandemic “normal”. While the economy still needs time to recover, it’s the best time to think about your finances and how to manage your money to make sure you come out of these unprecedented times strong. Find out how much risk you are taking on, what investments you have and where you want to be given the circumstances and with the all time highs in the markets. If you have any questions about your portfolio or ways you can manage your money during these rocky times, please reach out to us and we’d be happy to help.

Millennials Slammed by Second Financial Crisis Fall Even Further Behind

If one economic recession wasn’t enough for millennials to grapple with, why not throw another their way?

The economic hit of the coronavirus pandemic is looking pretty bad to millennials. We’ve been reading many articles discussing how unemployment seems to be looking the worst for their generation in contract to others.

The 12.5% unemployment rate among millennials is higher than that of Generation X (born between 1965 and 1980), and baby boomers (1946 to 1964), according to May figures from the Pew Research Center.

Millennials have found it fundamentally more difficult to start a career and find jobs in comparison to other generations who are now married and have children. Research shows that even the most educated millennials are employed at lower rates than older college graduates and millennials’ tendency to work at lower-paying firms has caused them to lag behind in earnings.

As a result, the millennial generation has less wealth than their predecessors had at the same age, and about one-quarter of millennial households have more debt than assets, according to the St. Louis Fed.

Between February and May, millennials got hit the hardest in terms of unemployment, according to the chart below by St. Louis Fed. Millennials are now at risk of falling further behind because they entered the pandemic in a weaker position than older Americans.

For millennials who have been impacted by this second economic recession, it is important to take a step back and start re-evaluating their careers and financial lives. It is also crucial to start early, set up a plan, and stick to it to see it through in the long run. Building up your wealth is crucial, especially while you are stuck at home during the pandemic and economic recession. Putting aside even just a little bit of money each week or month will grow over time due to compound interest. Think about investing some of the money you might have spent on going to the movies or out to eat or having some of your paycheck put directly into a different account that is solely for saving. However, make sure you still treat yourself to a morning latte or favorite takeout from time to time – you CAN save for your future without sacrificing all the little extra things that make you happy.

Now is the time for millennials to consider seeking financial help and guidance to navigate these bumpy waters and prepare a plan to help them succeed financially in the long term. If you have any questions or concerns, please reach out and we would be happy to help create a financial plan to suit your individual needs.

How Much Does it Take to Be Wealthy?

The coronavirus pandemic has certainly shaken almost every aspect of the lives of Americans. The stay at home orders, high unemployment rate and volatile market have many people thinking differently about the value of their money than they did before COVID-19 erupted in the country.

A survey conducted by Charles Schwab in January of 2020 regarding financial stability asked participants what it took to be financially comfortable, and survey participants cited an average of $934,000 in net worth. This number shifted down by 30% in June, to $655,000.

What is considered to be wealthy changed exponentially as well. Respondents stated that $2 million in net worth today is considered wealthy, down by 23% from $2.6 million in January. In 2019, respondents said it took $2.3 million to be wealthy, down slightly from $2.4 million in the two prior years.

Americans’ attitudes about money play a role in their overall happiness, but when asked about the most important factor to their overall happiness today, survey respondents regarded those drivers in the same order as before the coronavirus outbreak:

Relationships – 39%
Health – 27%
Money – 17%
Lifestyle – 14%
Career – 3%

After months of stay-at-home orders and a change of lifestyle, the coronavirus pandemic has vastly impacted the way we think about the value of money. 57% percent of respondents said the coronavirus has financially affected them or a close family member.

At the same time, many respondents mentioned that they are more likely to start saving in general than they did before the pandemics onset. The need for an emergency fund is now more important to many than ever before. Others said they are much more likely to consider hiring a financial advisor to set up a strong financial plan.

If the coronavirus pandemic has impacted your finances or you are uncertain about your financial plan, please reach out and we would be happy to help you find a plan that works for you. If you have any questions, contact us at info@shermanwealth.com and we will answer any questions you might have.

Fees & Your Investments: What You Need To Know

Whether your investment portfolio consists of a 401k or multiple brokerage and retirement accounts, it is important to understand the fees associated with your investments which can dramatically lower returns over the years. Here are some fees you should look out for.

Account Fees:

For 401k accounts, there are typically fees charged by the plan provider to administer the plan. Brokerage accounts may also have various account service fees, so check the fine print for more details. Sometimes these are waived if you opt-in to electronic delivery and or meet certain account minimums.

Fund Fees:

When it comes to fund fees, ETFs tend to be lower cost than mutual fund fees. Most ETFs are passively managed index funds, while most mutual funds are actively managed funds although the reverse also exists. Actively managed funds will have higher fees, but fees will also vary depending on the underlying assets.

Expense Ratio

The expense ratio is the annual fee that ETFs and mutual funds charge their shareholders. It is expressed as the percentage of assets deducted for fund expenses such as management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund. Mutual funds also include 12b-1 fees in the expense ratio, which ETFs do not have. What is not included in the expense ratio of a fund is the cost to trade the fund itself.

Mutual Fund Specific Fees:

12B-1 Fees

These mutual fund fees are charged annually and are considered to be an operational expense associated with a fund’s “marketing and distribution.” This could be anything from paying brokers to sell the funds or providing sales incentives. These fees are included in a fund’s expense ratio meaning the higher the 12B-1 fee, the higher the expense ratio. Investors can locate more information about these particular fees in a fund’s prospectus.

Front-End Load Fees

Front-end load fees are paid out to a broker in the form of commission when he or she sells a mutual fund. When an investor purchases a front-end load mutual fund, a percentage of their investment, usually 2% to 5%, goes to the broker.

Back-End Load Fees

Also known as a deferred sales charge or DSC, back-end load mutual funds charge a penalty fee if you sell your shares within five to ten years. Fees are highest within the first year of purchase, and decrease each year until the end of the agreed-upon holding period.

Trading Costs:

Transaction Fees

Despite a trend of more brokerages offering free transactions, transaction fees still exist when buying and selling investments. The price range of transaction fees varies, and it should be an expense to keep track of if you make lots of transactions over time.

Bid-Ask Spread

The bid-ask spread is a truly hidden cost to trading and is referred to as an implicit cost. This is the difference between the price to buy a security and to sell a security, which are not the same. Highly liquid securities will have very tight spreads, making this cost minimal, but it is important to pay attention to the liquidity of the fund.

Advisor Fees:

Looking for someone to manage your finances?

While some advisors are commission based and make money through the commissions associated with each investment transaction, here at Sherman Wealth, we are a fee-only (RIA) financial planning advisor, and can help you manage your finances and encourage you to think differently about your money.

As a fee-only registered investment advisor (RIA), we charge a flat rate for our services. RIAs have a fiduciary responsibility to act in their clients’ best interests. Unlike investment brokers who can end up costing the client a lot of money depending on the frequency and volume of trades, we provide advice and make transactions without taking commission-based compensation. RIA’s tend to use low-fee investments, including low-cost no-load mutual funds, individual stocks and bonds and investments that do not have 12B-1 fees.

If you have any questions or think we could be of service to you, please sign up for a free 30-minute consultation here. We would be happy to help you and answer any questions you may have.

Recent Market Volatility

This past week marked another volatile one in the market. After a significant rally, stocks suffered a large drop Thursday, with the S&P 500 down 5.9%, its worst day since March 16. The market had previously rallied 45% from its late March lows, and was flat for the year to date and trending lower overall. The Dow rose 400 points on Friday, but Wall Street recorded its biggest weekly loss since bottoming on March 23.

After a downturn in March, momentum turned positive in April and continued into May, as stocks registered healthy gains, and investors looked to future economic hopes rather than current woes. As we look to June, many investors believe a sustained and complete economic recovery may rest on developing a vaccine for COVID-19.

In recent days, there have been growing concerns as coronavirus counts in a number of states are on the rise, including Texas and Arizona, which had been spared the worst of the first wave. The US has now seen over two million confirmed coronavirus cases and over 110,000 deaths.

There have also been concerns when it comes to policy response to the COVID-19 crisis. While the initial policy response was overwhelmingly supportive, the Fed released an outlook on Wednesday suggesting an extended recession while at the same time not increasing their monetary support. Many feel as though they should have stepped in further. Furthermore, Congress, which offered significant support for both Wall Street and Main Street in the early days of this crisis, is now torn about the next round of stimulus.

When you take a look around the country and the world, it is clear that we are in an awful recession as well as a humanitarian crisis. Policymakers will have to do more to get us through the challenges that lie ahead. There are valid reasons to be optimistic about possible treatments in the near future and about potential vaccines later on, but this pandemic will continue to grind on our economy and on our society.

As the market continues to assess the long-term value of these businesses, it will periodically become too optimistic, and periodically become too pessimistic. Due to the uncertainty surrounding our current circumstances, we should expect elevated volatility for a prolonged period, which is hard for many people (and the markets they form) to digest. This volatility will create opportunities—sometimes to buy undervalued assets and sometimes to sell overvalued ones. Days like Thursday are why we consistently recommend diversification—while stocks fell, bonds rose slightly.

The key to successful, long-term investing is a well-diversified, customized portfolio that focuses on tax-efficiency, cost-effectiveness and risk management. We create and manage investment models tailored to your goals, timeline and evolving life circumstances. This is a challenging time in the real world and in the financial markets. We are continuing to monitor the markets, re-assessing portfolios and assisting our clients in any way necessary during these uncertain times. Click here to find out if your investments match your risk tolerance. And, as always, please reach out with any questions you may have – we are here to help!