Ways To Build Wealth And Boost Your Savings While You’re Stuck At Home

We’re all spending more time at home these days and it’s likely that money and finances are a stress for many during this pandemic. As the markets continue to be extra volatile,  many people are feeling a lack of control when it comes to their money.  Even though there isn’t much we can do about the state of the overall economy, there are some small-scale things you can do right now, from the comfort of your own home, to help you feel more in control of your finances. If it is all you can do right now to keep up with your bills, that should continue to be your main priority.  However, if you’re in the fortunate position of having an income or some extra cash, the following tasks take 30 minutes or less and might just have you feeling a little better about the state of your finances.

REVIEW YOUR BUDGET

 

 

Every solid financial plan starts with a good budget, and now is a great time to go over yours. You should review your spending habits and try to determine which areas of your spending are relatively fixed — such as monthly rent and insurance coverage — and those that are discretionary, like your lattes, subscriptions and eating out. 

Since you’ll likely be spending a lot of time at home this month, most of your convenience purchases will probably trail off. Comparing last month’s expenditures to this month, you will see where you are spending your money and you will be better positioned to make changes to your spending habits in order to prioritize saving money and spending on what you deem essential for your household.

GET SPECIFIC ABOUT YOUR FUTURE

 

 

Write down all the things that you want to do in your future – you can do this by yourself or with a significant other. Break it down into five-year segments. What do you want to do, where do you want to go, and what do you want to accomplish during each five-year segment? If you have career goals that include starting a business, making more money, or changing your job, you might need to learn some new skills to start down that path. 

Being confined to our home offices gives us a great opportunity to focus on learning something new and developing plans for the next steps in life, whether it is signing up for an online class or doing some research on what it might take to take your career in another direction.

SET UP A 529 COLLEGE-SAVINGS PLAN FOR YOUR KID(S)

 

 

If you’ve been considering a college savings plan for your child, setting one up online is quick and easy. You should start by reviewing the 529 plan options where you live, since they often provide tax benefits while you save for your child’s college education. Just remember to keep your own future financial goals in mind, as well. Saving for your children’s education is very important, but should come second to saving for your own retirement.

REVIEW YOUR BENEFICIARY INFORMTION

 

 

You should make a list of your financial accounts that include beneficiary designations —  like your IRA, 401(k), or life insurance — and make any necessary beneficiary information adjustments. Since these designations determine who will receive your account upon your passing, if they are left blank or not updated, your wishes could be ignored and assets could go to an ex-spouse, or state law could become applicable and decide how to split your accounts.

 

SET UP A NEW SAVINGS ACCOUNT

 

Now is the perfect time to set up a separate online high-yield savings account for your specific goals, whether it be for a vacation, saving for the holidays or possibly a new car. To make things even easier, you can also set up a direct deposit so that you put a little bit away from each paycheck towards that objective. However, remember that these “extras” should take a backseat to your emergency fund.  Having three to six months of expenses set aside in a money market or high-yield savings account can provide peace of mind and can be a lifesaver in times of temporary job loss or medical costs.

DO SOME BOOKKEEPING

 

 

Now might be a good time to do some overall bookkeeping.  This can include reviewing your insurance policies to see if you still have sufficient coverage for your needs, or working on your estate plan (are your medical directives all updated?).  If your kids are old enough, this could even be a good opportunity to teach them how to balance a checkbook by showing them how you do yours.

 

EVALUATE YOUR INVESTMENT PORTFOLIOS

If you have money in the market that’s earmarked for retirement, you might be a little worried about how current events will impact your goals. Now is a good time to have a call with your financial planner to determine if your portfolio is still meeting your long-term goals, or if it needs to be adjusted based on current events. 

 

Even though we may not have expected to be spending this much time in our homes over the past few months, it’s important to take advantage of the time while we can.  These unprecedented times have given us the opportunity to slow down and focus on our families, as well as other important aspects of our lives like our finances.  Taking just a half hour each day or week to go over these tasks can help us to feel more in control and less stressed about our money as we deal with the uncertainty of the times.  As always, if you have any questions about any of the suggestions above or any other concerns about your finances, please contact us.  We are here to help and we are all in this together!

Patient Investors Come Out on Top

Many feel they don’t have the money they need to invest, so they forego savings altogether. Sound familiar?

If this is you, the time has come for you to stop shooting yourself in the foot, and start saving today. Consistency while saving is key, and can make all the difference over time. Each dollar that you contribute to your portfolio adds up. In the long run, your investments early on can make a real impact, and when the time comes to withdraw your hard earned savings, the interest you’ve earned on your investments will help to provide a comfortable retirement or any long term goal you might be saving towards.

Start Saving Now

Consider the difference of waiting to begin saving. At age 27 you will need to put away $214 a month to reach a goal of $1 million. When you start at age 37, you will need to put away $541 a month to reach your goal. If you wait until age 47, that number rises to $1,491 a month and if you wait until age 57, you’ll need to put away a hefty $5,168 a month. Waiting until the last minute (age 62) would mean having to stash $13,258 a month to reach $1 million by the age 67 – ouch!

When you factor in things like compound interest, the negative impact of delaying your retirement savings becomes increasingly obvious. 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 surface.

As it keeps rolling, the snowball grows, so it picks up more snow with each revolution. If you invest $1,000 in a fund that pays 8% annual interest compounded yearly, in 10 years you’ll have $2,158.93, in 20 years that will be $4,660.96, in 30 years it will be $10,062.66, and in 40 years it will be $21,724.52. It takes patience, but with time you can turn $1,000 into $21,724.52. That sounds like a lot of money, but if we’re being realistic, $1,000 is often spent on:

• A weekend skiing with friends
• A few months of dining out with friends or your spouse
• A new piece of furniture, or tech that you may/may not need

By hitting “pause” on these non-essential goals, you can easily start saving today and take advantage of compound interest.

No matter where you are right now, the crucial point is to begin putting money aside immediately to achieve your long-term financial goals.

What are your future goals?

Travel? Education for your kids? Paying off your mortgage?

Even when you contribute a minimal amount annually, if you’re consistent with that contribution over many years, the growth your investment will make can maximize your wealth in the long ron.

The idea that you don’t have enough money right now to make your investment worthwhile is hurting you and your future. Resist the urge to overthink how much you are investing, and just act by giving what you can to your future savings today. Remember: every dollar counts, and the satisfaction of watching your investment grow over time will give you peace of mind and a freedom to plan for the future.

Don’t Jump Ship When Things Go South

Many investors view themselves as being rationally-minded individuals who don’t take sudden action when the markets become turbulent. Too often, though, people do try to time the markets, and wind up making a wrong decision as a result.

Derek Horstmeyer of the Wall Street Journal writes “Most investors think of themselves as rational and immune from the behavioral elements that periodically roil markets. Human factors, however, do continue to affect our personal portfolio decisions—usually to the detriment of our long-run returns.”

Thinking too much about the “perfect timing” when growing our portfolios is a strategy that will more often than not cause people to lose money in the long run. A far better investment plan is to focus on the big picture, and less on a perfect portfolio – where every decision is made at the exact right time.

Timing the market is less important than time in the market, and getting caught up in getting that “perfect timing” is almost certain to cost you money. Aiming toward a good, solid return on your investment is a smarter strategy than worrying about every detail affecting your portfolio. All too often, people panic as soon as things start to go south (pulling out when the market has already hit bottom and putting in more when at the top). As a result, they often don’t experience this stated return in full. By resisting this urge to make a rash decision, investors showing behavioral restraint may actually wind up saving 1-2 percentage points a year.

Starting early is a critical component to a successful portfolio. It is never too late (or too early) to start, so the sooner the better. Beginning in 2011, studies were conducted where participants were shown a computer generated rendering of what they might look like at their age of retirement. They were then asked to make financial decisions about whether to spend their money today or save that money for the future.

In each study, those individuals who were shown pictures of their future selves allocated more than twice as much money towards their retirement accounts than those who did not see the age-progressed images. Seeing the images gave the participants a connection with their future selves that they did not possess before. As a result, their saving behavior changed dramatically because, “saving is like a choice between spending money today or giving it to a stranger years from now.”

Picture Your Retirement

Instead of viewing your future self as a stranger, think of how you actually might look. Then think of the financial decisions you are making today and how they will affect you in the future.

Are your spending and saving habits today matching up with how well that future self is able to live tomorrow? Every delay you make toward saving for retirement, or investing wisely means a further burden you will place on yourself later on. In fact, starting your retirement saving early is actually more important than earning higher returns at a later date.

The importance of starting now can’t be stressed enough. Luckily, fee-only, fiduciary advisors exist to help everyday people in making wise choices and to lessen the anxiety associated with what can seem like an overwhelming task.

The good news is you don’t even have to be a millionaire to get this customized service. Working with a professional will enable you to maximize your return on investment and tailor a savings plan just for you. Don’t delay getting started. The benefits of starting early and often far outweigh how much you actually save.

Money in Cash? Make Sure you’re Getting the Best Rate

Sherman Wealth Management | Fee Only Fiduciary

While the stock market has been steadily climbing for the past few years, a surprising number of people are keeping a surprising amount of money in cash. And while everyone is going to have a certain amount of cash allocation, what’s even more surprising is how many people are losing out on maximizing the interest rates for those assets.

Advisors typically recommend holding 3%-5% of your assets in cash – for emergencies, short term savings goals, a new home or a vacation, or simply as a hedge against volatility.  Yet, according to the latest Capgemini World Wealth Report, high-net-worth Americans are currently holding more than 23% of their assets in cash.

Treasury yields are climbing

Why would investors prefer cash over a booming stock market? Studies, like this one, have shown that “cash on hand” – the balance of one’s checking and savings accounts – is a better predictor of happiness and life satisfaction than income or investments. Put simply, people like having “money in the bank.”

There’s no reason for that “money in the bank” to be earning zero though, particularly when there are many FDIC-insured, highly-rated, savings account options that may be yielding a higher interest rate on your savings than your current bank or investment firm’s savings options.

Short terms saving rates generally follow moves by the Federal Reserve and, as indicated by the chart to the right, short term interest rates, as reflected in short term Treasury yields, are rising. But is your bank raising your interest rates too or are they pocketing the difference and profiting? While the percentages seem small, there is actually a significant difference between earning .05% and 1.5%: the difference between earning $5 and $150 on a $10,000 savings account.

Put simply, if your cash is in a zero percent interest account, it’s no better than putting it under your mattress. You’re losing money, both in lost interest and because inflation can reduce the value of your savings.

Do you know if  your own savings account’s interest is keeping pace with rising interest rates? If not, check with your advisor to make sure you are maximizing your money’s earning power. If you’re not, consider shopping for a higher rate. Cash should be an asset class, but it shouldn’t earn zero.

If you’re not sure, we’re always available for a free consultation to see if you’re getting the best rates and you’re maximizing the earning power of your cash reserves.

 

Paying Hidden Costs Because your Broker’s not a Fiduciary?

Investors often choose big banks and investment firms over smaller financial advisors because they think the brand name and size makes the service and product offerings better. In actuality, it’s often the reverse.

Unless your firm is a Fiduciary, chances are there are sales quotas and contests for the non fiduciary, “suitability” reps, who are often paid extra to put clients in proprietary funds that are not in the clients’ best interests, but that reap commissions for the brokerage house.

Last Friday the SEC issued a statement announcing that three investment advisers “have settled charges for breaching fiduciary duties to clients and generating millions of dollars of improper fees in the process.” The release goes on to say that “PNC Investments LLC, Securities America Advisors Inc., and Geneos Wealth Management Inc. failed to disclose conflicts of interest and violated their duty to seek best execution by investing advisory clients in higher-cost mutual fund shares when lower-cost shares of the same funds were available.”

And according to an article in Investment News last week, it turns out smaller credit card and savings customers may not have been the only ones who were misled in the Wells Fargo “fake account” scandal. The article states that “according to inside sources, some clients of the bank’s wealth-management division were steered into investments that maximized revenue for the bank and compensation for its employees.”

When will this stop and why would any one continue to do business with one of these non Fiduciary firms?

The big problem is lack of transparency. Most investors don’t understand how the business works and how broker-dealers make their money. That means the investors are, in effect, investing blindfolded. And while there are many good, principled people at the larger firms, because they are not bound by the Fiduciary Standard, there is lots of potential for recommending something that is “almost as good” as the best product for you.

The result is that, according to a survey just released by the CFA Institute, a majority of investors believe that their advisors fail to fully disclose conflicts of interest and the fees they charge. Only 35% of individual investors polled believe that their advisor always puts their clients’ interests ahead of their own and only 25% of the institutional investors who participated in the survey.

April is National Financial Literacy month and one of the most important Financial Lessons investors – and potential investors – can learn this month is what “Fiduciary” means and why it’s so critical to your financial health.

When you’re working with a fee-only Fiduciary, they have sworn to only recommend financial products that are the best for their clients. Most broker-dealers in large wire houses have only agreed to uphold the “suitability” standard, which means they are allowed to recommend investments that are “suitable” – not best – for you but potentially yield a markup for their company or bonus or commission for them.

If you’re unclear about what fees you are paying, share classes you own, or how much your funds are costing you in annual expenses, contact us for a free analysis of your currents investments and the costs associated with them.

Particularly during Financial Literacy Month, make sure your Financial Advisor is working for you.

 

The Imperfect Fiduciary Rule just got Worse

Last Thursday, the U.S. Court of Appeals for the Fifth Circuit struck down the Department of Labor’s Fiduciary Rule, stating that it was “unreasonable’ that brokers handling investors’ retirement savings should be required to only act in clients’ best interest.

Unreasonable for advisors to only act in their clients’ best interests? Let that sink in for a moment…

In a nutshell: it’s still considered acceptable in the financial industry for advisors to give clients advice that is less than the best for the clients when it yields a higher commission for the broker.

In case you were wondering, the plaintiffs challenging the DOL’s Fiduciary Rule were the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association, the Financial Services Institute, Financial Services Roundtable, and Insured Retirement Institute. None of whom, clearly, are friends to the individual investor.

Because different Courts’ decisions have not been consistent about this Obama Administration effort to protect individual advisors, there is speculation the question will climb at some point to the Supreme Court, so this isn’t over. And while the Fiduciary Rule was not perfect, this is clearly worse.

Meanwhile, what can you as an individual investor do to make sure your interests are not being sacrificed for the benefit of your advisor? Very simple: make sure your advisor is ALREADY a Fiduciary. And if they’re not, switch. Why leave your money in a big brokerage house where conflicts of interest and commissions potentially eat into your gains and your future? Or where – instead of being given the full picture – you’re being steered toward a product that isn’t the best possible choice for you because of brokers’ sales goals or “contests”?

Individual investors have the power to tell the industry that this is unacceptable by voting with their feet (or computers.) Choose an advisor who has sworn to uphold the Fiduciary Standard and ONLY recommend choices that are in your best interest.

Just because the 5th Circuit is willing to settle for less doesn’t mean you should.

 

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If you’re concerned you’re not getting the fullest picture about what’s right for you and the best, un-conflicted advice, give us a call for a free portfolio review or learn more about our fee-only, Fiduciary approach.

The “Kiddie Tax” is Changing: What You Need to Know Now

Saving on taxes, while saving for your child or grandchild’s college education, just got a little trickier thanks to important changes in the “Kiddie Tax”.

The tax bill that was signed into law in December made some significant changes to how Uniform Gifts to Minors Accounts (UGMAs) and Uniform Transfers to Minors Accounts (UTMAs) are taxed.

What is the “Kiddie Tax”?

“The “Kiddie Tax” was first established in 1986 to keep parents from shielding income by placing investment accounts in the names of their children, who typically are in lower income tax brackets,” explains CPA Joshua Harris of Santos, Postal & Company. “The initial Kiddie Tax rules expired when a child turned 14. In 2008, this threshold increased to cover children through age 18 and full time students through age 23.”

How were Uniform Gifts and Transfers Taxed?

UGMAs and UTMAs have been a popular way to save money in a child’s or grandchild’s name precisely because of their significant tax advantages. A portion of the money earned – the first $1,050 of the child’s investment income (including interest, dividends and capital gains distributions) has been tax-free; the next $1,050 has taxed at the child’s rate; and investment income above $2,100 was taxed at the parent’s or grandparent’s “marginal” tax rate, ie the highest rate applied to the last dollar earned.

How is it Changing?

The 2017 Tax Cuts and Jobs Act made an important change to this graduated “Kiddie Tax.”

Instead of a child’s investment income above $2,100 being taxed at the parent or grandparent’s individual tax rate, it will be taxed at the 2018 trust and estate tax rates:

 

Investment Income Trust & Estate Tax Rate
Up to $2,550 10%
$2,551-$9,150 24%
$9,151-$12,500 35%
Over $12,500 37%

Will You Pay More or Less?

How much you will pay depends on the amount of investment income and your own marginal tax bracket. As a rule of thumb, the more you have the more you may be taxed this year.

While the Tax Code changed with this law, it unfortunately did not get simpler. And one alternative, if your rates are going up, may be to consider rolling the UTMA or UGMA into a 529 plan. Because of the complexity, it’s a good idea to speak with your Financial Planner about how the new law affects you, and what your best alternatives are now among the wide array of educational savings plans.

 

Please give us a call if you’d like to schedule a free consultation.

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 End of Low Volatility?

Whether you view Friday’s stock market sell-off as an adjustment to permit the markets to climb higher on a more solid base, or were nervous about the sharp short term “loss” of unrealized gains, it’s clear that the stock market’s meteoric, historically-long winning streak hit a bump in the road this week.

Draw downs and sell-offs are normal, but they are still painful when they occur. The market calls it a “correction” but, to the individual investor seeing their net worth drop, it never feels “correct,” particularly since it’s impossible to accurately predict when the volatility and the draw down in prices will end.

It’s hard for anyone to really anticipate what their own risk tolerance will be until it’s put to the test. In moments of calm, we all want to think we’ll have the presence of mind to remember that the market is cyclical and that downturns and corrections are often an opportunity. Things might look a little different though, if your child’s 529 plan funds just shrank, or if you’re nearing retirement and are counting on an IRA and a 401K, or if you were just about to take some earnings to finance an important project.

Notice how you felt on Monday as the market dropped again: it’s a good insight into your current risk tolerance.

Market values have increased dramatically in the last few years and in 2017 in particular. This current market volatility comes after the longest period in history without a correction and with remarkably low volatility. As a result, Friday’s sell off and Monday’s drop may have been a bit of a shock, even though a 5% drop was not unusual as recently as 2016. That makes it particularly difficult to anticipate what will happen next, in the direct short term, since investors may react unpredictably, including too many people who are driven by how they guess others will react.

There are two important things to remember when the market is volatile. The first is that volatility and risk are not the same thing: volatility is a normal variation in value, risk is the possibility that an investment will fail. The second is that it’s important to look at trends over time, not just yesterday’s news. As I said in this CNBC interview this week, this is a long-term process: you can’t be in it for just the 48-hour cycle.

If you’d like to review your financial plan or discuss  how your allocations conform to your own risk tolerance and response to volatility – please let me know and we’ll schedule a call to review your plan.

This post comes from our Tuesday Newsletter. To never miss Brad’s thoughts on building a successful future through smart planning, sign up here:

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Sign of the Times

Sign of the Times

It wasn’t too long ago that every teenager was fawning over the boy-band One Direction.  Now, only a few years later, the band members are all pursuing their own solo careers.  In his 2017 solo debut album, the former One Direction member Harry Styles sings the hook “Just stop your crying, it’s a sign of the times.”  While there are numerous interpretations of what the line is about, when I hear it my mind wanders immediately to investing.  

Maybe that makes me a finance nerd, but I connect these two because the world of investing is changing so rapidly, and that isn’t necessarily a bad thing.  It used to be that mutual funds were the be-all and end-all of getting exposure to diversified equity and fixed income returns.  Modern trends, though, show that millennial investors are increasingly enamored by exchange-traded funds (ETFs) and are pouring more money in these diversified low-cost, passively managed index funds than ever before.  A recent article reported that 66% of millennials say they expect to boost their holdings of ETFs over the next year, up from 61% in last year’s survey.

You can see a similar growth trend in the chart below.  We can see that while asset levels for actively managed mutual funds are still eight times higher than ETF asset levels, there is a staggering difference in their annualized growth rates.  While mutual funds are barely growing at .8%, ETF assets are growing at a pace of 21.4%.  

The conclusion is clear: ETFs took in more than three times the net inflows in the first half of 2017 because the world is changing.  Millennials are seeking out the funds as an alternative to traditional mutual funds in response to the changing environment around them, the preference for low-fees, and the flexibility of being able to trade in and out of the funds as frequently and as quickly as they desire.  The faster that advisors start to recognize and adapt to that changing world, the better they are able to meet the needs and desires of their clients.  

At Sherman Wealth Management, we understand that our clients are seeking low-cost, diversified portfolios and as a fiduciary, we feel it is our responsibility to take advantage of the opportunities posed by ETFs.  We were one of the early adopters of these diversified funds because we saw the value of having a low-cost, tax-efficient portfolio that, if done wisely, can be combined to meet target allocations that have diversification benefits creating worthwhile risk-adjusted returns.  

We see ETFs as an opportunity instead of competition.  Instead of individual stock picking, ETFs give us the ability to spend our time focusing on a top-down approach to asset allocation.  This means assessing where the opportunities lie within different asset classes and combining attractive ETFs in these high-probability sandboxes in a way that we feel will maximize risk-adjusted returns.  Instead of the cookie-cutter allocation achieved by working with robo-advisors, we have real people putting together your portfolio and looking under the hood of these funds to ensure that they are the best pick for you.  

At Sherman Wealth Management, we want to be ahead of the times – not stuck lamenting the past.  

So… just stop your crying, it’s a sign of the times.  

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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.

Sinking

Imagine this: you are in a car and it is sinking.

You try pulling on the door handles but they won’t open because the pressure on the outside of the car is much greater than the pressure inside the car.  What do you do?  More likely than not, you are now panicking and you can’t think clearly.  If you were thinking clearly, you might remember the driver’s education 101 tip that says stay calm.  If you have patience and wait for the car to fully submerge, the pressure on the inside and outside of the car will be equal and you should be able to open the door.

A similar thing happens in the world of investing.  During times of crisis, our instincts cause us to panic and forget everything we have learned.  When a crisis arises, we tend to take the first action we can think of, even if it is not the best one.  It takes a lot of patience and mental discipline to be able to watch a market dropping without pulling out your cash, but there is a huge difference in your returns if you remain calm.  From November 1, 2015, through February 11, 2016, the global stock market fell about 15% before rallying 31% to today’s level.  If you had sold at this time out of fear, though, you would be up only 4% compared to the 20% cumulative you’d be up if you had remained steady.  

Source: data from Xignite, total returns data for ACWI ETF representing global stock markets, chart from Betterment

 

The best advice you can be given is: understand the level of risk that you are taking in your current portfolio and make sure that you are comfortable taking on that level of risk.  Your risk level is closely tied to your financial plan.  You should ask yourself if you are taking too much or too little risk to accomplish your goals.  Are you saving enough to achieve your goals?  Are you using unreasonable future growth assumptions to accomplish your goals?  If you are honest with yourself and realize you are taking on more risk than you are comfortable with, you should adjust your risk level and financial plan as soon as possible, not as a reactionary measure to a market downturn.  Additionally, regardless of your risk tolerance, everyone should have an emergency fund that is invested conservatively as a fallback.  

If you feel that you are taking a level of risk that you are comfortable with, but are still worried about your own panic getting in the way of your plans – draft a plan now for how you will deal with it.  If you can’t handle seeing the color red, logging into your portfolio every day is probably not recommended. Ask yourself where there is wiggle room in your financial plan.  Prioritizing your goals and figuring out what you would do differently if the need arose is a good way to feel more secure if things are not going well.  

If you think making changes to your portfolio is the right move, make sure get a second opinion from someone with a level-head.  At Sherman Wealth Management, we are committed to answering all of your questions, addressing your concerns and helping you to avoid common behavioral mistakes.  When you imagine yourself in a sinking car, rest assured that we are right there to coach you through it.

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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.