Which Investor Personality Best Describes You?

psycology-investment

This article was originally published on investopedia.com

According to many studies, our different personality traits and preferences, along with a range of emotional and mental behavioral biases, have a strong impact on the way we invest. This is commonly referred to as behavioral finance. As part of a two-part series on Behavioral Finance, we will start by exploring the different personality types of most investors. When it comes to money and investing, there are many factors that contribute to the “how” and “why” of important financial decisions.

Investor Personality Types

There are four different types of investors, according to the CFA Institute, each with their own distinct behavioral biases. Understanding your own investor personality type can go a long way toward helping you determine and meet your long term investment goals, as well as producing better returns. (For more from Brad Sherman, see: 6 Questions to Ask a Financial Advisor.)

Which of these profiles best describes you?

Preservers

Preservers are investors who place a great deal of emphasis on financial security and on preserving wealth rather than taking risks to grow wealth. Preservers watch closely over their assets and are anxious about losses and short-term performance. Preservers also have trouble taking action for fear of making the wrong investments decisions.

Common Issues with Preservers: An investment strategy should take into account short-, mid- and long-term goals. By overemphasizing short-term returns, an investor risks making an emotional decision based on the short-term performance, which may end up being more detrimental to them in the long run.

Accumulators

Accumulators are investors who are interested in accumulating wealth and are confident they can do so. Accumulators tend to want to steer the ship when it comes to making investment decisions. They are risk takers and typically believe that whatever path they choose is the correct one. Accumulators have frequently been successful in prior business endeavors and are confident that they will make successful investors as well.

Common issue with Accumulators: Overconfidence. We recently wrote a blog on the issue with stock picking and active management. Overconfidence is a natural human tendency. As investors, accumulators consistently overestimate their ability to predict future returns. History has shown that it is impossible to predict markets at large scale, yet accumulators continue to try and do so and expose themselves to extreme risk.

Followers

Followers are investors who tend to follow the lead of their friends and colleagues, a general investing fad, or the status quo, rather than having their own ideas or making their own decisions about investing. Followers may lack interest and/or knowledge of the financial markets and their decision-making process may lack a long-term plan.

Common Issues with Followers: The herd mentality is a concept of investors piling into the same investments as others. This is often the basis of investment bubbles and subsequent crashes in the stock market. When you are a follower, you are typically following fund managers who have tools and recourses to act on new information in a fraction of a second. By the time the average investor “follows” them into a position, it is often too late. It is always important to understand your investment decisions and how they fit into your overall plan.

Independents

Independents are investors who have original ideas about investing and like to be involved in the investment process. Unlike followers, they are very interested in the process of investing, and are engaged in the financial markets. Many Independents are analytical and critical thinkers and trust themselves to make confident and informed decisions, but risk the pitfalls of only following their own research.

Common Issues with Independents: Similar to overconfidence bias associated with accumulators, independents face similar issues with relying too heavily on their own train of thought. We as humans have ability to convince ourselves that we are correct or that we don’t need guidance, even when that is not the case.

 

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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.
If you have any questions regarding this Blog Post, please Contact Us.

6 Questions to Ask A Financial Advisor

6 Questions for Financial Advisor

Finding a financial advisor who is right for you is an important process. A good financial advisor is there to prevent you from making decisions that would have a negative, unintended impact on you. Who wouldn’t love to have a financial coach to keep you on track to achieve your financial goals?

Just like with any working relationship, it’s a good idea to interview advisors until you find the one who is the best fit for you, your life, and your financial goals. Since you are entrusting your financial well-being to someone, you should get to know them and their financial planning and investing philosophy before committing to a long-term relationship.

As you may have heard the Department of Labor (DOL) has just released its new fiduciary rule in its final form. We previously wrote about the reasons why someone would oppose this rule considering it was created to improve financial transparency and eliminate conflicted advice from advisors. While this rule would still allow advisors to keep their “conflicted” commissions in some instances, it would require advisors to act as fiduciaries (a.k.a. “best interests contract”) when handling client’s retirement accounts.

We have long been proponents of more transparency and conflict-free advice and feel this is a step in the right direction.

So how does this affect your search for the right financial advisor? Here are 6 questions to ask to help with finding a financial advisor.

1. Are You a Fiduciary? (Are You ALWAYS a Fiduciary?)

As we mentioned earlier, this new rule will only require financial advisors to act as a fiduciary for client’s retirement accounts. A fiduciary is regulated by federal law and must adhere to strict standards. They must act in the client’s best interest, in good faith, and they must provide full disclosure regarding fees, compensation, and any current or potential conflicts of interest.

Until now, broker-dealers, insurance salesman, bank and financial company representatives, and others were only required to follow a Suitability Standard. That means they only had to provide recommendations that are “suitable” for a client – based on age or aversion to risk for example – but this may or may not be in that client’s best interest.

The brokerage industry, as you can probably imagine, and all those who earn their compensation from commissions are strongly against these new rules.

Even with this new law passed, we feel it is important to make sure your advisor is acting as a fiduciary when dealing with ANY of your finances, not just retirement accounts.

 

2. What is Your Fee Structure? (Difference Between Fee-Only, Fee-Based and Commission)

Advisors throw out terms like “fee-based” and consumers assume that is the same as
“fee-only.” That is not the case. At Sherman Wealth Management, we are fee-only which means that we are paid exclusively by our clients, so we are completely conflict-free. We do not get commissions from the investments or products we recommend. We do not get bonuses based on how many clients we get to invest in company products. We are paid an hourly or quarterly fee by our clients who retain us because we are making their money work for them with only their best interest in mind.

Think of it this way: would you want to work with an accountant who also gets commissions from the IRS? Of course not. You want your accountant to represent your best interests. Would you go to a doctor who makes money each time he prescribes penicillin? No, you want your doctor to prescribe what is right for you.

Do not assume that an advisor is following a fiduciary standard with their compensation now. The new rules will not be enforced until 2018. Ask your financial advisor to clearly specify their fees. With many layers of diversification that can be applied to your portfolio, you want to be aware of whether you are exposed to up-front charges, back-end fees, expense ratios, and/or whether a percentage of your returns will be deducted.

 

3. Why Are They Right for YOU?

A financial advisor should be able to tell you their strengths and what sets them apart. Some advisors will advise on investments while others specialize in comprehensive financial planning. While you may think all advisors are the same, and it certainly may seem like that on the surface, by now you should be seeing that is not the case.

Ask how involved they are with their client’s portfolios. Are they hands-on in their approach? How available are they for their clients’ needs?

For us, we enjoy serving a wide-range of clients, from young first-timers who are just getting started with investing and financial planning, to experienced savers, to high-net-worth investors who are well on their way to financial independence.

We strive to understand our clients wants and needs. We help our clients plan for the long term while simultaneously working to avoid short-term roadblocks. We do so by making it a point to SHOW you that you are not alone. We’re just like you, we’ve been there, and we know that financial planning can be an anxiety provoking activity for many. We use a fluid process to help set clear, realistic goals with an easy to understand roadmap of what you need to do to get there. We are right there with you every step of the way.

In today’s world you don’t just want a trusted advisor, you want instant access to your accounts and the progress you are making. That is why we offer some of the best in new financial services technology tools.

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The relationship with your financial advisor is an important one. You need to feel comfortable with whom you are working with.

 

4. What is Your Investment Philosophy?

Every financial advisor has a specific approach to planning and investing. Some advisors prefer trying to time the market and actively manage funds versus passive investments. Others may seek to gain high returns and make riskier investments. Your goals and risk tolerance need to align with the advisor’s philosophy.

When anyone invests money, they are doing so with the hopes of growing it faster than inflation. While some traditional investment managers not only want to generate a profitable return, they aim to beat the market by taking advantage of pricing discrepancies and attempting to time the market and predict the future. Some investment companies offer “one-size-fits-all” investment management solutions that only take into account your age and income.

We have a different approach. We believe an individuals best chance at building wealth through the capital markets is to avoid common behavioral biases in the beginning and utilize a well thought out, disciplined, and long-term approach to investing. We create a well diversified, customized portfolio that focuses on tax efficiency, cost effectiveness, and risk management. Read more about how we do this.

Make it a top priority to understand the strategy your advisor uses and that you are comfortable with it.

 

5. How Personalized Are Your Recommendations for Your Clients?

It is important that your financial advisor tailors your financial plan to your specific goals. Your retirement plan and investment strategy should be customized to take into account your risk tolerance, age, income, net-worth, and other factors specific to your situation. There should not be a one-size-fits-all approach to managing your money.

Some traditional brokers and insurance companies are so big that it becomes impossible for them to give you a truly individualized experience. They have a corporate agenda that they must follow and it can restrict the service they provide to you.

As frustrating as the requirement for a high minimum balance is for first-time investors, it has also inspired a new breed of smaller independent Registered Investment Advisors (RIAs), like Sherman Wealth Management. What our clients all have in common is that they appreciate the focus on their own individual goals and best interests that we guarantee as a boutique, independent, fee-only fiduciary.

We know that each client is unique.  We don’t look for “market efficiencies” or work for sales commissions on the products we recommend. Our focus is different. We strive to help investors build a strong foundation and grow with them, not by profiting off good or bad trades. This gives us the opportunity to create individual strategies and plans that are uniquely suited to each client, not just a cookie-cutter plan based on age, income, or broadly assessed risk tolerance.

 

6. Do You Have Any Asset or Revenue Minimums?

Some have argued that the proposed DOL rule will end up hurting the small investor because larger institutions will not be willing to serve small accounts. This logic is fundamentally backward and flawed, as those clients were never on their radar to begin with. In fact, the ability for these large institutions to generate commissions and thus charge more to these small investor clients have driven that business, without regard to the best interests of the individual investor.

For example, In a company statement quoted by Janet Levaux in Think Advisor, Wells Fargo, the most valuable financial institution in the world according to the Wall Street Journal, said that in 2016, “bonuses will be awarded to FAs with 75% of their client households at $250,000.”

Wells Fargo isn’t the only large institution effectively ignoring Millennials and other smaller and entry-level clients. Most of the corporate institutions prefer high-net-worth clients because it creates “efficiencies of scale” and a higher profit margin on larger trades.

The complaints against the new DOL rule have nothing to do with protecting the little guy. Rather, the complaints are driven by the desire of commission-based large institutions, insurance companies, and broker-dealers who are trying to protect their ability to generate commissions and charge clients unnecessary fees.

Make sure you understand your advisor’s motivations. If they don’t want you, why should you want them?

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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.
If you have any questions regarding this Blog Post, please Contact Us.

Is Your Retirement Advisor a Fiduciary?

Is your Retirement Advisor a Fiduciary?

Do you want a financial professional who is opposed to financial transparency managing your money?

The upcoming and long anticipated proposed rules by the Department of Labor (“DOL”) exposes that very debate, as it seeks to eliminate the ability of financial advisors to profit by selling retirement account products to investors without being held to a “fiduciary standard.”

For those wondering what that means, with a fiduciary standard an advisor must always act in your (their client’s) best interests. A fiduciary standard ensures that the advisor’s duty is to the client only, not the corporation they represent. To the surprise of many, that currently is not always the case. Financial advisors have had the ability to profit (through commissions and high fees) to the potential detriment of their clients. That is exactly what many large financial institutions and insurance companies have done. In fact, the federal government estimates that there are roughly $17 billion dollars of fees generated each year from conflicted advice.

The DOL has made clear –and we agree– that a commission based investment model creates a conflict of interest. Companies with a commission based model operate with an inherent conflict: the pressure to sell products that are more profitable for them and/or their firm can be important factors in how they direct you to invest. For example, an advisor may receive a 5% commission by selling you a fund through their company when you could get a similar product elsewhere without commission. Think of it this way: would you want to work with an accountant who also gets commissions from the IRS? Of course not. You want your accountant to represent your best interests. Would you go to a doctor who makes money each time he prescribes penicillin? No, you want your doctor to prescribe what is right for you. That is the primary reason we stay completely independent and operate as conflict-free, fee-only advisors.

The proposed DOL rule will hopefully begin to fix this issue as it is expected to require a strict fiduciary standard for financial advisors in the context of sales for retirement account products.  This standard will require advisors to certify that they are acting independently and in their client’s best interest, and are not motivated by the prospect of a commission. This has created a firestorm among big insurance companies, broker dealers and other institutional investors who, as we pointed out, don’t typically operate as fiduciaries.

In a letter sent last week to the SEC, Senator Elizabeth Warren, a strong proponent of the proposed DOL rule, pointed out that presidents of Transamerica, Lincoln National, Jackson National and Prudential all have called this proposal “unworkable.”  She commented on the self interest in their position, and the danger in permitting unwitting investors to be guided by non-fiduciaries in the context of their retirement investments.

Why would a rule that requires a financial advisor to act in their client’s best interest create such an uproar? One reason is that unlike Sherman Wealth Management, they are in a commission driven model, and therefore fear that the way they currently serve clients would not meet the standards of this new rule. We hope that because of the conflict a commission driven model creates, that eventually enough pressure from policy-makers like Senator Warren and Labor Secretary Perez will propel this proposed new rule beyond just retirement accounts. In the meantime, think to yourself why anyone would oppose this rule if not for purely selfish reasons?

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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.
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.

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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.
If you have any questions regarding this Blog Post, please Contact Us.

Why Stock Picking Is a Losing Investment Strategy

roulette

This article was originally published on NerdWallet.com

Picking a stock that goes up 100% in a year is exhilarating. But there’s a problem with this method of investing. Like gambling in Vegas, it may be fun and even rewarding in the short term. Yet in the end, just as the house always wins, picking stocks is a losing game.

I talk to friends all the time who say they invest in stocks — meaning individual ones rather than broad-based index funds that capture the movement of the entire market — and I always wonder why. I think many people see a company that carries a well-known name — maybe they are customers or they hear about it on the news — and they assume it’s a good investment. But history has shown us time and time again that picking stocks of individual companies, and thus trying to determine which will be the winners, is not a good investment strategy.

No company is immune to short- or long-term failure, no matter how good they look in the moment. The company’s value may not go to zero, but it could certainly take a huge hit relative to its underlying industry or index. Just think about how the Standard & Poor’s 500 index has changed in the past two decades. There has been a revolving door among the largest companies in the S&P 500, proving that even the biggest companies out there are not immune to volatility and risk.

Individual stocks vs. an index

As further evidence that picking stocks is risky and ultimately a losing game, consider recent research from financial firm JP Morgan Chase & Co. It compared the Russell 3000 index — which, as the company notes, “represents approximately 98% of the investable U.S. equity market” — between 1980 and 2014 with information on individual stocks. Here are the three main findings:

  1. The risk of ‘catastrophic’ failure among individual stocks is higher than you think. “When looking at how often a stock has what we call a ‘catastrophic decline’ — falling 70% or more and never recovering — we see that 40% of all stocks suffer this fate at some time in their history. And some sectors — like telecom, biotech and energy — saw higher-than-average loss rates,” the report states.
  2. Most stocks underperform over their lifetime. According to the report, “The data shows that two-thirds of all individual stocks underperform over their ‘lifetime,’ as compared to the Russell 3000. On average, the outcome for individual stocks was underperformance of about 50%.”
  3. Concentrated holdings in individual stocks add huge amounts of risk to your portfolio. “When computing the optimal risk-adjusted return for a concentrated holder,” the report notes, “we find that 75% of concentrated stockholders would benefit from some degree of diversification.”

Why investors keep picking stocks

So why do so many individuals keep trying to pick stocks? I see two main reasons.

We all enjoy making money, and we don’t usually associate the word “boring” with something we enjoy. That reason alone likely explains why so many people try to pick stocks. It’s the “sexy” way to invest. But the research is clear that this is not an optimal strategy. When it comes to investing, “sexy” might as well be spelled “sucker.”

Rather, investing should be boring. It’s like baseball: Base hits are the name of the game. By properly diversifying your investment portfolio — picking a mix of asset classes with exposure to many sectors and countries — with a long-term strategy, you allow yourself to take advantage of compounded gains without subjecting yourself to unnecessary risk (i.e., swinging for the fences).

The other major issue is that not all investors understand what they are doing. When you’re stock-picking, you may think that you are diversified by owning five different stocks; but if that’s all you own, you’re exposing yourself to a huge amount of risk by having such a large percentage of your portfolio invested in just one stock or industry. One catastrophic loss could devastate your portfolio.

Diversification

The logical question you might have is, “OK, so what should I do?” While answers are going to vary slightly for each individual, one applies across the board: Diversify. That doesn’t mean owning many different individual stocks in the same sector, but rather spreading your investments throughout multiple asset classes, industries and countries. Proper diversification of your portfolio is key to your investing success over the long run.

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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.
If you have any questions regarding this Blog Post, please Contact Us.

Why Volatility Is an Opportunity for Long-Term Growth

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

This article was originally published on NerdWallet.com

The market has been on a wild ride lately, which has provided a wake-up call for investors who rode the six-year bull market — and its low volatility — without a care in the world. Now reality has set in.

As with all market corrections, this one has inspired retail investors to question whether it’s time to pull money out, shift to safer and more stable investments or just throw in the towel entirely.

While it is normal to feel anxiety during a downturn, there’s another way to look at it. As long as downturns and dips don’t affect your financial plan or, more specifically, your immediate need for cash, they can be an opportunity.

Remember the mantra “buy low and sell high”? The volatility, geopolitical risk and uncertainty we’ve experienced so far in 2016 have presented a particular opportunity for investors in the accumulation stage of their lives, or for anyone who has money but hasn’t started investing yet, to actually buy low (or at least lower). If you’ve been delaying investing regularly because the “market was too high” or “you knew a correction was coming,” now might be a good time to start.

The key is to view volatility — like what we experienced last August and what we are seeing now — as a tool to keep contributing regularly to your investments. This will let you maximize the possible potential for your investments and enable you to watch them grow. The two best concepts to help you do that are dollar-cost averaging and compounded interest.

Dollar-cost averaging

Dollar-cost averaging is the process of spreading out the costs of your investments as the market rises and falls, rather than purchasing shares all at one (potentially higher) price. The key is to pick a schedule — whether it’s monthly, bimonthly or weekly — and an amount, no matter how small, and stick to it by purchasing as many additional shares in your investments as your fixed amount will allow. This is much more effective than trying to “time” the market by buying shares when they are at their lowest or selling when they are at their highest.

Using this system, you are regularly contributing the same amount, regardless of the price of shares. As a result, that fixed dollar amount buys more shares in times when the market has dropped and prices are low, and it limits the amount of shares when the market has risen and prices are high. Over time you will come out ahead, compared with trying to time the market.

Compound interest

Once you have started to build up the size of your investment with the help of dollar-cost averaging, the concept of compound interest gives you a boost. Compounded interest is the interest you earn on the sum of both your initial investment and the interest that investment already has earned. If you have $1,000, for instance, and it earns 5% interest yearly, you will earn $50 at the end of the first year. Then, if you keep that money invested, the next year you will earn 5% interest on the total — $1,050 — which is $52.50. The following year, you will earn 5% on $1,102.50, which is a little more than $55.

Because dips in prices allow you to buy more shares with a fixed amount, volatility allows you to maximize the potential for compound interest as well.

Using these two concepts, the daily ups and downs and market corrections are not a cause for undue concern. If you are sticking to your dollar-cost averaging plan and taking advantage of compound interest, news events shouldn’t affect your long-term plans and goals. Any dollar that is invested in the stock market should be a dollar that you are comfortable keeping invested through a bear market or a major correction.

If you are disciplined about investing, and consistent about reinvesting, you’ll start to look at market volatility as a tool and an opportunity, rather than as a source of anxiety or, worse, a reason to throw in the towel and lose out on long-term growth.

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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.
If you have any questions regarding this Blog Post, please Contact Us.

In Times of Uncertainty, Feeling Certain about Your Plan

As I was listening to Fed chair Janet Yellen’s testimony in front of Congress last week, I was intrigued by a tweet from Morgan Housel: “Go back to 2008 and tell people that in 2016 our biggest headwind would be low oil prices and a strong dollar. Economics is hard. Not in a “things are actually good today” way. But in mid-2008 surging oil prices and a falling dollar were a big headwind.”

As a Financial Advisor, I read every piece of economic data available to me and follow the thought processes of the top thinkers at virtually all the key financial institutions so I can carefully invest money on behalf of our clients.

Here’s what I’ve discovered: none of them, and none of us, have been given a roadmap to what the future holds. They can watch and study the relevant economic indicators, but they cannot predict the financial future with absolute certainty. We all live with uncertainty while trying to make the best decisions we can with the information available.

Given the certainty of uncertainty, what can individuals do to best prepare for their financial future?

With all of the speculation about the upcoming elections, questions about possible negative interest rates, and concerns about international instability, it’s easy to feel anxious about the potential effects on the economy and on your savings and investments. Particularly because the airwaves and the Internet are full of news reports, commentary, blogposts and Tweets about how volatile and risky the markets are.

One thing that is certain: there will always be volatility and risk in the markets. That’s what makes the stock market the stock market. 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 (which are considered a drop of at least 10%). Don’t take my word for it, take a look at the chart below:

 

These charts show 27 corrections of at least 10% or more since 1987. All of those corrections had one thing in common: they all rebounded with a bullish rally. What history has shown is that, over the long run, markets continue to move higher.

What does this mean for individual savers and investors? No matter your age or experience with financial planning and investments, there is one universal “must” that applies to everyone. You need a financial plan:  a carefully thought-out, customized financial plan, not just something you downloaded from Google. Once you have that plan in place, the next steps are to implement it, then put your head down and trust in that plan.

This current market in particular highlights the importance of having a financial plan that is both age-appropriate and risk-adjusted to your specific financial situation, goals, and needs. If you’re in your 20s or 30s, for instance, the correction we’re experiencing is a great opportunity. Why? Because you have the luxury of time on your side. With the market currently down significantly from where it was a year ago, this is a great time to implement a dollar cost averaging strategy and start saving and investing on a consistent basis.

One of the things that differentiates us at Sherman Wealth, however, is that we believe that no two people are alike and that everyone’s investment strategy and portfolio should be customized to suit his or her individual situation, needs, and goals. We get to know each client – or potential client – so we can analyze their actual risk tolerance in a holistic way, rather than just plugging their age and one or two other factors into a simple, one-size-fits all algorithm the way some of the Robo-Advisor platforms do. Then we create a plan that is designed to work for our clients.

I can’t tell you what the market is going to do tomorrow or six months from now – no one can. But with a well-thought-out financial plan – one that takes into consideration who you are now, where you want to be, and how much risk you can tolerate – you will feel much more confident about your own strategy and less likely to panic about what the next crazy pundit to pop up on the internet has to say.

Photo Source: AP

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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.
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

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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.
If you have any questions regarding this Blog Post, please Contact Us.

Still haven’t won the Powerball?… Now what?

Powerball

Still haven’t won the Powerball/? You may have to postpone that fantasy of buying a private island in Thailand, but that doesn’t mean you can’t still be on your way to achieving your financial goals and dreams.

Here’s one way to do it – take that money you’re sinking into lottery tickets and invest it instead.

Why are so many people willing to waste hundreds of dollars on a lottery they won’t win instead of investing it in capital markets that have shown growth over time? Many reasons. For some people, the hardest part of saving and investing could be just getting started. For others, it’s not understanding the benefits of compound interest and that even small amounts add up over time. For others it may be fear of volatility and distrust or the markets from listening to too much CNBC, Fox Business, and Bloomberg!

While it’s true that markets have dipped significantly in January, market dips are a potential opportunity to buy low and earn higher returns over time. The bottom line is that, for most people, even those starting with modest amounts, keeping money in cash is generally not a winning proposition.

Here’s why:

Lets say you are contributing $250 each month ($3k/yr) to your 401k plan with a 100% company match and invest it in a diversified basket of stocks and bonds based on your risk tolerance. At the same time, you save and invest $20 a week (the cost of 10 Powerball tickets a week) in a regular investment account. Assuming historical 4.8% annual returns*, here is how your money will grow over a 20-year period (in today’s dollars) vs. saving the same amount as cash:

Picture1

*based on a diversified portfolio that assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Barclays Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NA REIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data represents total return for stated period. Past performance is not indicative of future returns. Data are as of 12/31/15. Annualized (Ann.) return and volatility (Vol.) represents period of 12/31/99 – 12/31/15. Source: Page 59 https://www.jpmorganfunds.com/blobcontent/202/900/1158474868049_jp-littlebook.pdf

So go ahead and keep dreaming about that island! But first speak with a financial advisor about your current situation and future goals and what the best steps are to start working towards financial freedom.

And when the next Powerball comes around? Our guess is that a good financial advisor can help you find better ways to let that $2 grow for you!

 

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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.
If you have any questions regarding this Blog Post, please Contact Us.

Why Go Where Your Money’s Not Wanted?

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

In the film The Shining, a ghostly bartender tells Jack “your money’s no good here,” while other ghosts are planning to do away with Jack and his family. In December it was Wells Fargo doing the “ghosting.” By urging its brokers to get rid of clients with a minimum balance of less than 65,000, Wells Fargo Advisors sent a clear message to younger investors that, going forward, their money is “no good” at Wells Fargo.

In a company statement quoted by Janet Levaux in Think Advisor, Wells Fargo, which is the most valuable financial institution in the world according to the WSJ,* said that, in 2016, “bonuses will be awarded to FAs with 75% of their client households at $250,000.”

Wells Fargo isn’t the only large institution effectively ignoring Millennials and other smaller and entry-level clients. Most of the corporate institutions prefer high-net worth clients because it creates “efficiencies of scale” and a higher profit margin on larger trades.

As frustrating as the requirement for a high minimum balance is for first time investors, it has also inspired a new breed of smaller independent RIAs, like Sherman Wealth Management (“SWM”), as well as the the new “robo-advisor” firms.

Younger, breakaway firms like SWM aren’t looking for “efficiencies” or working for sales commissions on the products we recommend. Our focus is different. We strive to help investors build a strong foundation then grow with them, not by profiting off the trades, good or bad, we recommend for them.

Where large brokerages currently see a “revenue problem,” we see a growth potential and are building long-term lasting relationships. By the time Wells Fargo and the other firms with traditional models get around to investing their time and attention in younger investors, it may just be too late. Those Millennial clients will be growing their wealth with firms that didn’t “ghost” them and, like Jack – spoiler alert! – may end up being “frozen out” of the largest wealth transfer in the history of the world as capital shifts from Boomers to Millennials.

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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.
If you have any questions regarding this Blog Post, please Contact Us.
*http://www.wsj.com/articles/wells-fargo-co-is-the-earths-most-valuable-bank-1437538216