Category: blog

“Be fearful when others are greedy; be greedy when others are fearful.”

The above quote is attributed to “The Oracle of Omaha,” Warren Buffett. The last 10 years have been good for stock investors, with the S&P 500 Index up almost 250%. This historic bull market has favored the aggressive investor. A long period of steady growth has a tendency to make people both complacent and ever more aggressive, even if unintentionally, in their investments. However, there is an old saying on Wall Street that “trees do not grow to the sky.” At some point the party ends and the overly aggressive investor finds himself looking at serious losses.

If we go back to the last bear market, from October 2007 until March 2009, the U.S. stock market lost over 50%. That was immediately followed by the extraordinary bull market run that we are currently experiencing.

The aggressive investor who held the S&P 500 ETF or mutual fund lost half his money during the crisis and needed to more than double it just to break even! Assuming he stayed the course and didn’t sell-off in a panic, it would have taken over four years just to earn back what he lost.

While aggressive investing may be appropriate for younger investors who have decades ahead of them to recover from financial panics, it’s not recommended for people approaching – or in – retirement. To lose half of your hard-earned nest egg, designed to provide for a comfortable lifestyle in retirement, would be financially and emotionally devastating.

What is the appropriate investing style for you? Do you consider yourself aggressive or cautious? Have you ever really looked at your portfolio and done any sort of analysis to see if it is truly as aggressive or conservative as you think it is? If you haven’t, or if you have concerns that your portfolio may be at risk during the next recession, it’s worth your time to talk with a professional investment advisor. We can review your portfolio and your goals with you and provide recommendations and guidance to ensure that you are where you need to be with your investments.

Here are several important steps and considerations when it comes to choosing the best financial advisor for you.

1. Hire an advisor who is a fiduciary. 

By definition, a fiduciary is always ethically bound to act in your best interest.  This obligation eliminates conflict of interest concerns and makes their advice more trustworthy.  If your advisor is not a fiduciary and is constantly trying to sell you products, find somebody who has your best interest in mind.

2. Don’t necessarily hire the first advisor you meet. 

While it’s tempting to hire the advisor closest to home or the first one listed in the yellow pages, you need to find the advisor who is most compatible with you.  Take time to interview a few advisors and pick the one who is the best match.

3. Choose an advisor who specializes in clients like you.  

Some advisors specialize in retirement planning, others focus on business owners or medical professionals.  Some are better for young professionals starting a family.  Ask the advisor what kinds of clients he focuses on and understand his strengths and weaknesses.

4. Pick an advisor whose strategy fits your personal style. 

Each advisor has a unique strategy.  Some focus on picking individual securities, while others use mutual funds.  Some are aggressive investors and try to beat the market, and others are conservative and focus on preservation of capital.  Choose the one with which you are comfortable.

5. Ask about credentials. 

Ask your advisor about their licenses, tests and certifications.  Financial advisor tests include the Series 7, Series 66 or Series 65.  Others have gone a step further and become a CERTIFIED FINANCIAL PLANNER™ practitioner, or CFP®.

6. Don’t assume that a major brand on the door is a seal of approval. 

Most advisors start their careers with one of the major brokerage firms like Merrill Lynch, Morgan Stanley, UBS or Wells Fargo.  What often happens is that new clients are referred to the newest rookie in the office.  In addition, the major firms view their advisors as their “salesforce” and provide them with incentives to generate fees and commission for the parent company.   Advisors working for the major firms generally are not held to fiduciary standards.

7. Understand clearly how your advisor is paid. 

Some advisors are “fee only.”  Others are paid commissions on the purchase of sale of securities, annuities or life insurance.  Still others receive fees, called “trailers,” from mutual funds.   Advisors who are paid from the sale of products have an inherent conflict of interest that you should be aware of before you enter a relationship with them.

8. Ask what happens if your advisor retires or leaves. 

An advisor should have a succession plan that makes sense for you.  Solo advisors could leave you without a trusted advisor at a critical time.  If you have an account with a solo advisor at a major firm, your account will be passed along to someone else, who will initially be unfamiliar with your goals and objectives.  If this is a potential concern for you, find an advisory team who will be there for you for the long term.

Conclusion

Those are some of the most important things to keep in mind when you are picking a financial advisor.  Use our contact page or call 757-638-5490 if you would like us to help you get started with planning for your future!

The average investor significantly underperformed the market in 2018.

Bad decisions caused the average U.S. investor to lose roughly twice as much as the S&P 500 in 2018 according to a new study from Dalbar, a financial services firm. While the S&P 500 declined 4.38%, according to Dalbar, the average investor lost 9.42%.  

This underperformance follows a pattern that is confirmed in study after study that shows that the average individual investor underperforms in both Bull and Bear markets.  

The primary culprit is trying to time the market and the tendency of individual investors to believe that they can predict when the market will go up or down. This causes them to buy when the market is high and they feel good about investing, and to sell when the market is low, believing it’s going to go lower.

The dramatic drop on April 13th triggered by fear of a trade war with China is a good example of how dramatic moves in the stock market can cause the typical investor to do the wrong thing at the wrong time. A combination of scary headlines in the press, combined with sharp drops in the stock market often causes investors to “move to the sidelines” until they feel safer. That means they miss the sharp rebound after locking in their losses.      

Professional investment managers realize that market timing is a losing proposition and develop strategies that allow them to remain invested through market cycles.

Another reason why the average investor loses badly is that they tend to buy yesterday’s winners. Reading popular publications like Money Magazine, poring over lists of last year’s “best” stocks or stock funds is a recipe for failure. While mutual fund prospectuses always say that past performance is no guarantee of future success, few investors take this to heart and, buying yesterday’s winners find themselves owning today’s losers.

Korving & Company creates investment portfolios that allow their clients to ride through the ups and downs of the market while sleeping well at night.

For more information, contact us at www.korvingco.com.

Warren Buffett is known as “The Oracle of Omaha” and for being the third richest man in America because he knows his circle of competence. He made his fortune by using his ability to identify great companies and investing in them. Here is a piece of advice he provided in a 1996 shareholder letter:

“What an investor needs is the ability to correctly evaluate selected businesses. Note the word “selected.” You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”

Warren Buffet On The Circle Of Competence

Warren Buffett recently used the phrase circle of competence to explain why he didn’t invest in Amazon despite having known the founder, Jeff Bezos for 20 years. Evaluating the Amazon business model – and its start as an online book store – was outside his circle of competence.

So what does this legendary investor do when he realizes that there are investment opportunities outside of his area of expertise? He doesn’t venture into areas in which he is not an expert. He does what other smart people do. He hires people whose competence supplements his own. Charlie Munger, Warren Buffett’s partner explains it this way:  

“You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.”

The problem most people have is that there is a big difference between what they think they know and what they know.

It’s a problem that gets so many people into trouble. They think they know more than they do. In fact, many believe they can predict the future and, in turn, the market’s ups and downs. Because no one really has a working crystal ball, it’s one reason why the typical investor does so much worse than the market.

Conclusion

If you’re an engineer, a doctor, a business owner, or an executive you will improve your odds of success in life if you operate inside your circle of competence. If you’re not a professional investor, investing is not in your circle of competence. We can provide that competence. We know what our circle of competence is and, like Warren Buffet, we stay within it. That’s how we help our clients succeed in life.

Use our contact page or call 757-638-5490 for more questions.

Physicians have attributed poor health to diet since at least the times of Hippocrates and Galen. The authors of a comprehensive study published this month by The Lancet (a widely-respected medical journal) showed that among countries, the U.S. ranks 43rd in terms of a healthy population. Just because you’re wealthy does not mean you’re healthy. The study confirms what many believed: poor diet is responsible for more deaths than any other risk factor.

The Lancet study suggests that people need to eat a variety of nutritional sources and not overconcentrate in just one or two. It recommends eating more nuts, whole grains, and milk and decreasing the amount of sugar-sweetened foods you intake.  

Doesn’t that line of thinking also sound like good advice for investors? Studies in finance have shown that a portfolio’s investment allocation and diversification directly influence wealth outcomes.

Just as a healthy diet, consisting of a good variety of foods, leads to better health, a healthy portfolio that can withstand market shocks is the result of owning a variety of investments. Just as we should not overindulge in our favorite food, our investment portfolio should not be overly concentrated in just one – or a few – securities or types of securities. A healthy investment portfolio should not be overly focused on one asset class, one stock, or one country’s securities, even the U.S. alone.  

People who want a long and healthy life should gravitate toward healthy foods and limit unhealthy ones. In the same way, when building a portfolio, we should avoid gravitating towards things that give us a “sugar high.” For some, it is tech stocks; for others, it’s IPOs, or gold, or the stock of the company they work for. We need a variety of investments to maintain a healthy investment portfolio.

Just as we watch what we eat, we should look at our portfolios and see if we are gravitating toward things that may be unhealthy for us. Even long-standing winners like Apple stock may be less than ideal, as we saw in the fourth quarter of 2018. Question those things that you most desire in your portfolio. Everything in moderation.  

Over the decades as an advisor, I have observed clients who focused on their company’s stock. They did very well for many years…until the company lost its focus and made some bad business decisions. In the span of a few years, these investors lost over half their wealth.

Like a healthy diet, a portfolio that’s properly balanced between various types of investments – stocks, bonds, and cash – is likely to serve investors best.

Volatility is the price investors pay to get rich.

From 1989 through 2018 the Dow Jones Industrial Average (DJIA) generated an average return of 8.3% annually. I think anyone would be happy with these returns. But during those three decades, the DJIA never once had a year where the return was anywhere near that number. There were eight years when that index had losses, one year the loss exceeded 33%. There were 22 years when the DJIA was up. One year the market rose more than 33%, equal to the year of maximum loss. That’s quite a ride.

Every year you can expect the market to experience a significant correction. Since 1980, the S&P 500 has averaged a 14% decline at some point during the calendar year. For many people the ups and downs are terrifying. We all hear of the long-term average annual return over time, but for too many people the roller coaster ride is more than they can handle.

As portfolios grow, the gains – and losses – get bigger in terms of dollars. A $10,000 portfolio losing 14% means the investor is down $1,400. A $500,000 portfolio’s 10% loss is $70,000.  At $1 million, that same percentage loss means the investor is down $140,000 from its peak value. If that was your portfolio, how would you feel?

This is where investor psychology becomes critically important. Losing money is never fun but there will be times when – if you invest at all – you will find yourself in this situation. That’s why Registered Investment Advisors (RIAs) like Korving & Co. try to judge their client’s risk tolerance. In order to get the kinds of returns investors can get over the long term, it’s necessary to accept the fact that there will be years when the market goes down.

Investors hiring investment advisors sometimes assume that we can produce high, yet safe, returns.  That’s a combination that no one can provide. The only people who offer high returns with no risk are con men. One of our jobs is to warn our clients about how to spot promises that are “too good to be true.”

What a good investment advisor can do is create and monitor portfolios designed to make the bumpy ride a great deal smoother. We create diversified portfolios designed to cushion the downside risk during “Bear” markets. But there is always a tradeoff and that means we must give up some of the upsides during the “Bull” phase of the market. If we do our jobs properly, we will get our client a fair rate of return near their personal growth objectives over the long term.

Investors vary greatly in risk tolerance. We have some great tools, like Riskalyze, a tool used for measuring risk tolerance and with it, we can customize portfolios for nearly every investor. Contact us if you want to find your “risk number” and see if it matches your portfolio. What do you have to lose?

The Wall Street Journal printed a great article on a subject close to our heart. Because of decades of experience, we are the preferred advisor to many widows.

Many marriages have a division of labor where one spouse is the primary manager of the family finances. The article had this to say about this scenario:

“It’s common for surviving spouses who took a back seat on money matters to find themselves with an incomplete picture of their net worth or where the accounts are held.”

To prepare for this, married couples should take the following key steps:

• Hire an estate attorney to draft or update wills and other estate-planning documents.
• Hire a financial advisor both spouses like and trust.
• Set up bank and other financial accounts that a surviving spouse will need immediate access to. These should be in both spouses’ names or as “transferable on death” from one spouse to the other.
• Order a copy of Before I Go and Before I Go Workbook

A surviving spouse should

• Order at least 15 copies of the death certificate. These will be needed to retitle financial accounts and settle the estate.
• Contact the financial advisor, the estate attorney, and the accountant, in that order.

It is almost inevitable and completely understandable that the surviving spouse will be overwhelmed during this time, so you’ll want to prepare a list of things to do in advance should this happen.

Your financial advisor is the one individual that the surviving spouse will have the closest relationship with. They will guide your CPA through your taxes once a year and your estate plans, which should be reviewed every few years.  It is to be expected that financial issues are ongoing and conversations will be frequent so if you are experiencing this, understand that it is completely normal.

• If you don’t have an advisor already, you need to hire one who understands the needs of the surviving spouse and will provide holistic advice and guidance.
• Find an advisor you feel comfortable with. A large percentage of widows end up firing advisors they inherit because they are not comfortable with their husband’s advisor.  
• Find a financial advisor who is a fiduciary, or legally obligated to put your interests first, one who is willing to discuss your needs and who is not simply an investment manager.