Tag: Investment strategy

Market Myth #2: It’s all about beating the market.

For many amateur investors the object is to beat the market.  They are abetted in this belief by the many magazines and newsletters that make the market the benchmark of what a successful investor should emulate.  People spend hours scouring the media looking for stock tips and investing ideas as if investing was a sport, like horse race, where the object is to beat the others to the finish line.

The fact is that “beating the market” does not address any individual’s actual financial goals.  It’s a meaningless statistic.  And it’s dangerous.

The fact is that most professional investors don’t beat the market on a consistent basis.  Even index funds, designed to replicate the market, don’t actually beat the market.  At best they provide market rates of return minus a fee.  Attempting to beat the market exposes the investor to more risk than is prudent.

Your portfolio should be built around your needs and consistent with your risk tolerance.

What does this mean?  Your portfolio should provide a return that’s keeping you ahead of the cost of living, that allows you to retire in comfort, and is conservative enough that you will not be scared out of the market during the inevitable corrections.

Want to create a portfolio that’s right for you?  Contact us.

Market myth #1: the stock market can make you rich.

This is one of a series of posts about common market myths that can be dangerous to your wealth.

The market is rarely the place where fortunes are made.  Real people get rich by creating and running great companies.  Bill Gates became the richest man by building and running Microsoft.  Steve Jobs the same way.  The Walton Family, ditto.

In the less rarefied world of multi-millionaires, millionaires and semi-millionaires the same thing is true.  People get rich (or well-to-do) by starting a business, studying and becoming a professional or just working for a living and saving part of what they earn.

This is not to disparage the market as a  tool for protecting  wealth, maintaining purchasing power, living well in retirement and getting a fair rate of return on your money.  But the idea that you can get rich by trading stocks is a myth that can actually destroy your financial well-being.

One of the best ways of avoiding the temptation to use the market as a “casino,” a place where you can “win the lottery” is to turn to a professional investment advisor.  Someone who knows what’s possible and what’s not.  Someone who is in the business of getting you a fair rate of return on your money while minimizing the risk that you will lose it.  An independent, fee only RIA is someone who will not try to sell you one the latest investment fad that the  wire-houses are selling, but who will act in your best interest, because that’s in his best interest.

Have a question about the markets?  Ask us.

What to do when couples disagree on investing

It’s well known in the investment business that women are more risk averse than men. There are, of course, exceptions and I should qualify that by saying that’s true of “most” women and men.

In most cases this does not cause problems when couples invest. That’s because there is usually a division of labor with one spouse making most of the investment decisions. However, when spouses collaborate on investing, a significant difference of opinion can cause a lot of stress in a marriage. Differences in money management styles between two partners can ruin a marriage.

That’s the time for the couple to meet with a trusted financial advisor who can provide unbiased advice and professional expertise. Getting an intermediary involved in what could be a serious dispute usually helps. This often allows a couple to come to an understanding that both can agree works for them.

If you and your partner have disagreements about money and investing, get in touch with us.

And don’t forget to read the first three chapters of BEFORE I GO.  It’s free.

Avoiding the Housing Trap in Retirement

Homes are a money pit. This morning the HVAC repairman showed up to fix the broken attic fan. Painters are coming next week. The insurance bill on the home is due soon. The landscaping needs some work. Let’s not forget real estate taxes and the mortgage payment.

Many people think of their home as a financial asset. Most people thought real estate was a safe financial asset. People were flipping houses for fun and profit. Then 2008 came along and we learned a whole new set of terms, like “liar loans” and “short sale.”

What does this have to do with retirement? Just this: many people are over-spending on their dream home or holding on to costly vacation homes. There is a term for this: being “house poor.” It describes the homeowners who spend too much of their income on housing costs.  How much is too much?  If it’s nearing 40{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} it’s definitely too much.

We won’t go into the reasons for this; they are well-known. The answer is to either make more money or to get rid of the money pit. It may be a very difficult emotional decision, but over the long-term, the financial markets have done better than the housing market. Another benefit is that the financial markets are liquid while your home is not,  sometimes taking a year or more to sell.

We are big believers in home ownership. But in our experience a home is not a financial asset that is used in retirement. In most cases the home does not become a financial asset until the owner gets too old and has to move into a retirement community or a nursing home. By that time, retirement is nearing its end.

Investment Mistakes Millionaires Make

Think millionaires don’t make investing mistakes?  Think again. The deVere Group asked some of its wealthy clients to tell them about the biggest investing mistakes they made before getting professional guidance. It demonstrates that the rich are not that much different. Keep in mind that many people get rich by starting a successful business or inheriting money. That does not make them smart investors.

Here’s a list of five common investment mistakes, and how to avoid them:

5. Focusing Too Much On Historical Returns

Too often investors look at stocks, bonds and mutual funds in the rear view mirror, expecting the future to be a repeat of the past. This is rarely the case. It’s why mutual fund prospectuses always state “past performance is no guarantee of future results.” Too many investors buy into last year’s top investment ideas, only to find that they bought an over-priced lemon. Investment decisions need to be made with an eye to the future, not the past.

That’s why we build portfolios based on what we think the markets (& investments) will do in the next 6-36 months. Of course we also look at track records, but in a more sophisticated way than buying last year’s winners.  And when investing in mutual funds, it’s vitally important to examine who is responsible for the fund’s performance and if that person’s still managing the fund.

4. Not Reviewing the Portfolio Regularly

Things change and your portfolio will change with it, whether you watch it or not. If you don’t watch it you could own GM, Enron or one of the banks that closed during the crisis in 2008. Every investment decision needs to be reviewed. The question you always need to ask about the investments in your portfolio is “if I did not own this security would we buy it today?” If the answer is “no,” it may be time to make changes.

We review your portfolios regularly, to make sure you’re on track with your stated goals.  We also offer regular reviews with our clients and prepare reports for them to show how they are doing.

3. Making Emotional Decisions

The two emotions that dominate investment decisions are greed and fear. It’s the reason that the general public usually buys when the market is at the top and sells at the bottom.

We help take the emotion out of investing.  We have a system in place that helps keep emotion out of the equation.

2. Investing Without a Plan

Most portfolios we examine lack a plan. In many cases they are a collection of things that seemed like a good idea at the time. This is often the result of stockbrokers selling their clients investments without first finding out what they really need.

We always invest with a plan.  You tell us your goals, timeline, etc and then we use that as an investment guide.  We don’t care about beating arbitrary indexes; we care about helping you achieve your plans with the least amount of investment risk possible.

1. Not Diversifying Adequately

One of the biggest risks people make is lack of diversification. It’s called putting all your eggs in one basket.   This often happens when people work for a company that offers stock to employees via their 401(k) or other plan. Employees of Enron, who invested heavily in their own company via their retirement plan, were devastated when their company went broke.   Sometimes investors own several mutual funds, believing that they are properly diversified only to find that their funds all do the same thing.

Nobody has ever accused us of being under-diversified.  We champion broad diversification in every one of the MMF (Managed Mutual Fund) portfolios we create. We choose funds that invest in different segments of the investment market. We own many assets classes (bonds, stocks, etc.). We diversify geographically, including some overseas funds. And we have style diversity: growth vs. value, large cap. vs. small cap. With rare exceptions, there is always something in our portfolios that’s making you money.

More information on Social Security benefits.

Let’s face it, Social Security is a confusing mix of benefits.  Depending on your age, health, marital status and the age of your spouse, your benefits can vary significantly.  Once you make a decision, it’s often impossible to change your mind or correct a mistake.

For example, how do you determine the Social Security benefits available to a 50-year-old disabled divorcee whose ex-spouse is deceased?

We have a series of “Social Security Savvy” guides available for people in different stages of life to help answer those questions.  They are titled:

  • Making Smart Decisions if you are Married.
  • Making Smart Decisions if you are Divorced.
  • Making Smart Decisions if you are Widowed.

For copies of these brief, easy-to-read guides, contact us via our website or e-mail us.

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When to start collecting Social Security benefits. Chapter 5.

You have three main options:

  • Start collecting early
  • Start collecting at full retirement age
  • Start collecting after full retirement age

 What are the trade-offs? 
Here’s a hypothetical example. Let’s assume that your full retirement age is 66 and you are eligible for a benefit of $1000 per month at full retirement age.
If you start collecting at age

  • 62 you collect $750
  • 63 you collect $800
  • 64 you collect $866
  • 65 you collect $933
  • 66 you collect $1,000
  • 67 you collect $1,080
  • 68 you collect $1,160
  • 69 you collect $1,240
  • 70 you collect $1,320

Getting business owners to diversify

 Successful business owners usually have strong confidence in the growth of their business.  As a result, they tend to invest most of their assets in their business.  They know their business, but are not nearly as knowledgeable about more liquid investments.  They are nervous about putting money into investment they can’t control and reluctant to turn large sums of money over to others to invest for them.

As a result, they often put their financial future at risk because the bulk of their net worth is tied up in the success or failure of their business.

The financial shock of 2008 brought this home to many companies.  Between 2008 and 2010 more than 200,000 small businesses closed.  The failure rate for new businesses is between 50{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} and 70{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}.  Once a business is established, the failure rate drops.  But any number of things can come along; changes in demographics, changes in the economy or even changes in surrounding area can cause a previously thriving business to close.

The challenge for the investment manager who offers to help the business owner diversify is to point out that a total focus on investing everything in his business leaves him and his family in a precarious situation.  One money manager likens it to riding a unicycle when they should be sitting on a piano bench.

The unicycle may be exciting and profitable, but you can easily fall.  The four legs of a piano bench are (1) the business, (2) a tax-qualified retirement plan, (3) a personal taxable portfolio and (4) real estate.  If the business is a huge success, the business owner wins big and, at retirement can sell out or leave it to his children.  If the business fails at some point, the other three legs of the piano bench are there to provide for his family and himself.

One investment advisor persuaded a reluctant entrepreneur to invest $5 million in a diversified portfolio instead of plowing it back into his company. At the meeting where the client finally agreed, his wife gave the advisor the thumbs-up behind her husband’s back, triumphantly mouthing the words, “My kids can go to college!”

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In times of market volatility … remain calm.

FIRST TRUST’S Brian Wesbury has some good advice for people who have been wondering about the market volatility so far this year.

After strong gains in 2013, equities have struggled this year.  Thursday and Friday felt a little panicky.  US stocks were down close to 3{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, gold was up, and the 10-year Treasury yield fell below 2.75{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} for the first time since November.  Investors are on edge, short-sellers are a little giddy and we even heard a TV host mention the infamous “Black Swan” again.
It’s hard to tell exactly what triggered the “Risk Off” trade, but last Thursday, even though 15 out of 20 S&P 500 companies beat earnings estimates, weakness in the Chinese purchasing managers’ index set off some selling. So, is this a moment to “run for the hills” or to “pull on your parka and wait it out?”  We opt for the latter.  Right now, there’s a mad rush for a narrative to explain the recent market stumbles.  One is that Chinese weakness hurts commodity exporters.  Another is Federal Reserve “tapering” is shrinking global liquidity, hurting emerging markets.

Still others point to turmoil in foreign currencies in places like Argentina and Turkey.  But we have seen this movie before along with government shut-downs, oil spills and even regional wars.  But the fundamental have not changed, housing is on the rise,  jobs are up despite people leaving the jobs market, oil and gas production is booming and new technology is boosting productivity, growth and profits.  We went to a few stores recently and they were filled with shoppers, parking lots were full and there were long lines to check out.  When large, flat screen, TVs are flying off the shelves, the economy isn’t doing badly.

We may see a full-fledged correction yet, but every bull market has these as part of the pattern.  The problem with trying to time the markets is that without a working crystal ball the timing is almost always wrong; you have to be right about the time to step out and the time to step back in.  It’s at times like this that having an appropriate asset allocation for your risk tolerance and your time horizon shows its true worth.  This is what RIAs do best.   If nothing has fundamentally changed, our outlook remains cautiously optimistic.  We suggest that everyone remain calm.

Adding to Your Returns Four Ways

There are at least four things you can do to get better returns on your money.

  1. Create an asset allocation program and stick to it.  Don’t chase the market up and don’t sell at the bottom.  If you have created an asset allocation that is right for you, it should be robust enough to take advantage of rising markets and allow you to sleep well at night in declining markets.
  2. Be tax aware.  Don’t buy mutual funds in taxable accounts at the end of the year just before they make their capital gains distributions.  Take tax losses to offset capital gains.
  3. Keep an eye on costs.  Investment firms are increasingly turning to fees for services they once provided for free.  Your investment manager should be aware of the fees you are paying and keep them under control.
  4. Re-balance your portfolio regularly.  It may be tough to sell some of your winners and add to the losers, but it works.  It’s really tough to sell on euphoria and buy on fear, but some of our biggest winners were bought when nobody wanted them and they could be bought for pennies on the dollar.

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Korving & Company, Investment Management, Suffolk, VA

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