Tag: statistics

What’s Your Risk Number?

risk

Defining how much risk someone is willing to take can be difficult.  But in the investment world it’s critical.

Fear of risk keeps a lot of people away from investing their money, leaving them at the mercy of the banks and the people at the Federal Reserve.  The Fed has kept interest rates near zero for years, hoping that low rates will cause a rebound in the economy.  The downside of this policy is that traditional savings methods (saving accounts, CDs, buy & hold Treasuries) yield almost no growth.

Investors who are unsure of their risk tolerance and those who completely misjudge it are never quite sure if they are properly invested.  Fearing losses, they may put too much of their funds into “safe” investments, passing up chances to grow their money at more reasonable rates.  Then, fearing that they’ll miss all the upside potential, they get back into more “risky” investments and wind up investing too aggressively.  Then when the markets pull back, they end up pulling the plug, selling at market bottoms, locking in horrible losses, and sitting out the next market recovery until the market “feels safe” again to reinvest near the top and repeating the cycle.

There is a new tool available that help people define their personal “risk number.”

What is your risk number?

Your risk number defines how much risk you are prepared to take by walking you through several market scenarios, asking you to select which scenarios you are more comfortable with.     Let’s say that you have a $100,000 portfolio and in one scenario it could decline to $80,000 in a Bear Market or grow to $130,000 in a Bull Market, in another scenario it could decline to $70,000 or grow to $140,000, and in the third scenario it could decline to $90,000 or grow to $110,000.  Based on your responses, to the various scenarios, the system will generate your risk number.

How can you use that information?

If you are already an investor, you can determine whether you are taking an appropriate level of risk in your portfolio.  If the risk in your portfolio is much greater than your risk number, you can adjust your portfolio to become more conservative.  On the other hand, if you are more risk tolerant and you find that your portfolio is invested too conservatively, you can make adjustments to become less conservative.

Finding your risk number allows you to align your portfolio with your risk tolerance and achieve your personal financial goals.

To find out what your risk number is, click here .

 

How well do couples communicate on money? – Part 5

Most couples think they communicate well, but research indicates otherwise when it comes to finances. Communication on financial issues between couples is especially poor, as we have discovered in previous essays. Despite concerns about medical costs, running out of money, inflation and Social Security, most couples have not created a plan to deal with these worries.

The 20{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} of couples who have created a plan get the benefit of peace of mind, less stress, and a more cohesive relationship. Uncertainty and doubt around important financial issues creates stress within relationships.
Couples who have a retirement plan in place:

  • Are twice as likely to live a very comfortable retirement.
  • Are 50{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} more likely to be “completely confident” in assuming responsibility for retirement.
  • Are much more confident that their partner will be OK in retirement.
  • Are twice as likely to know how much they will need in retirement.
  • Are less concerned about unexpected health care costs.
  • Are much less likely to be concerned about outliving their savings.

Having a plan to reach your goals is much like going to the grocery store with a shopping list. You know what you need and are less likely to forget important items, nor are you as likely to buy things you don’t need.

Creating a plan forces couples to be open with each other about their goals, their finances, and the issues that may keep them from achieving those goals. Working with a Certified Financial Planner™ (CFP) to create a plan also brings an important measure of reality to the process. Professional guidance creates realistic assumptions about how much should be saved and the rate at which it should grow. A CFP can also help mediate differences between couples when issues arise.

Our next essay will focus on advice to young couples.

Korving & Company, the 2015 Suffolk Small Business of the Year is a family owned investment management and financial planning firm. We deliver a very personal level of service to guide, empower and assure our clients that their money is carefully managed to meet their long-term life goals.

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How well do couples communicate on money? – Part 4

Most couples think they communicate well, but research indicates that communication about finances is often not good. In our previous essays we have discussed common financial disagreements.

In this essay we will discuss some of the financial worries couples have.

Nearly three-quarters (74{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}) of couples worry about unexpected health care costs. For more than half, it’s their top concern. With people living longer than ever before, advances in medical technology and the skyrocketing cost of health care, this concern comes as not real surprise.

After health care, the next biggest concern for couples (51{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}) was outliving their retirement savings.

The negative effects of inflation and concerns that Social Security may run out were the next biggest concerns.

Despite these worries, only 20{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} of couples actually have a plan in place to address these issues! And over one-third (36{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}) haven’t even thought about planning!

Our next essay will take a look at those couples who have taken the time to create a financial plan.

Korving & Company, the 2015 Suffolk Small Business of the Year is a family owned investment management and financial planning firm. We deliver a very personal level of service to guide, empower and assure our clients that their money is carefully managed to meet their long-term life goals.

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How well do couples communicate on money? – Part 3

Most couples think they communicate well, but when it comes to their finances research indicates otherwise. Our previous essays on the subject have shown just how poor it typically is.

On the issue of retirement, nearly half (48{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}) of the couples surveyed had no idea how much they needed to save in order to maintain their current lifestyle once they retire.

Nearly half (47{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}) disagreed on the amount they need. Even more startling, those who were nearest to retirement – when changing course is the most difficult – disagreed the most!

Over half (52{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}) of the respondents had “no idea” what they would receive in monthly retirement income. Asked about Social Security, 60{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} either did not know, or were not sure, what they would receive. That includes the about-to-retire Baby Boomers.

Roughly one-third of couples disagreed on their retirement lifestyle. Half could not even agree on when they would retire.

Our next essay on this series will have a look at what financial issues couples worry about financially.

If this sounds like you or someone you know, contact Korving & Company.

Korving & Company, the 2015 Suffolk Small Business of the Year is a family owned investment management and financial planning firm. We deliver a very personal level of service to guide, empower and assure our clients that their money is carefully managed to meet their long-term life goals.

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Successful and investing and emotional control

One of the big benefits of professional money management is “emotional control.”

Emotional control is the ability to control one’s emotions in times of stress. Napoleon once said that “The greatest general is he who makes the fewest mistakes.” There is a similarity between war and successful investing. Both require the ability to keep a cool head at times of high stress.

There is another old saying in the investment world: “Don’t confuse brains with a Bull Market.” When the market is going up, it’s easy to assume that you are making smart investment decisions. But your decisions may have nothing to do with your success; you may simply by riding the crest of a wave.

That’s when people become overconfident.

When the market stops going up, or the next Bear Market begins, the amateur investor allows fear to dominate his thinking. The typical investor tend to sell as the stock market reached its bottom. In fact, following the market bottom in early 2009, even as the stock market began to recover, investors continued to sell stock funds.  Since then the market has doubled.

Professional investors are not immune to emotion, but the good ones have developed investment models that allow them to ride through Bear Markets with moderate losses and ride the rebound up as the market recovers. It is that discipline that allows them to make fewer mistakes and, like Napoleon’s general, come out ahead.

Financial tips for corporate executives

The December 2014 issue of Financial Planning magazine had an article about “Strategies for Wealthy Execs.” It begins:

Just because your clients are successful executives doesn’t mean they understand their own finances.

And that’s true. Successful executives are good at running businesses or giant corporations. But that does not make them experts in personal finance.

One of the ways executives are compensated is with stock options. But options must be exercised or they will expire. Yet 11% of in-the-money stock options are allowed to expire each year. That’s usually because they don’t pay attention to their stock option statements.

Executives usually end up with concentrated positions in their company’s stock. Prudence requires that everyone, especially including corporate executives, have to be properly diversified. Their shares may be restricted and can only be sold under the SEC’s Rule 144. To prevent charges of insider trading, many executives sell their company stock under Rule 10b5-1.

An additional consideration for executives is charitable giving. Higher income and capital gains tax rates make it beneficial for richer executives to set up donor-advised funds, charitable lead trusts, charitable remainder trusts, or family foundations.

For more information on these strategies, consult a knowledgeable financial planner.

If you’re rich, will your kids stay rich?

Different countries have different ways of expressing the same beliefs about wealth: “Shirtsleeves to shirtsleeves in three generations” is the one I most often hear. In Japan, it’s “Rice paddies to rice paddies in three generations”. In China, “Wealth never survives three generations.” In fact, for 70% of all wealthy families, the money has been spent, or otherwise lost before the end of the second generation.

People who have enough money to consider themselves, ‘rich” – those with at least $10 million — worry about their kids squandering the money they’re given or inherited.

According to a study by U.S. Trust, 75% of families worth over $5 million made it on their own. In other words, they built it, mostly by starting a successful business.

Unfortunately, that doesn’t mean that their kids are equally smart or hardworking. And it doesn’t mean that their parents are wise investors.

That means there’s a market out there for advisors who can teach the kids (and often the parents) the ins and outs of investing. This provides these families with the means to keep the wealth they have earned and keep it for the next generation, and the next after that.

But just as important is passing on the social, intellectual and spiritual capital that created the wealth in the first place. Too often the children of wealthy families fail to appreciate the work and sacrifice it took to create that wealth, and assume it will always be there for them.

At Korving & Company often serve several generations of the same family. If you have concerns about your children’s ability to manage money, call us for a consultation.

Retirement Insecurity and What to do about it.

Would you care to guess what percentage of men age 51 years or older, making over $75,000 per year, who feel very confident about maintaining their current lifestyle in retirement?

According to the Journal of Financial Planning (July 2014) the number is less than half:

43{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} to be exact.

Women of the same age and the same income are even less secure:

Only 32{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} feel very confident that they can maintain their lifestyle in retirement.

If you are in the majority who are unsure about being able to retire and not cut back, isn’t it time you got a financial physical? Check out our website.  Give us a call. It won’t cost you anything. We won’t try to sell you anything (we hate that when we’re on the receiving end of a sales pitch).

After looking at these statistics, it may explain why we have such a large number of women clients as well as retirees. Retirement should be a time to enjoy life, to do the things you never had the time to do before. It’s not the time to worry about money.

Five year returns can be misleading

Chris Latham at Financial Advisor talks about the words “long-term” and the fact that there is no consensus about its meaning.  If one year is not long-term, is 2, 5, 10 or more?  The longer the period being measured, the closer we get to actually talking about the long-term.  Of course we have to take into consideration that fact that our individual time horizons are not infinite.  A 20-year-old can afford to think in terms of a 70 year time span, someone 70 years old cannot.

Many people will look at a five-year span and make a judgement about the market, a stock or a mutual fund.  But there’s something revealing that tells us that we can be misled by these statistics.

In fact, one calendar year can make all the difference in the minds of stock investors. Compare the five-year period ending in 2012 with the same span ending in 2013. They look like two completely different time frames, even though they share three identical years. Counting dividends, the five years ended in 2012 returned 1.7{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} on the S&P 500, while the five years ended in 2013 returned 17.9{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, the Times reports.
The long crawl up from the depths of the Great Recession accounts for the poor showing in the first snapshot, while last year’s 32.4{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} market rise accounts for the apparent miracle in the second.

Be cautious when viewing data that changes the beginning and end-points.  And keep in mind that market indexes are not important as a way of achieving financial freedom.

Retiree vs. Pre-retiree Investment Goals

Factors influencing household investment decisionsIt is often believed that the investment goals of people change when they retire.   That may not be true.  Extended lifetimes make it increasingly likely that people may live decades following retirement.  Combine that with low-interest rates and it’s increasingly common for retirees to continue to invest the same way they did before they retired.

A recent survey by Ignites Retirement Research showed little difference between pre-retirees and retirees in the factors that influenced their investment decisions.

Some additional survey results show that many retirees in the survey (66{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}) said growing wealth is a crucial or very important financial goal, greater than pre-retirees (51{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}). And, somewhat strangely, 84{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} of retirees named saving for retirement as a crucial or very important goal, compared with 70{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} of pre-retirees. The findings suggest that one psychological result of the 2008 crash is a marked reluctance for investors to shift from accumulation to distribution just because they happen to stop working a steady job.

What’s the essential difference between retirees and pre-retirees?  Retirees are forced to live on the benefits and assets they have accumulated over their working lives.  Given their desire to continue to invest their financial assets after retirement and the importance of protecting those assets from excessive risk of loss, it become increasingly important to have high quality, affordable financial help in retirement.  This makes an important case for getting the services of an RIA who can provide the professional, ethical and unbiased guidance that retirees need.

Government shuts down: No sign of economic problems

The news has been co-opted by the partial government shut down with its attendant predictions of economic catastrophe if the government doesn’t re-open all its branches in a few hours.  Meanwhile in Realville, First Trust notes:

we’ve still seen the two ISM indices (on manufacturing and services), auto sales, chain-store sales, and two weeks of unemployment claims.  None of these reports suggests the economy has broken out either to the upside  or the downside from the pattern of Plow Horse growth of the past few years.  While real GDP itself probably slowed in Q3 to around 1.5{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} growth, the economy as a whole looks to be expanding at roughly a 2{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} annual rate over a two or three quarter average.
The bottom line on  the economy right now is that there is no sign the partial shutdown, or anything else for that matter, has knocked it off the same course it’s been on for the past few years.  Hopefully, when the government finally opens back up, it’ll do so with a better set of polices, which would help the plow horse pick up his pace.

It’s a different view than we get on the 24/7 cable shows, but it helps to look at reality when those around you are losing their heads.

Market commentary as we begin the fourth quarter of 2013

As the third quarter of 2013 came to a close, focus turned to Washington with the government shutdown and the looming November 1 debt limit.  As we write this, it remains to be seen how the competing factions will come to a resolution or if they’ll just end up kicking the can down the road, as they have done so many times in the past, without making any real compromises on the underlying issues.  From 1976 to 1996, the government shut down 17 times, spanning a total of 110 days.  Historically, government shutdowns have had no detectable long term effect on the markets.  The last, and longest, shutdown doesn’t appear to have hurt the economy.  That was mid-December 1995 until early January 1996, a three-week shutdown under President Clinton.  The year before the shutdown, real GDP grew 2.3{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}.  In the fourth quarter of 1995 it grew at an annual rate of 2.9{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} and then during the first quarter of 1996 it grew at an annual rate of 2.6{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}.  This was despite the shutdown and the East Coast Blizzard in January 1996, which was then followed by large floods.

While headline news will have short term effects on markets, over the long term, economic conditions and the direction of corporate profits will have the greatest and most long-lasting effects on portfolios.  Economic conditions have been slowly and steadily increasing over the past few years, and now Europe seems to have stabilized and may be beginning to experience modest growth.  China’s new leadership is working to transform that country’s economy from being export-oriented to one that is more focused on increased consumer consumption.  This will have a major impact on the future of global trade.

As we have said for several quarters now, we continue to remain optimistic about stocks and cautious on bonds.  Even though the Federal Reserve has indicated that they will not begin easing until the economy improves, and they have spelled out what they’ll consider improvement, just the mere mention by the Fed of future rate hikes sends bonds tumbling.  As we said last time, we think that the Fed being able to remove itself from the equation of the U.S. recovery is a net positive, not a net negative.  Additionally, we now have the November 1 debt ceiling looming, which could send both stocks and bonds oscillating as politicians and pundits take to the airwaves to bring a little “Halloween cheer” (sarcasm alert).  We think a last-minute deal will be struck to avoid any real damage, aside from the emotional toll imparted upon people who watch the news or the stock markets very closely.

Whatever comes our way, we are always positioning our portfolios to participate in further market gains and to cushion any market declines.  Over the long term the trend is up.  Please call if we can be of any other assistance to you or someone you care about.

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