"The unfortunate truth is that intelligence and experience in one domain do no necessarily translate to another domain. More importantly, IQ tests do not assess whether a person is rational. Someone can have a very high IQ and yet not be very rational. A high-IQ individual may also not have well developed skills, such as judgment and decision making." - Tren Griffin. In fact, having a high-IQ may lead to over-confidence and not understanding where your circle of competence ends.
"A lot of people with high IQ's are terrible investors because they've got terrible temperaments." - Charlie Munger, Vice-Chairman of Berkshire Hathaway. Charlie also said, "Very-high-IQ people can be completely useless-and many of them are."
An old joke about Albert Einstein illustrates this point, Einstein passed away and went to heaven where he was informed that his room was not ready yet. He was told by an angel who was responsible for new arrivals, “I hope you will not mind staying for a while in a dormitory, I’m sorry but this is the best we can do right now.” The angel then escorted Einstein to meet his roommates saying this is your first roommate, she has an IQ of 180. “That’s wonderful!” exclaimed Einstein, “we can discuss mathematics.” The angel then said here is your second roommate his IQ is 150, “That’s wonderful,” responded Einstein, “we can discuss physics,” The angel finally said here’s your third roommate his IQ was 100. “That’s wonderful, where do you think the stock market is headed?”
Being humble and thinking your IQ is a bit lower than it actually is may in fact improve your investment success.
This blog is written from ideas from Tren Griffin's book, "Charlie Munger, The Complete Investor"
Never bet against America and more sage advice from the Oracle of Omaha
Warren Buffett, one of the most successful and admired investors of our time, held the 2020 Berkshire Hathaway Annual Meeting of Shareholders from the company’s Omaha, Nebraska headquarters on the first Saturday of May.
The Berkshire Annual Meeting, which has become an annual Woodstock-like event for investors around the world, drew a record 40,000 visitors last year, but this year (2020) the event was live-streamed instead due to COVID-19. And the Meeting was also limited to 89 year old Buffett holding court without his 96-year old friend and colleague Charlie Munger, who did not attend given the stay-at-home orders.
But the almost 5-hour event, even without the fans, did not disappoint. Buffett’s presentation covered a lot of ground, including the performance of Berkshire Hathaway, the airlines, stock buybacks, succession plans, cash positions, the coronavirus, the federal government’s response, his office attire during the shutdown (sweatpants) and America’s prospects going forward. Here are just a few takeaways from the Oracle of Omaha.
Buffett Dumped All Airline Stocks
Before the Annual Meeting, there was a lot of chatter about Berkshire’s selling of airline stocks in April – positions Berkshire started making in late 2016. In fact, Berkshire held 10.1% of Southwest, 10% of American, 9.2% of Delta and 7.6% of United as of December 31st. And he sold all of it.
High Regards for the Federal Reserve Chair As has been well documented, since early March the Federal Reserve has taken bold and drastic actions to combat COVID-19, with many suggestions that such drastic actions have not been taken by the Fed since the Great Financial Crisis of 2008. In all, the Federal Reserve’s actions have provided the bulk of the more than $6 trillion worth of liquidity to our financial system because they adopted:
Here is what Warren said about the Fed and its current Chairman, Jerome Powell:
“Never Bet Against America” That is not a pithy title, those are the exact words spoken by Buffett when asked about the impact of COVID-19. And he had a lot more to say. He acknowledged that the range of possibilities are wide and it will likely take years before investors truly understand the full impact of the virus, from an economic perspective but also from an emotional perspective. But he left no doubt that the markets would regain their footing, especially in the U.S.
On comparing the current virus to the Financial Crisis of 2008:
On whether America will rebound:
Heading into your retirement years brings a slew of new topics to grapple with, and one of the most confusing may be Medicare. Figuring out when to enroll, what to enroll in and what coverage will be best for you can be daunting. To help you wade easily into the waters, here are 8 essential things you need to know about Medicare.
Medicare Comes with a Cost
Medicare is divided into parts. Part A, which pays for hospital services, is free if either you or your spouse paid Medicare payroll taxes for at least ten years. (People who aren't eligible for free Part A can pay a monthly premium of several hundred dollars.) Part B covers doctor visits and outpatient services, and it comes with a monthly price tag -- for most people in 2017, that monthly cost is about $109. New enrollees pay $134 per month. Part D, which covers prescription drug costs, also has a monthly charge that varies depending on which plan you choose; the average Part D premium is $34 a month. In addition to premium costs, you'll also be subject to co-payments, deductibles and other out-of-pocket costs.
You Can Fill the Gap
Beneficiaries of traditional Medicare will likely want to sign up for a Medigap supplemental insurance plan offered by private insurance companies to help cover deductibles, co-payments and other gaps. You can switch Medigap plans at any time, but you could be charged more or denied coverage based on your health if you choose or change plans more than six months after you first signed up for Part B. Medigap polies are identified by letters A through N. Each policy that goes by the same letter must offer the same basic benefits, and usually the only difference between same-letter policies is the cost. Plan F is the most popular policy because of its comprehensive coverage. A 65-year-old man could pay from $1,067 to $6,772 in 2017 for Plan F depending on the insurer, according to Weiss Ratings.
There Is an All-in-One Option
You can choose to sign up for traditional Medicare -- Parts A, B and D, and a supplemental Medigap policy. Or you can go an alternative route by signing up for Medicare Advantage, which provides medical and prescription drug coverage through private insurance companies. Also called Part C, Medicare Advantage has a monthly cost, in addition to the Part B premium, that varies depending on which plan you choose. With Medicare Advantage, you don't need to sign up for Part D or buy a Medigap policy. Like traditional Medicare, you'll also be subject to co-payments, deductibles and other out-of-pocket costs, although the total costs tend to be lower than for traditional Medicare. In many cases, Advantage policies charge lower premiums but have higher cost-sharing. Your choice of providers may be more limited with Medicare Advantage than with traditional Medicare.
High Incomers Pay More
If you choose traditional Medicare and your income is above a certain threshold, you'll pay more for Parts B and D. Premiums for both parts can come with a surcharge when your adjusted gross income (plus tax exempt interest) is more than $85,000 if you are single or $170,000 if married filing jointly. In 2017, high earners pay $187.50 to $428.60 per month for Part B, depending on their income level, and they also pay extra for Part D coverage, from $13.30 to $76.20 on top of their regular premiums.
When to Sign Up?
You are eligible for Medicare when you turn 65. If you are already taking Social Security benefits, you will be automatically enrolled in Parts A and B. You can choose to turn down Part B, since it has a monthly cost; if you keep it, the cost will be deducted from Social Security if you already claimed benefits. For those who have not started Social Security, you will have to sign yourself up for Parts A and B. The seven-month initial enrollment period begins three months before the month you turn 65 and ends three months after your birthday month. To ensure coverage starts by the time you turn 65, sign up in the first three months. If you are still working and have health insurance through your employer (or if you're covered by your working spouse's employer coverage) you may be able to delay signing up for Medicare. But you will need to follow the rules, and must sign up for Medicare within eight months of losing your employer's coverage, to avoid significant penalties when you do eventually enroll.
A Quartet of Enrollment Periods
There are several enrollment periods, in addition to the seven-month initial enrollment period. If you missed signing up for Part B during that initial enrollment period and you aren't working (or aren't covered by your spouse's employer coverage), you can sign up for Part B during the general enrollment period that runs from January 1 to March 31 and coverage will begin on July 1. But you will have to pay a 10% penalty for life for each 12-month period you delay in signing up for Part B. Those who are covered by a current employer's plan, though, can sign up later without penalty during a special enrollment period, which lasts for eight months after you lose that employer coverage (regardless of whether you have retiree health benefits or COBRA). If you miss your special enrollment period, you will need to wait to the general enrollment period to sign up. Open enrollment, which runs from October 15 to December 7 every year, allows you to change Part D plans or Medicare Advantage plans for the following year, if you choose to do so. (People can now change Medicare Advantage plans outside of open enrollment if they switch into a plan given a five-star quality rating by the government.)
Costs in the Doughnut Hole Shrinking
One cost for Medicare is decreasing -- the dreaded Part D "doughnut hole." That is the period during which you must pay out of pocket for your drugs. For 2017, the coverage gap begins when a beneficiary's total drug costs reach $3,700. While in the doughnut hole, you'll receive a 60% discount on brand-name drugs and a 49% federal subsidy for generic drugs in 2017. Catastrophic coverage, with the government picking up most costs, begins when a patient's out-of-pocket costs reach $4,950.
You Get More Free Preventive Services
Medicare beneficiaries can receive a number of free preventive services. You get an annual free "wellness" visit to develop or update a personalized prevention plan. Beneficiaries also get a free cardiovascular screening every five years, annual mammograms, annual flu shots, and screenings for cervical, prostate and colorectal cancers.
You hear it all the time: you should make sure your retirement savings at least keep pace with inflation.
But what is Inflation and how does it really affect your retirement savings?
In simple terms, Inflation is an increase in the general level of prices for goods and services.
Deflation, on the other hand, is defined as a decrease in the general level of prices for goods and services.
Example and some history:
If inflation is high, at say 10% – as it was in the 1970s – then a loaf of bread that costs $1 this year will cost $1.10 the next year, and $1.21 two year from today. Inflation in the United States has averaged 3.29% from 1914 until 2016, but throughout history, it's varied quite a bit. It reached an all-time high of 23.70% in June 1920 and a record low of negative -15.80% in June 1921. Some will remember the high inflation rates of the 70s and early 80s when inflation hovered around 6% and occasionally reached double-digits.
For comparison purposes, the inflation rate in Venezuela averaged 32.47% from 1973 until 2017, reaching an all-time high of 800% in December of 2016. So needless to say, Inflation around the world can and does vary dramatically.
So how does Inflation affect your Retirement Account?
The simple answer is: inflation decreases the purchasing power of your money in the future. Consider this: at 3% inflation, $100 today will only be worth $67.30 in 20 years, a loss of 1/3 its value.
Said another way, that same $100 will only buy you $67.30 worth of goods and services in 20 years. And in 35 years? Well your $100 will be reduced to just $34.44.
Think back to many good or services you paid for some years ago, and I bet you can say, "I remember when..." For me personally, I remember purchasing a gallon of gas for well under $1 per gallon in high school.
How is Inflation calculated?
Every month, the Bureau of Labor Statistics calculates indexes that measure inflation:
How the Federal Reserve Attempts to Control Inflation
Up until the early part of the 20th century, there was no central control or coordination of banking activity in the United States. In fact, the US was the only major industrial nation without a central bank until Congress established the Federal Reserve System in 1913 with the enactment of the Federal Reserve Act.
With the Federal Reserve Act, Congress set three very specific goals for the Fed:
These three goals are sometimes referred to as the Fed's "mandate."
In order to help the Fed stabilize prices, Congress gave the Fed a very powerful tool: the ability to set monetary policy. And one way the Fed sets monetary policy is by manipulating short-term interest rates in an effort to control inflation.
If the Fed believes that prevailing market conditions will increase inflation, it will attempt to slow the economy by raising short-term interest rates – reasoning that increases in the cost of borrowing money are likely to slow down both personal and business spending which therefore slows down the pressure for good and services, thus lowering inflation.
The flip side is true too: if the Fed believes that the economy has slowed too much, it will lower short-term interest rates in an effort to lower the cost of borrowing and stimulate personal and business spending.
As you might imagine, the Fed walks a very fine line. If it does not slow the economy soon enough by raising rates, it runs the risk of inflation getting out of control. And if the Fed does not help the economy soon enough by lowering rates, it runs the risk of the economy going into recession.
Currently, the Fed believes that “inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Fed’s mandate for price stability and maximum employment.”
What Investors Need to Remember
Therefore, it is imperative that your long-term retirement strategies account for inflation and that you prepare for a decrease in the purchasing power of your dollar over time. As a financial advisor, I would suggest you assume inflation will be approximately 3%, its historical average. So in other words, your investment portfolio needs to AT LEAST cover the "cost" of Inflation or earn a rate of return equal to or greater than inflation.
It’s true that inflation today hovers around 2% – the Federal Reserve’s target inflation rate – but I would prefer to use the last 100-years of data. If I’m wrong and we find that the inflation rate for the next 25 years turns out to be 2%, then the purchasing power of your retirement savings will be more, not less.
And I’d rather err on the side of caution.
Now more than ever, understanding how you are invested in your Retirement account(s) is critical.
We use several powerful platforms to review, analyze, diagnose, and improve our clients portfolios to optimize for the greatest amount of return for the least amount of risk.
by Joachim Klement, CFA
The nice thing about being an investor is that the forces that drive the markets change all the time. However, there are different “market regimes” in which a major narrative dominates market action.
Over the last 20 years of my career, there have been several ascendant market narratives: technology companies revolutionizing the world, followed by the “jobless recovery” of the early 2000's, and then the “Great Moderation” a few years later. Suddenly in 2007, we all had to become experts in housing and mortgage markets as subprime mortgages blew up the world.
Then it was back to central bankers and such unconventional monetary policy as quantitative easing (QE) and “Operation Twist” that created a “new normal.” Then came the European debt crisis and austerity, which was replaced in recent years by geopolitics and the rise of populism.
And while I am generally skeptical that individual geopolitical events will have a listing influence on financial markets, there are clearly circumstances — the US–China trade tensions or Brexit, for example — that can and do have a material influence on investments.
The challenge then is how to forecast these events and their impact. For forecasting rules, the gold standard is described in Dan Gardner and Philip Tetlock’s Superforecasting — a mandatory read for anyone who forecasts. But there are other great resources, including Steve LeVine's 14 rules.
Personally, I have created my own set of 10 rules that I try to use as guidance when forecasting economic or political events:
1. Data matters
We humans are drawn to anecdotes and illustrations, but looks can be deceiving. Always base your forecasts on data, not qualitative arguments. Euclid’s Elements was one of the earliest texts on geometry, yet none of its oldest extant fragments include a single drawing.
Predicting the next financial crisis will make you famous if you do it at the right time. It will cost you money and reputation at all others. Remember that there are only two kinds of forecasts: Lucky and wrong.
3. Reversion to the mean is a powerful force
In economics as well as politics, extremes cannot survive for long. People trend toward average, and competitive forces in business lead to mean reversion.
4. We are creatures of habit
If something has worked in the past, people will keep doing it almost forever. This introduces long-lasting trends. Don’t expect them to change quickly even with mean reversion. It is incredible how long a broken system can survive. Just think of Japan.
5. We rarely fall off a cliff
People often change their habits in the face of a looming catastrophe. But for that behavioral change to occur, the catastrophe must be salient, the outcome certain, and the solution simple.
6. A full stomach does not riot
Revolutions and uprisings rarely occur among people who are well fed and feel relatively safe. A lack of personal freedom is not enough to spark insurrections, but a lack of food or water or widespread injustice all are. The Tienanmen Square protests in China were triggered by higher food prices. So too was the Arab Spring.
7. The first goal of political and business leaders is to stay in power
Viewed through that lens, many actions can easily be predicted.
8. The second goal of political and business leaders is to get rich
Combined with the previous rule, this explains about 90% of all behavior.
9. Remember Occam’s razor
The simplest explanation is the most likely to be correct. Ignore conspiracy theories.
10. Don’t follow rules blindly
This applies to these rules as well as all others.
Here is a link to the original article by Joachim Clement, CFA
The above article is copied from the original.
Critical for long-term success, your financial plan doesn't need to be complicated, but it should provide a starting point and create a baseline for measuring your goals and determining what’s most important to you.
Just Cut Fees
Physically review all financial statements (bank, brokerage, retirement, etc.), bills (home & auto insurances, utility, etc.), and subscription services (gym memberships, streaming services, internet providers, phone contracts, etc.) to uncover fees that you can eliminate or reduce. There's no excuse not to now...most of us are at working from home due to COVID-19. Find the time to spend just a few minutes which could end up saving you hundreds if not thousands of dollars every year.
You have to know exactly how much you need per month to live. The easiest way to create a budget is to track what you earn, save and spend. Keep it simple...but accurate. Do it.
Invest to earn a rate of return greater than inflation. Consider low-cost, broad-based index funds to diversify holdings, reduce management expenses and mitigate tax consequences.
Just Plan for Retirement
It's never too early (or late) to start saving for life after work. Make regular contributions to retirement accounts, like 401(k) plans, for tax deferred growth.
Just Eliminate Debt
Reduce or eliminate debt whenever possible - you'll find it easier to achieve your goals without having debt hanging around your neck. You'll sleep better too.
Monitor your brokerage statements and 401(k) account to ensure you are on track for retirement. It is always a good idea to overestimate your needs. Expect the unexpected, plan for and invest for recessions to be part of our future. Why? Because they are. Having a solid financial plan can weather the toughest storms.
According to reports from CNBC, 75% of Americans are going it alone, without the help of a financial advisor. To achieve their goals, everyone should have a financial advisor. But not just any advisor – a good one, and the right one for you.
We will get through this. We will.
Appreciate everything that is right in your life. Appreciate the people in your life. Appreciate the little things. Appreciate the big things. Appreciate your struggles...it's during challenging times that you can grow and become the best version of you.
NOW GO OUT AND JUST DO IT.
One of the first steps to choosing the right manager for your wealth is knowing the right questions to ask. And knowing the right answers to see if they measure up to your financial goals.
How long have you worked with high-net-worth individuals, and in what capacities? Although private wealth advisers often find working with high-net-worth investors to be satisfying, other career paths can offer insights about the technical knowledge required for client success.
What training did you undertake to prepare for this role? Some larger firms offer specialized training courses, while practitioners elsewhere may enroll in classes or degree programs to prepare themselves.
Have you earned any relevant professional credentials? There are many, many professional designations that private wealth advisers can attain. Inquire about the breadth of curriculum, hours of preparation required, and pass rates to determine how substantive each program might be.
Describe any conflicts of interest that could exist between us, and how you would propose to address or manage them. Would you certify that you are acting as a fiduciary on my behalf at all times? While some business models may not permit an adviser to act as a fiduciary on your behalf (that is, someone who always puts your best interests ahead of any others, including their own or their employer’s), you should note how conflicts of interest are managed and mitigated.
Have you ever been subject to any allegations of misconduct or disciplinary actions from a regulatory body? Details about disciplinary actions may be available on regulator websites, but advisers should also discuss allegations with you that did not result in disciplinary actions. Refer to the SEC’s guide https://www.sec.gov/reports pubs/investor-publications/investor-brokershtm.html for more information.
Of the many dimensions of a wealth management offering (e.g. investment management, financial planning, behavioral coaching, financial concierge, family dynamics coaching) which do you think are your particular strengths and/or areas of emphasis? How do you work with external advisers? It is unlikely that any single professional can be an expert in all aspects of wealth management. Consider how your adviser addresses the dimensions of wealth management outside of their core expertise, as well as how they could work with any other existing advisers you currently have and like.
Describe any conflicts of interest that could exist between us, and how you would propose to address or manage them. Would you certify that you are acting as a fiduciary on my behalf at all times? While some business models may not permit an adviser to act as a fiduciary on your behalf (that is, someone who always puts your best interests ahead of any others, including their own or their employer’s), you should note how conflicts of interest are managed and mitigated.
What do you think your specific added value is, and how would I recognize that in our relationship? Your adviser’s answers should align well with your needs and be realistic and appropriate. Beware of unrealistic claims of potential performance or discussion of services that you don’t expect to be of interest to you.
Is management of my wealth more about “winning” or “not losing?” How is that reflected in what you do for me? The most appropriate answer in many cases will involve some elements of both winning and not losing, but pay attention to how your adviser describes their philosophy and the tactics that reflect their approach. Consider how your appetite for risk fits with your adviser’s approach being sure to remember that returns without risk are unrealistic.
What is your approach to investment management? Do you prefer a particular investing style? Do you prefer particular investment vehicles? Your adviser should be able to explain why they choose to execute their investment strategy in the way they do, and will often reflect priorities for diversification, expense control, tax management, or liquidity. Consider how your adviser has regarded more recent innovations in the marketplace to assure yourself that they bring fresh perspective to their strategy.
Describe your proposed fee schedule. How does your fee schedule align with achieving my goals? Many advisers will assess a fee based on the market value of assets they manage on your behalf, which aligns with your interests to the extent that successfully growing assets within agreed upon risk parameters is to your benefit. Discuss with your adviser how such fee arrangements might affect their advice that would cause the level of assets under management to decline (for example, to buy investment real estate) as well as how growth in assets would affect the marginal cost of their advising services.
What other expenses would I expect to incur as part of our relationship? To properly understand the cost of advice and make your adviser’s fees easily comparable to others, consider any additional fees that may apply including fees for financial planning, financial concierge services, custody, or other expenses.
Download the PDF below for even more important questions to ask.
The pace with which the Coronavirus bear toppled the longest-running bull market in history was startling. The Dow Jones Industrial Average officially entered the “Coronavirus bear market” in just 20 trading days, easily making it the fastest such slide in stock market history. The second fastest was 1929 and that took 36 trading days.
Lest we forget: the highest closing record for the DJIA was set on February 12, 2020, when it closed at 29,551.42. Less than one month later, on March 11th, the DJIA closed at 23,553.22, down 20.3% from its high and officially ending the longest-running bull market in history that started in March 2009.
Bear Market Defined
In technical terms, the stock market enters a bear market whenever stock prices have fallen over 20% from their recent peaks. A bull market, on the other hand, is when stock prices rise by at least 20%. There is debate as to where the true origins of these expressions came from, but many suggest that it has to do with how each animal attacks: a bull thrusts its horns and enemies upward whereas a bear swipes its paws and enemies downward. Neither sound pleasant.
In fact, an examination of the historical performance of the S&P 500 from 1926 through March 2020 shows that:
The silver lining is that bear markets are shorter than bull markets.
Stock Market Corrections & Crashes
It is important to distinguish a bear market from a market correction, which is shorter and involves less of a market decline. Market corrections are short-term trends that typically last less than a few months and involve stock market declines of at least 10% – but not as severe as the 20% fall of a bear market.
Stock market crashes, by contrast, are when stock markets plummet by more than 10% in a single day. The Great Crash of 1929 consisted of market drops of 13% and 12% on successive days. The stock market crash of October 19, 1987 – known as Black Monday – saw the market drop 23%. And on March 16, 2020, the market crashed when it dropped 13%.
Historical Bear Markets Between 1926 and March 2020
There have been eight bear markets, ranging in length from about 6 – 24 months and bringing market declines ranging from more than -80% to just over -20%.
Here are the more memorable bear markets.
The upside of a Bear Market
The one great thing about Bear Markets, is they end. And almost more importantly they make way for a new Bull Market.
Consider the rallies that occurred during a few of the past bear markets:
Thoughts for Investors
The question is, should the average investor remain invested when a bear market starts swiping its paws and everything downward? While the answer to that question depends on the individual investor, it is important to beware of the tendency to over-react to fears of a bear market or thrills of a bull market. Often times, individual investors tend to let their emotions adjust their holdings, which can result in selling after prices have fallen sharply, instead of buying at low prices (or buying after stocks have risen to unsustainable heights). Whether you will be able to out-wait the Coronavirus bear market and rebuild your portfolio to your satisfaction depends upon a deluge of factors, including the duration of the Coronavirus bear, your risk tolerance, your time to invest, the strength of your investments and the choices you make going forward.
What's the difference between these two S&P 500 index funds?
They both track the same index.
They invest in exactly the same companies.
They both are passively managed.
So what might cause their dramatic difference in performance over the last decade?
Simply, the amount of money they charge investors. The industry calls this fee their "expense ratio."
If you had invested $100,000 in the most expensive S&P 500 index fund 10-years ago vs. the investing in one of the lowest cost S&P 500 index fund 10-years ago, you'd have $60,000 less. Let that sink in. $60,000 LESS.
Again, these funds invest in the exact same companies. You simply paid more money for investing in the exact same companies, and in the end, the fund company kept more money and you earned less.
Many investors and for that matter many Financial Advisors don't understand what they are actually investing in when they pick a particular investment fund. Many unsuspecting investors look at the name of the fund, do a quick glance at the historical performance and hit the "buy" button without fully vetting what the fund is actually invested in. For many investors the process I just laid out is what they call "research", but in truth it's nothing more than window shopping.
Take a look at the chart below of a fund that claims to be a "Low Volatility" fund...meaning, the goal of this fund is to be LESS risky than the market. This didn't work out so well for this fund and its investors. This particular fund has been actually MORE risky.
Deep due diligence is required of all investments that are under consideration to be put into a portfolio to adequately understand the risks and the potential returns. Looking beyond the name of the investment is just the first step.
Depending on the time frame you are referencing, the Stock Market return has been great, horrible or something in between. It's important to understand, time can be considered a diversifier similar to diversifying across different assets and securities. Being invested across many different types of securities and across several asset classes is akin to using time to reduce risk, risk goes down with time.
It's important to keep Stock Market returns and Time in perspective.
In less than a month the Stock Market is up over 27% from the recent bottom.
Over the last 3 months the Stock Market is down about -13%
Over the last year the Stock Market is essentially flat.
The Stock Market is up almost 50% in the last 5 years.
In 10 years the Stock Market is up over 190%.
“The worst thing mistake you can make in investing is to buy or sell based on current headlines.” - Warren Buffett
During these challenging times, it's actually a great opportunity to review your Retirement Portfolio and your overall Financial Plan. There are some amazing opportunities to take advantage of what the market is providing long-term investors. With more people working from home right now, you might have some extra time to dig up a recent statement and make sure you are on track to meet your financial goals. Here are 8 quick ideas to help improve your Retirement Portfolio.
1. Have Clear Investment Goals
The adage, “If you don’t know where you are going, you will probably end up somewhere else,” is as true of investing as anything else. Everything from the investment plan, to the strategies used, the portfolio design, and even the individual securities can be configured with your life objectives in mind. Avoid focusing on the latest investment fad or on maximizing short-term investment return, instead design an investment portfolio that has a high probability of achieving your long-term investment objectives.
2. Focus on the Right Kind of Performance
There are two timeframes that are important to keep in mind: the short-term and everything else. If you are a long-term investor, speculating on performance in the short-term can be a recipe for disaster because it can make you second guess your strategy and motivate short-term portfolio modifications. But looking past near term chatter to the factors that drive long-term performance is paramount. If you find yourself looking short-term, refocus.
The only way to create a portfolio that has the potential to provide appropriate levels of return and risk in various market scenarios is adequate diversification. Often investors think they can maximize returns by taking a large investment exposure in one security or sector. But when the market moves against such a concentrated position, it can be disastrous.
4. Know What You Own
Far too many investors don’t know what they are invested in. Not knowing what the specific risks of the investment are and not understanding how it does or doesn’t fit into their portfolio. Every investment should have a reason why it’s in your portfolio. Ensure that every investment in your portfolio has a reason to be there.
5. Control What You Can
No one can predict the future, but you can take action to shape it! Similarly, you can’t control what the market will do, but you can control how you react to it. Right now the market is offering some great opportunities, use the market’s volatility to your advantage.
6. Reduce Your Media Consumption
There are plenty of 24-hour news channels that make money by showing “tradable” information. The key is to parse valuable information out of all the noise. Successful and seasoned investors gather information from several independent sources and conduct their own proprietary research and analysis. Using the news as a sole source of investment analysis is a common investor mistake because by the time the information has become public, it has already been factored into market pricing. A focus on near-term returns leads to investing in the latest investment craze or fad or investing in the assets or investment strategies that were effective in the near past. Either way, once an investment has become popular and gained the public’s attention, it becomes more difficult to have an edge in determining its value.
7. Don’t Try to be a Market Timing Genius
Market timing is next to impossible. For people who are not well trained, trying to make a well-timed call can be their undoing. An investor that was out of the market during the top 10 trading days for the S&P 500 Index from 1993 to 2013 would have achieved a 5.4% annualized return instead of 9.2% by staying invested. This difference suggests that you are better off contributing consistently to your investment portfolio rather than trying to trade in and out in an attempt to time the market.
8. Review Investments & Rebalance
If you are invested in a diversified portfolio, there is an excellent chance that some things will go up while others go down. At the end of a quarter or a year, the portfolio you built with careful planning will start to look quite different. Check in regularly and rebalance to make sure that your investments still make sense for your situation.
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When weather forecasts are inaccurate, we can usually change our plans with little consequence in the greater scheme of things. While making financial decisions does involve some guesswork, an educated guess—even with elements of uncertainty—sometimes can be better than making a decision with no forecast at all.
Unfortunately, economic forecasting, like weather forecasting, is far from an exact science. Even professional economists may strongly disagree on the direction of the economy at any given point in time, based on their interpretations of conflicting economic indicators. Although many factors are pivotal in assessing the economy, let’s focus on two key points that may help you better understand the economy, and where it may be headed in the near future.
1. Consumer Spending: Since consumer spending has historically accounted for about two-thirds of the economy, according to the U.S. Bureau of Economic Analysis. Consumer cutbacks on spending are not usually the primary cause of a recession. Rather, consumers may buy more on credit, which leads to greater monthly payments. But at some point, consumers can spend only what their incomes will allow. When consumer debt rises, it becomes particularly important because of the impact of total consumer spending on our economy. It may also be helpful to understand the Federal decisions that lay the foundation for our overall economic climate.
2. U.S Government (Monetary & Fiscal Policy): The Role of the Federal Reserve Bank (the Fed) Even the casual observer of business news knows that “Fed watching” is a serious activity in the financial and business sectors. You may be wondering, what it is that makes the Fed so important.
While consumers can affect the economy by spending according to their own situations and financial pressures, Federal policy decisions, such as fiscal and monetary measures, also have an effect on the economy. Fiscal policy, enacted by Congress in the form of tax and/or spending legislation, is the result of the political process and the prevailing political climate. In contrast, monetary policy is the responsibility of the Fed, whose role is to evaluate all factors influencing the economy (individual, market, and government) and take action in attempts to keep the economy on an even keel.
The Fed can manipulate the flow of money in order to obtain a desired effect over time. However, the Fed’s most effective short-term policy decisions that can manipulate the economy involve short-term interest rates. Consequently, the Fed can realistically have only one target: inflation. If the Fed perceives that prevailing forces will increase inflation, it can attempt to slow the economy by raising short-term interest rates. It does this based on the assumption that an increase in the cost of borrowing is likely to dampen both personal and business spending. Conversely, if the Fed perceives that the economy has slowed too much, it can attempt to stimulate growth by lowering short-term interest rates, the theory being that lower costs for borrowing may stimulate more spending.
The Fed walks a fine line in trying to maintain this balancing act. If it doesn’t tighten the reins soon enough by raising interest rates, it runs the risk of uncontrolled inflation. If it fails to loosen them soon enough by lowering interest rates, the economy could plunge into a recession. An argument could be made that the primary goal of the Fed is to keep inflation low enough that it does not affect business decisions.
You & Your Financial Plan: Your own personal financial plan is really what will drive your success (or failure). By understanding what your goals are, where you are today and having a well-thought out plan to get you from where you are today to where you want to go is ultimately what's important.
Understanding how the markets work, who the participants are, and realizing that many things are unknowable at the time you have to make a decision are extremely important. And it's this last part that is most important, knowing that you won't know everything you'd like to know beforehand is the hardest idea to grapple with. As the well known Nike saying goes, "Just Do It."
Many times when you don't know what to do, it's wise to take advice from people who are experts in their respective fields and have been extremely successful. When things seem unsettled, these 3 savants offer timeless advice for investors.
Such words of wisdom are especially appropriate amid the current turbulent circumstances: Stocks recently hitting lows and experiencing extreme volatility - to say the least. The variables change, but inevitably crises and problems occur and affect markets like they are today. But most importantly we ALWAYS overcome them.
Here’s some food for thought from three great investors to help avoid investment mistakes:
Crises in markets come and go: Shelby M.C. Davis.
A legendary mutual fund manager. Human history is the history of crises and relative periods of calm.
It’s no surprise that markets exhibit the same patterns of exuberance, fear and everything in between. Every crisis seems to have different origins, whether stagflation or inflation, collapsing or soaring energy prices, falling or climbing home prices. A wise investor acknowledges that crises ebb and flow, and that the best investment strategy adjusts to changes but avoids drastic over-reactions.
As Davis puts it: “Crises are painful and difficult, but they are also an inevitable part of any long-term investor’s journey. Investors who bear this in mind may be less likely to react emotionally, more likely to stay the course, and be better positioned to benefit from the long-term growth potential of stocks.”
Don’t let your gut emotions steer investment decisions: Benjamin Graham.
Graham is considered the father of value investing, he taught Warren Buffett and wrote a number of classic books on investing. Graham said: “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
Avoid market timing: Peter Lynch.
He rose to fame by successfully managing the Fidelity Magellan fund from 1977 to 1990, racking up an eye-popping 29% annual rate of return. Sadly, the average investor in his fund during those 13 years earned a small fraction of 29% by jumping in and out of Magellan to try to enhance returns.
Lynch once summed up his dim view of market timing this way: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."
Another example of market timing’s weakness: The Standard & Poor’s 500 from 1992 to 2012 registered a nice 8.2% annual return. What kind of return did investors earn if they missed the best 10, 30, 60 or 90 trading days during those two decades, which is about 2,500 trading days?
Investors who missed the best 10 S&P 500 days earned half as much, 4.5% annually those who missed the best 30 days realized zero the best 60 days, negative 5.3% the best 90 days, a whopping minus 9.4%. In other words, stay at a party from start to finish - don’t dart in and out if you don’t like the music or find the conversation boring.
The lessons provided by these three investment sages is that your own mistakes may be a bigger source of your own poor return than economic and political factors that move markets and are beyond your individual control.
I repeat. Do nothing.
Our whole lives we have been told and our own experience shows us by working hard, getting good grades, keeping busy, and pushing forward is almost a sure bet to getting ahead and grabbing the brass ring.
In investing, the opposite is true. Which is why it makes it so hard to do. Doing nothing is almost always the surest way to success. As Warren Buffett says, "The Stock Market is designed to transfer money from the active to the patient."
The best-performing mutual fund in the first decade of the 21st century was the CGM Focus Fund. During the ten years covering two recessions, the fund managed to generate an impressive 18% annualized return. What's even more amazing than this impressive return is that the typical investor in the fund actually lost almost -11% annually.
You read that right, an 18% gain for the fund and an -11% loss to the investor.
Huh? How is this even possible?
Investors were doing exactly the opposite of what they should have been doing; they were buying high and selling low. Investors plowed into the fund when it was high, and when the fund waned a bit, they sold. This is one of the surest ways to go broke.
And the CGM Focus Fund’s shareholders are not alone. Several other studies indicate that equity fund investors underperform across the board, on average, by over 6% per year between 1991 and 2010, according to Davis Advisors.
Why does this happen?
You can blame biology, we are preprogramed to want to "do something" when we are scared. And it made sense tens of thousands of years ago when we had to decide if a large animal might attack us. Quick action made sense, run now and live to hunt another day. This evolutionary response was critical to our survival as a species for thousands of years, unfortunately, our biology hasn't kept up with our current 'survival' needs.
So where does this fear come from today? It comes from the media, so-called 'advisors', friends, family, co-workers, and neighbors. Most unsuccessful investors chase performance, engage in panic selling, and adopt myopic thinking encouraged by watching daily prices.
Successful investors realize that no one can time the market consistently and therefore they ignore all the fear around them. They know the most important thing, is to have a plan, stick to their plan, and when others are selling, they do nothing. Warren Buffett said it best, "Investing is simple, but not easy."
- Paul Rossi
Below is a letter that Warren Buffett penned in THE NEW YORK TIMES during what would become known as the Global Financial Crisis. During these turbulent times, I think it's important to re-read what he wrote, it's sage advice for investors.
By WARREN E. BUFFETT OCT. 16, 2008
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So…I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
Over the last 10-years the S&P 500 or what many people refer to as the "Stock Market" is up over 285% when factoring in reinvested dividends (purple line). While it's not mentioned a lot in the news, the dividends paid by these companies has a dramatic impact on investors and their overall return. In the chart above, you'll notice the same index (in orange) shows the index return excluding dividends. The return difference is material. Dividends Matter.
My firm was recently approached by the leading online Real Estate firm Redfin to provide a very short tip that could help potential homebuyers save for a home. Redfin asked myself and several advisors around the country for their advice. Collectively, there is some great advice for would be homebuyers as well as helping give people some financial direction.
Here is the beginning of Redfin's article:
Are you a millennial thinking about settling down and buying your first home? Saving for the 20% down payment can be overwhelming – for many of us, it’s tough to know where to begin! To help ease the burden, we rounded up the financial experts to weigh in with their best tips for millennial homebuyers. From long-term investment strategies to day-to-day saving tips, whether you’re in Sacramento or Philadelphia, here are the best ways to inch toward your first home straight from the experts that know best.
Here is what I wrote for the article on Redfin's website. - In fact it's really two thoughts.
Click here to be directed to the entire Redfin article and all the great advice.
FOR IMMEDIATE RELEASE
Rossi Financial Group Receives 2019 Best of El Dorado Hills Award
El Dorado Hills Award Program Honors the Achievement
EL DORADO HILLS December 23, 2019 -- Rossi Financial Group has been selected for the 2019 Best of El Dorado Hills Award in the Financial Services category by the El Dorado Hills Award Program.
Each year, the El Dorado Hills Award Program identifies companies that we believe have achieved exceptional marketing success in their local community and business category. These are local companies that enhance the positive image of small business through service to their customers and our community. These exceptional companies help make the El Dorado Hills area a great place to live, work and play.
Various sources of information were gathered and analyzed to choose the winners in each category. The 2019 El Dorado Hills Award Program focuses on quality, not quantity. Winners are determined based on the information gathered both internally by the El Dorado Hills Award Program and data provided by third parties.
About El Dorado Hills Award Program
The El Dorado Hills Award Program is an annual awards program honoring the achievements and accomplishments of local businesses throughout the El Dorado Hills area. Recognition is given to those companies that have shown the ability to use their best practices and implemented programs to generate competitive advantages and long-term value.
The El Dorado Hills Award Program was established to recognize the best of local businesses in our community. Our organization works exclusively with local business owners, trade groups, professional associations and other business advertising and marketing groups. Our mission is to recognize the small business community's contributions to the U.S. economy.
SOURCE: El Dorado Hills Award Program
El Dorado Hills Award Program
This is a question I hear a lot.
It's difficult to explain the most recent monthly return or year-to-date return and not talk about the long-term average return of the stock market. Many investors have a tough time hanging on during the difficult times to then subsequently reap the rewards during the good years. With all the ups and downs the market provides, it very rarely returns in any single year the long-term market average. Take a look below.
Part of the value of getting professional financial advice is understanding the history of the various investable markets and what you can expect both in terms of volatility and return. A good financial advisor will provide sound financial advice that will stand the test of time both in good times and bad times.
When the financial markets are in turmoil and account balances start to fall, there is a strong temptation to ask your financial advisor to “do something” to stem any perceived losses. Yet it is often the case that staying the course—or doing nothing—proves to be the better path.
Sometimes the hardest thing to do...is to do nothing.
While this advice is well served to those who are properly invested for the long-term, it may not be the correct advice if you are not invested properly or your time horizon doesn't allow for markets to recover. Proper planning is crucial to being able to stay the course when rough weather is approaching or is already hammering your ship. The best time to make any course corrections is long before any corrective action is forced upon you by the market.
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Investing in your future pretty much requires that investors have patience. I know, I know...it's easier said than done.
The historical proof is in the pudding. See the chart(s) below. There has never been a 20-year period where the stock market hasn't had a positive return (although this doesn't guarantee the future will be like the past). While 1-year returns and even 5-year returns have had many periods that have had negative returns. This clearly shows that investors that are willing to accept short-term losses can reasonably expect long-term gains. While very few things in life are guaranteed and investment gains are not one of them, however, there is a high likelihood that you will be successful if you give yourself and your investments enough time.
Planning for retirement, buying a new home, or saving for your child's education are important financial decisions and you can significantly put the odds in your favor of success by ignoring the short-term noise and focusing on the what the long-term can likely provide.
What do I mean when I'm talking about the Big One, well I'm not talking about what you might think. I'm talking about the one big mistake that would dramatically impact your life. The Big One is any event or decision that leads to an outcome that could be considered catastrophic and unrecoverable. In this article, I will be talking about financial related Big Ones, but there are many other Big Ones to avoid, it could be physical, psychological, relational, etc. Statisticians refer to this as avoiding the left tail; what they are referring to is the far-left hand side of a normal bell shape curve. The left side is typically associated with highly improbable or highly unlikely outcomes, but when they do happen, can have a major impact.
Back in the late 1990s I had a friend who worked for a technology company, and if you remember the late 90s, it was a time that saw a lot of people working for technology companies, especially if you lived anywhere in California. The company he worked for was building out several co-location server farms where people could rent the servers to build their companies by not having to buy the servers themselves. My friend, being that he worked for the company, felt that he had a good idea as to the direction his company, the technology, the industry, the people, and overall felt confident about the company’s prospects. So, on top of the company stock options that he was given when he started there, he went out and purchased additional shares in the public market. Needless to say, he was highly concentrated, essentially every dollar he had was tied up in his company. Both his net worth and income were closely connected, therefore if his company did well then it was reasonable to assume that both his income and net worth (net worth = assets – liabilities) would do well. Conversely, the opposite held as well, and by the middle of 2000 with the implosion of the .com bubble my friends outlook dramatically changed as technology companies all over were struggling to survive the shock of the stock market’s drop which would later be called the bursting of the technology bubble. This had a compounding effect on my friend, as the shares he owned dropped and eventually became worthless over a few short months. In addition, he also lost his job which sent him scrambling to find another job at the same time everyone else was looking for a job. It was a 1 – 2 punch that knocked him down and almost out which took him several years to recover. His biggest saving grace was his age, at the time he was in his early thirty’s and had time to recover. Can you imagine if this happened to him later in his career? Without time to recover, what happened to my friend would have been his Big One. The reason I bring this up is that, yes being highly concentrated with your investments does have the opportunity of a huge reward, it also comes with the higher probability of a huge loss. Fortunately for my friend, he was relatively young and had many years to rebuild his asset base. Unfortunately, this isn't the case for people who are toward the end of their career and time is working against them. This event, if it happened to a person a couple of decades older could have been their Big One. Many times, time is the key determinant of whether an event could be considered the Big One.
It is this idea; your advisor's primary job is to prevent you from making this type of mistake in the first place. First the good news, let's start by talking about some of the things that investors can do wrong and recover from, which fortunately are quite a few. Investors can fail to rebalance, they can own sub-optimal investments, they can be somewhat tax inefficient, they can overpay on a mortgage, just to name a few. These are all mistakes, while definitely not ideal, people can survive and might still be able to reach their goals. Many times, if the financial advisor can just keep their client from making the big mistake, they've earned every penny you pay them.
While comprehensive financial planning encompasses many things, which include things like retirement planning, investment selection, asset allocation, portfolio management, college education planning, Social Security optimization, Medicare, tax planning, estate planning, risk management and insurance, one of the most important ideas is to prevent the Big One from happening. The idea is making sure that the decisions that are being made today will not wipe a person or a family out. People can come back from many sorts of small mistakes, but it's those big critical life altering decisions that you must have a zero-tolerance threshold.
It can be thought of similarly as the idea in the aviation industry where anything deemed critical, has checklists and redundancies built in. The check-lists help avoid the problems in the first place by having a system in place to make sure pilots are following standard procedures. These checklists are continually updated and improved to reflect new information and data as it becomes available. This process has proven to keep passengers safe and make air travel one of the safest forms of transportation. The redundancy aspect is about having all critical systems backed up just in case the original system fails the secondary system can take over. This multi-level system builds on the idea of an industry that strives for zero-tolerance failure. This type of process and zero-tolerance of failure is exactly what is needed in your financial life. Having initial plans, contingency plans, check-lists, etc., all in the name of making sure you never get blinded-sided by the Big One.
The challenge is that many clients may not realize it, but they need their advisor to be a barrier between themselves and a bad decision. How much is avoiding the Big One worth? How much is it worth in terms of stress, in terms of money, in terms of physical health, in terms of mental health, and in terms of relationships saved?
Albert Einstein is arguably considered one of the smartest people to have ever lived, so when quotes are attributed to him, most of us would be wise to listen what he might have said. Below are 3 such quotes.
Paul R. Rossi, CFA