Year: 2013

Buy low, sell high.

Diversify.

Let your winners run.

Sell your losers quickly.

These are the simple axioms of investing. And yet, they’re some of the hardest principles for experienced and novices to follow.

Time and time again I’ve watched as investor losses mount due to an unwillingness to sell a stock at a lower price than what was paid for it. In fact, that behavior is so common that there’s actually an industry term for it: anchoring.

Investopedia defines anchoring as “the use of irrelevant information as a reference for evaluating or estimating some unknown value or information. When anchoring, people base decisions or estimates on events or values known to them, even though these facts may have no bearing on the actual event or value.”

A good example is someone who pays $50 for a share of stock. Not long after the purchase it is trading for $40. Is it natural to sell it to cut your losses and move on? No, our brain “anchors” in on the $50 price. We think $50 is what the price should be even though the true value is whatever someone is willing to pay currently and in this case it’s $40. So we hang on to the stock hoping and hoping that it goes back up. Sometimes it does, but often the price continues down adding to the losses.

In order to sell quickly and move on to the next trade investors have to, a) overcome the cognitive bias of anchoring, and b) admit their mistake. That is, they need to accept that the analysis and decision making that went into the purchase decision was flawed or simply incorrect. Rather than sweep the mistake under the rug, I advise investors to capitalize on the experience by making it a teachable moment. By reviewing and analyzing the factors that drove the purchase decision, investors can improve the chances of not making the same mistake in the future.

No professional investor will ever chalk up their success to luck. Experience, learning from mistakes, perseverance, discipline, and an awareness of the cognitive biases humans have when investing all are part of what it takes to make repeatedly good investing decisions.

End-of-year is always a busy time for business owners. While there are lots of items, initiatives and, no doubt, people competing for your time and attention, there is one item that simply can’t be ignored — 401(k) management and review.

On the management side of things, there are annual notices that you as a plan sponsor must issue to participants — many by Dec. 1. The three most common notices are the Section 401(k) Safe Harbor Notice, the Section 401(k) Automatic Enrollment Notice, and the Qualified Default Investment Notice. Failure to issue notices on time may result in IRS penalties (as well as unhappy employees).

Turning to the review side, end-of-year is the ideal time to conduct a benchmarking review of your plan. Essentially a competitive review of your plan’s pricing, features, benefits and value provided to the participants, benchmarking should be done at least every three years. It is costly and or time consuming, so annually is too frequent. A benchmarking review is great way to ensure existing participant plans have the same product options and pricing that new plan enrollees might receive. In addition, benchmarking can ensure the fees associated with your plan are reasonable and commensurate with the services you’re receiving.

There are a couple of ways to go about benchmarking your plan. One is to hire outside advisors to do the analysis. Another is to put the plan out to competitive bid. Each option has its own strengths and weakness but both are considered completely and equally acceptable and desirable routes to go.

It’s important to note that benchmarking isn’t just important to making sure your employees’ (as well as your own) retirements are on track; it’s essential to satisfying your fiduciary responsibility as plan sponsor. As a business owner and plan sponsor you act as a fiduciary. As such, you are held to the highest standard of the law. The Department of Labor looks to you and the vendors you have chosen to work with to make sure the plan you’re offering is competitive in all aspects. While the vendors you work with to provide your 401(k) plan will assist in the compliance and notices to participants, the ultimate responsibility for the plan design and review falls to you. No firm or no other entity can completely replace your fiduciary responsibility.

While benchmarking is not required by law the way annual notices are, it’s my opinion that you should consider it an equally important responsibility. It’s an extremely effective way to stay on top of the evolving needs of your employees, the services offered by your plan provider, and it can go a long way towards protecting you as the fiduciary and all the participants.

Autumn is once again upon us and everything is feeling right and comfortable. The kids are back in school, we’re slipping back into old routines, the fall weather has been spectacular, and, quite happily, the stock market is up. What could be bad?

Well, unfortunately, a wee bit further south of us some other folks are also falling into some familiar routines. Specifically, the federal government is once again making noise about debt ceilings and a federal shutdown. Just like last year, the threat of a shutdown has added to and will continue to increase market volatility over the short term.

Granted, volatility is part of any market, especially the stock market. Measured in a number of different ways, volatility in and of itself it isn’t a bad thing. In fact, it’s part of what leads to a higher return for certain asset classes. However, the increased ups and downs in daily and weekly stock prices tend to lead to investor uncertainty prompting some to make irrational — and often poor —investment decisions.

Which is why in times of uncertainty it pays to be certain.

That is, it pays to have an investment strategy in place ahead of time with defined entry and exit points on your investments. By committing in advance to a plan, you can essentially ignore the media frenzy and avoid making reactionary decisions. Instead, you can use this time to make some calculated choices.

For example, if you are an investor with a plan and some cash available, there’s a good chance that any near term pullback in prices will provide an excellent entry point at prices lower than today. If you’re more conservative and more interested in locking in the gains of the US market over the past year, you can look at tightening up your stop loss points.

Most importantly, if you get stopped out of your holdings — the term used to describe when an investment reaches its stop loss point and is sold — or you fear the volatility is the start of the next big decline, you can commit to a new plan; a plan in which you reinvest after certain metrics have been met so you don’t miss the inevitable next rally.

While nothing is ever certain when it comes to forecasting the market, having a pre-determined plan for how you’ll respond in good times and bad is one certain way to avoid making reactionary and reckless moves.

A few weeks ago, I received an email from a client requesting that I wire money to a Western Union office in London. The brief email stated that he had been mugged and now needed $1,500 to get back to the United States.

While my first response was a mix of panic and compassion, my second was suspicion. I had spoken to the client just a few weeks earlier and he hadn’t mentioned an international trip on the horizon. However, the email was from his standard account and the sender used my first name in the salutation. Added to that was the fact that it wasn’t an outrageous amount of money being requested. I had to consider that it might just be legit.

I replied to the email stating that I suspected his email was hacked and that I was not going to send the money without speaking with him first. Moments later a reply came back saying, indeed it was my client, he had been mugged and he really needed the money sent ASAP! I thought, wow, either this email hacker is really good or my client really is in trouble in London.

Not convinced one way or another, I picked up the phone and called my client’s home number. Sure enough, he picked up the phone. While he was safe and sound at home, his account had indeed been hacked. Not only was I grateful he was okay, we were both grateful I was cautious.

While the ease of instantaneous global fund transfers provides some significant convenience, it’s not without risk. The truth is, once the money leaves your account it is almost impossible to get back. Ninety-percent of the time, wire fraud involves email hacking.

Very simply, email hackers go through your address book and look for previous emails from financial services firms as well as grab your personal email address book. They then create personalized emails directly to individuals that, on the surface, appear very believable. So believable, in fact, that it’s estimated that nearly $300,000,000 (that’s million, folks) will be lost to wire fraud this year in the US alone.

Fortunately, there is an easy solution for protecting your assets. Simply call all the financial services firms that you have relationships with and verify that their policy is to never send money out of your account without verbally verifying the request directly with you. While many firms have adopted this policy in recent years, it is not a law, so you cannot assume you are protected. If the firms you work with do not have a formal policy specifically requiring verbal authorization, you may request that your account be handled in this manner.

I would further ask to have your request confirmed via letter or by email (trust me, the irony of the latter form is not lost on me). It’s a simple step that could literally save you thousands.

While this advice may not help increase your return on your investments, it may help you from worrying about the return of your investments.A few weeks ago, I received an email from a client requesting that I wire money to a Western Union office in London. The brief email stated that he had been mugged and now needed $1,500 to get back to the United States.

While my first response was a mix of panic and compassion, my second was suspicion. I had spoken to the client just a few weeks earlier and he hadn’t mentioned an international trip on the horizon. However, the email was from his standard account and the sender used my first name in the salutation. Added to that was the fact that it wasn’t an outrageous amount of money being requested. I had to consider that it might just be legit.

I replied to the email stating that I suspected his email was hacked and that I was not going to send the money without speaking with him first. Moments later a reply came back saying, indeed it was my client, he had been mugged and he really needed the money sent ASAP! I thought, wow, either this email hacker is really good or my client really is in trouble in London.

Not convinced one way or another, I picked up the phone and called my client’s home number. Sure enough, he picked up the phone. While he was safe and sound at home, his account had indeed been hacked. Not only was I grateful he was okay, we were both grateful I was cautious.

While the ease of instantaneous global fund transfers provides some significant convenience, it’s not without risk. The truth is, once the money leaves your account it is almost impossible to get back. Ninety-percent of the time, wire fraud involves email hacking.

Very simply, email hackers go through your address book and look for previous emails from financial services firms as well as grab your personal email address book. They then create personalized emails directly to individuals that, on the surface, appear very believable. So believable, in fact, that it’s estimated that nearly $300,000,000 (that’s million, folks) will be lost to wire fraud this year in the US alone.

Fortunately, there is an easy solution for protecting your assets. Simply call all the financial services firms that you have relationships with and verify that their policy is to never send money out of your account without verbally verifying the request directly with you. While many firms have adopted this policy in recent years, it is not a law, so you cannot assume you are protected. If the firms you work with do not have a formal policy specifically requiring verbal authorization, you may request that your account be handled in this manner.

I would further ask to have your request confirmed via letter or by email (trust me, the irony of the latter form is not lost on me). It’s a simple step that could literally save you thousands.

While this advice may not help increase your return on your investments, it may help you from worrying about the return of your investments.

True Story:  My next door neighbor a few years ago went to his local Honda dealership and bought 2 Hondas.  He got a Honda Minivan and a Honda Accord.  Clearly he was looking for dependability.  My wife and I went out to dinner with him and his wife in the new Accord.  I complemented him on the comfort and the electronic gizmos that populated the dashboard.  His response was “Yes, thanks”.  Clearly he liked the new car but he did not exude a lot of enthusiasm.  A year later I noticed that he had traded in the Accord for a Mazda Miata (sports car).  The Miata was a convertible.  A few days later, my wife and I were out for a walk, they drove by with the top down, and pulled to the curb so we could chat.  I said, “Nice Car! why did you get rid of the Accord?”  And, he said, “The minivan and the Accord were too much alike.”  Yes they were different body styles, but they were so close in their ride and feel, that they really wanted more variety.  The Miata, was strictly a two-seater, a convertible, lower to the ground, and really fit the sporty car image.  And besides, he said, “the Honda Minivan has plenty of space, and gives a reliable ride for long drives…we wanted something different.”

The fact that, my neighbor has a two car garage does not necessarily mean that the garage should have the same or similar car in each bay.  Could he have opted for reliability and comfort for both cars?  Of course!  However, there is something about the human psyche that craves variety.  Variety is almost hardwired into our makeup.  But we do not like change for change-sake.  Witness the daily routines that we all follow…we are literally “creatures of habit”.  Interestingly, the process of defining habit is based on analyzing all the diversity that confronts us on a daily basis.  “Should we do this, or should we do that?”  “Should we buy this, or should we buy that?”  One of the great capacities of human beings:  being able to compare and contrast between different options.  The capacity for comparison is so great that we spend an enormous amount of time actually thinking about it.

OK, so what does this have to do with investing?  Think of the garage as your portfolio.  If it has two bays or even 3 bays, it obviously has room for more than one type of investment strategy.  Notice the emphasis on the phrase investment strategy!  Wall Street has spent so much time talking about diversification that this area can be confusing.  A strategy usually embraces two distinctly different areas: performance management and risk management. One strategy should perform differently from another strategy in different types of markets.  Remember my neighbor? Just recently I was talking to him, and I brought up the topic of his Mazda Miata.  “Still like it” I asked?  He said, “You know something, the Miata is great for short drives, but when we go out to see our daughter (long drive) we take the minivan.”

The reason to have more than one strategy in your portfolio garage is very apparent:  it will give you two different types of performance.  But, what is not so apparent is that it engages our natural tendency to compare and contrast.  The act of comparison is also an incredible educator.  You could derive the following conclusion:  this type strategy does better in this type of market than another type of strategy.  That conclusion is incredibly valuable to a private investor.  

Retirement. Regardless of our age, it’s an event to which we all look forward. But age actually matters a great deal when it comes to planning for retirement. How you save and how much you save should evolve as your roles, responsibilities and income change. It’s important to adjust your strategy as your circumstances and ability to save change so that when that much-anticipated day arrives, it is truly something to celebrate.

Here’s a quick look at a number of the factors that shape your retirement savings at the various ages and stages of life.

The mid-twenties to thirties: Carefree but not careless

In all honestly, your priorities at this stage of life are probably not saving money. However, now really is the time to develop good savings habits. While it may not feel like it, your financial responsibilities at this stage of life are actually very low. Capitalize on this fact by setting a goal of saving 15 percent of your income now. By starting early, you’ll reap the benefits of time and compound growth. Don’t worry such much about picking the perfect investment but do resist the temptation to accumulate material things that depreciate.

The mid-thirties to forties: Keep calm and save on

Buying a home, starting a family and raising children can be fantastically expensive. Fortunately, for many, these life events are often accompanied by professional advancement and increases in income. It’s important to not automatically increase your expenses as your income increases. Yes, you need to cover expenses but you also need to remain mindful of the fact that retirement is drawing closer. Make sure saving for it remains a top priority.

The mid-forties to fifties: Make the most of the time left

This is a critical time period for those who haven’t been so dutiful in saving in their younger years. This is your last chance to make up for lost time. The truth is, modest increases in the stock market along with a strategy to minimize the down years can help you catch up. For example, getting 10 percent growth on $300,000 is $30,000, a good amount of money, especially if you continue to add your own contributions. Your total annual growth could easily be one full year of income in retirement.

The mid-fifties to mid-sixties: Accumulate and anticipate

Thanks to an empty nest, a fully paid mortgage, and hitting the top of the pay scale, this is the time to save the most for your retirement. Make sure you have a handle on your projected income and expenses (do this in your fifties, not sixties), and adjust your portfolio so that it allows for continued wealth accumulation and avoids large losses sometimes associated with the capital markets. The latter is particularly important as your time for recovery from a big loss, is growing shorter and you want to avoid having to dip into your retirement savings to cover it.

Starting around 1988 we had our first workshops.  The workshops were mostly about getting organized as an investor, we talked about:  the reasons for saving money, explained retirement accounts, the importance of reducing taxes… tax deferral vs. tax free, financial planning 101, estate planning etc.  Comments about the future viability of social security were used to lend credence to the imperative nature of saving and investing money.  Assumptions that the government would be there to take care of you in retirement were considered humorous support for taking responsibility for your own financial future.  Actual comments about portfolio management typically were based on fundamental analysis (A.K.A analyzing the balance sheet of a corporation for clues as to future growth in sales in earnings.).  The concept of diversification was used as a panacea for investing.  And essentially if you were in fact “diversified” and prepared to be a long term investor all would be well.  We used charts depicting the last 30 years of being invested showing the inexorable climb in values of the capital markets.

In the early 1990’s we were in a recession, with a new word invented for being fired: Downsized.  Downsized implied the reason for the firing, the fact that companies could no longer operate with bloated employee numbers.  “Lean and Mean” became the slogan for increasing corporate profits. The shrinking corporate budget mandated cutting the fat, and we adopted Wendy’s Fast Food slogan as a metaphor:  “Where’s the Beef?”, or let’s focus on the doughnut not on the hole.  Quietly at first, and then with a roar of the river going over the falls corporations started eliminating pensions.  Pensions inspired and rewarded employee loyalty.  Good employees were hard to find, so why not do what needed to be done to hang on to them.  The baby boom generation changed the qualified pool of employees from small to big.  It was clear that with a large group of qualified employees, why the issue of loyalty could be down played.  And it gave an easy rational for eliminating pensions.  Pensions were expensive.  Pensions guarantee income.  No matter what the results of investing in the capital markets, the income for retirees had to be assured.  Bad years in the market meant that the company had to make up for poor performance, with contributions to the pension plan coming out of corporate income.  The bottom line short and sweet: pensions had to go.

The retirement environment changed to 401ks, 403bs, IRAs, Keoghs.  The beauty of this retirement planning environment (for corporate America) was that the future results were not guaranteed.  Employees put their own capital at risk.  As they say, hindsight gives you 20/20 vision.  The insight of the hindsight is that as the years progressed from the 1990’s towards the 21rst century the discussion in our workshops changed from understanding the terminology of financial planning, to understanding the terminology of risk.  The change was subtle.  Looking back, treating what we used to do as a sort of “connect the dots”, the picture…the word…that was emerging as we drew a line from dot to dot, was that the demand for topics at our workshops changed from the basics of savings and the investment process to subtleties of risk management.  Yes, today we still have the very real risk that Social Security could go up in smoke!  Nevertheless, looking back in time connecting the dots, the real retirement planning risk was the disappearance of the pension.  A pension PLUS Social security was and is the retirement “nirvana” of the “World War II Generation”.

Please notice the chart below.  During the 1980’s and 1990’s we would never have talked about periods where prudent risk management would have us “out of the market”.  Missing the best days of the market was tantamount to missing the most positive performance in the market.  As you can see, the biggest help to performance for the 25 years ending December 31, 2011 was to miss the worst 40 days.

Notice the last column to the right; compare the performance of the “Average Annual Return” at the top of the chart, to the column showing “Miss Both Best and Worst” days. This implies in our opinion that risk management is worthwhile even if in your attempt to miss the worst days you miss BOTH best and worst days, ….it was well worth the effort.

Connect the dots:  risk management is here to stay.

While not universal, there is a perception that when you retire, drastic changes should be made to your investment portfolio. One of the most common questions I hear from those about to retire is, “Shouldn’t I reduce my exposure to stocks in my portfolio and buy bonds once I retire?” While the impetus for the question is clear (i.e. the notion that moving investments to safer options will help negate the lack of contribution), the answer is less so.

Let’s look at this question from the viewpoint of someone who is 62, in good health, and is going to retire next month. Since summer is baseball season, I’m going let the fictitious soon-to-be-retiree make a few pitches for making changes based solely on the date of retirement and we’ll see how they hold up.

Pitch one: It makes sense to make changes to my portfolio based on my retirement date.

Instead of making wholesale changes to your investments simply because your last day of work is pending, I’d argue to take a look at what is going on in the capital markets. What asset classes are trending up and what asset classes are on the way down?

Monitoring current market conditions and making changes based upon this data makes more sense than shifting a large amount of money into income-producing long term bonds. The income from the bonds may be appealing, but with interest rates on the rise, the value of your bonds will not feel very safe as you watch it go down. That’s strike one against making wholesale changes.

Pitch two: I’m retiring now so big, protective changes need to be made now.

While you’re making a major life change now, you need to consider how any changes you make will impact your future. Hopefully, your goal is to have your monies last through your entire retirement providing an income stream or a source of money for fun trips or to cover major expenses.

As a new retiree, a major risk is inflation. Not owning investments that will at least keep up with, if not outpace inflation, will cause you to lose purchasing power down the road. Becoming too conservative too soon could be costly. Unless this 62-year-old is going to retire next month and spend all his money within the next two years, that’s strike two against making changes.

Pitch three: I’m retiring. I have to do something!

Yeah, relax. Assuming you’ve been planning for retirement for a number of years and paying attention to your investments, don’t make drastic changes based upon the emotion of retiring. Keep your portfolio matched to your income, growth and risk tolerances. Your final day at work will not result in a major shift in the investment universe. And there you have it, strike three

Staying abreast of the market and staying open and willing to making changes based on true market shifts rather than making drastic changes based on arbitrary dates will not only keep you in the game longer, it will allow you to play the retirement game the way you want.

With the daily, and in some cases hourly, reports of the Dow Jones, S&P 500 and NASDAQ prices, it’s no wonder that the stock market is the first thing that comes to mind when most people think of investing. Compared to the hype and borderline hysteria often associated with the stock market, the lesser-reported bond market can seem dull and less significant.

But a bit like the tortoise in “The Tortoise and the Hare,” slow and steady performing bonds have offered a level of security that’s been difficult to match over the last 15 years. As a result, they’re often considered and used as a hedge against stock market risk. But let me back up and explain how they work and why they perform differently.

In the simplest terms, bonds are essentially a loan you make to the government (i.e Treasury bonds) or a corporation. Like a traditional loan, bonds have both a term ranging from a few days to many years, and an interest rate attached to them. Here’s where bonds get interesting.

There is an inverse relationship between bond prices and interest rates. In fact, the bond market actually dictates what lenders charge for loans, including car loans, home equity accounts, and even mortgages.

In 2008 the Federal Reserve attempted to stimulate the economy by buying bonds and artificially keeping interest rates low. However, the Federal Reserve recently put Wall Street on notice that the monthly $85 billion bond buying spree will end some day soon. That has helped push the yield on the US 10-Year Treasury Note to approximately 2.1 percent. That’s a significant increase from the less-than-1.5 percent yield experienced at the same time last year.

Together, those factors make this an excellent time to review bond holdings.

One strategy to mitigate bond price decreases in the face of higher interest rates is to find bonds that are less interest sensitive. Examples of these include High-Yield and Floating Rate bonds. In addition, consider very short-term bonds (i.e. two years or less), as their value tends to fluctuate less than longer-term bonds.

If you have a 401k and own bond funds, review your choices and find out how interest sensitive they are. Further, ask if your plan offers Stable Funds or money market funds that don’t fluctuate in value.

Just like a road race, investing requires preparation. You need to research and determine your course, you need to identify potential risks and you need to develop a plan for addressing the ups and downs you may face along the way. While preparation is no guarantee that you’ll emerge the ultimate winner, it greatly improves your chances of finishing exactly where you deserve.

While the phrase, “wealth management” means many things to many different people, the industry accepted concept is this: wealth management is a professional service that provides financial planning and investment portfolio management coordinated with estate and tax planning. Note the word “coordinated.”

In some instances, wealth management companies have all the necessary resources under one roof to guide a client while others rely on relationships with firms and experts in very specific, silo-ed areas. In either case, the key to successful wealth management is making sure that all the individuals involved in guiding and advising a client are aware of what actions other advisers are taking to accomplish the same. In other words, they’re coordinating their efforts.

Here’s why that’s important.

If all of your advisers are working independently of each other without an understanding of the overall strategy being implemented, your chances of missing opportunities to make or save money increases.

Let’s take portfolio managers, for example. Operating in their silo of investments, they tend to focus only on managing money and take actions geared toward doing so. Meanwhile, in the next silo over, the accountant is looking at and acting on behalf of the tax-side of things. By taking actions without understanding all the other factors at play, they may put their client’s assets at risk.

It’s not uncommon, for example, to hear of individuals who checked with their accountant to calculate the tax implications of selling real estate for gains but unknowingly left unrealized losses in their stock portfolio by not coordinating with their portfolio manager; losses that could have easily offset some of those gains.

Another common example of the negative impact of poor coordination is when more than one investment manager implements a strategy that duplicates what has been done elsewhere. Instead of doubling the benefit of the move, it can actually lead to compounded losses.

It’s important to note that the one common thread in these tales of financial woe is the client. It’s up to you, the client, to make sure all the professionals you work with are up to speed on where you’re currently at in life and where you want to be, and that they are acting in a coordinated manner to ensure you get there.

Make sure that they are aware of any actions others are taking on your behalf and ask how those actions might impact their thinking and plans.

Simply put, communicating with your wealth management advisers and striving to keep their actions coordinated is the best way to ensure you actually have wealth to manage in the future.