Author: Minich MacGregor Wealth Management

The importance of a sell discipline for retirement investment…

Whipsawed and Loving It

I went to the online dictionary Investopedia to look up the definition for “Whipsaw” and this is the definition:  A condition where a security’s price heads in one direction, but then is followed quickly by a movement in the opposite direction. The origin of the term is derived from the push and pull action used by lumberjacks to cut wood with a type of saw with the same name.  Look at the picture to the right, saw #2 is the best picture of a saw that can actual deliver a whip.  Visualize 2 people holding the

saw, one on one handle, and one on the other handle.  The benefit of using this saw is that one person at a time pulls on the saw and then lets their arms go slack so that the other person can pull the saw back.  This increases the speed to cut a log and reduces the effort since 2 people do the sawing. In the investment world, whipsawed has come to mean typically that you sell a security as the price declines and then in a relatively short time the price reverses its negative path and goes back up above the price that you sold it at.  Naturally if that happens, you feel like you have sold at the wrong time and now are reluctant to buy back the security at a higher price than you sold it at.

Risk management is defined as adopting a sell side discipline that protects your money as the market goes down.  Sell discipline means that you have created a predetermined exit point that you execute absolutely as the market goes down.  The exit point can be based a variety of measurements.  We use relative strength as the measure.  So for example if bonds exceed on a relative strength basis the relative strength of stocks it would meet one of exit points that we use on some of the portfolio models.  Predetermined exit point means a percentage reduction in equity holding and a percentage increase in the bond holdings.  Increasing bond holdings, most of the time, means decreasing risk in the portfolio.  (Naturally depends on what type of bonds and the interest rate environment.)  All of the above is good news if the overall stock market is going down.  The bad news is that periodically you get “whipsawed”.  Meaning your exit point was met and you take the predetermined action that I just mentioned.  And then the market goes back up.  Your thought could be, “I sold too soon.”  Or your thought could be, “Wow, the sell discipline really works…THINK WHAT WOULD HAVE HAPPENED IF THE MARKET CONTINUED TO GO DOWN!”

The importance of sell side discipline, meaning the commitment to take action without hesitation, can save valuable portfolio dollars in a negative market.  Now, what is the antidote for the negative side of “whipsawing”?  The answer is you wait until your predetermined buy point and take action absolutely.  Does this mean you could wind up increasing the portfolio’s percentage in stocks at higher price?  Yes!  Establishing sell points and buy points must be done with some margin between the points so that the buys and sells do not happen quickly and repeatedly.  My experience has been that many people exit the market during negative trends but fail to get back in the market when the trend is reversed.  Discipline, Discipline, Discipline!  It is the price to be paid for “sleep through the night” money management comfort.

If you are a 401k participant, this article is worth a read.

This article by Catherine Golladay, from Schwab, was published on her blog featured on the Huffington Post website. 

Click Here:  “401k Resolutions for 2014”

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.