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Election Misconceptions

The noise can be deafening. It seems to come from everywhere, all the time. It can cause headaches, frustration, even anxiety. Sometimes, you wish you could turn it off altogether.

No, we’re not referring to whatever music the kids are listening to these days. We’re referring to the noise surrounding the upcoming presidential elections.

Election season is one of the most important aspects of our political system, but there’s no doubt that getting through it can be stressful. All of us, at some point, will wonder things like, “What if my preferred candidate doesn’t win?” “Who is my preferred candidate, anyway?” “Does so-and-so really mean this?” “Did so-and-so really say that?” “What’s fact and what’s fiction?”

One thing you shouldn’t have to worry about is how the elections will affect the markets. Every four years, many misconceptions arise about the impact of presidential contests on your portfolio. These often lead to unnecessary anxiety for investors. As financial advisors, our goal is to ensure our clients feel confident about their financial future, not worried. That’s why we send educational messages like this one. Let’s explore three common misconceptions about election season and the markets.

The first misconception is that presidential elections lead to down years in the markets. It’s understandable why we might feel this way. When we look back at past elections, the first things we remember are probably the controversies, uncertainties, and negativity. Election years feel volatile in our minds and memories, usually because there’s so much drama and so much at stake.

But statistics prove this misconception is a myth. Since 1944, there have been twenty presidential elections. In sixteen of those, the S&P 500 experienced a positive return for the year.1 In fact, the median return for presidential election years is 10.7%.1 Of the four election years that saw a negativereturn, two did occurin this century – in 2000 and 2008 – but on both occasions, the nation was either entering or in the midst of a significant recession.

Now, we do sometimes see increased volatility in the months leading up to an election. If we just look at how the S&P 500 performed from January through October in a presidential election year, the median return drops to 5.6%.1 That’s not bad, but it is nearly 50% lower. This suggests the uncertainty over who will triumph in the election – and the debate over what each candidate’s policies will mean for the economy – does tend to have at least some effect. Then, as the victor is announced and the picture becomes a little clearer, volatility tends to subside, and investors move on to other things. So, in that sense, election season does matter, but nowhere near what the media may have you believe. Elections are just one of the many ingredients in the gigantic stew that is the stock market…and they’re far from the most important.

The second misconception is that if one candidate wins, the markets will plummet. This narrative is, frankly, driven by pure partisanship. The fact of the matter is that the markets have soared under both Republican and Democratic presidents. Naturally, they’ve occasionally soured under both parties, too. Since 1944, the median return for the S&P 500 in the year after a presidential election is 9.8%.1 Since 1984? The median return rises to over 24%.

The reason for this is because of that gigantic stew we mentioned. You see, the markets are driven by the economy more than by elections. By the ebb and flow of trade, the law of supply and demand, by innovation and invention, by international conflict and consumer confidence. And while the president does have an influence on all this, it’s just one of many, many influences. As a result, the markets are far more likely to be affected by inflation and whether the Federal Reserve will cut interest rates than by the election.

When you think about it, the markets are like life. The course our lives take isn’t determined by one gigantic decision, but by the millions of small decisions we make every day. The same is true for the markets. We don’t know about you, but we find this comforting.

The third misconception is that we have no control over any of this, and thus, no control over what happens to our portfolio.

It’s true. We can’t dictate who the president will be. We can’t determine how the markets will react. But what we can control is what we will do. And that, is a mighty power indeed.

There’s a reason we began this email by referencing noise. As investors, one of the keys to long-term success is filtering out the noise and focusing on what reallymatters. You see, the goal of all political campaigns – and the media that covers them – is to create noise. That’s because noise provokes emotions. Fear. Anxiety. Anger. A greater emotional response leads to more clicks, more views, more shares, more engagement…and, yes, more money. It’s understandable why campaigns and the media want these things. But what we must guard against is letting those emotions drive our financial decisions. Emotions promote the urge to do something – buy, sell, get in, get out, take on more risk, less risk, you name it. They prompt us to make short-term decisions to alleviate what is, when you think about it, a short-term concern.

A presidential term lasts four years. But the goals you have saved for, and the time horizon you have planned for, lasts much longer than that. That’s why our investment strategy is built around the long-term. It’s designed to help you not just tomorrow, or next month, but years and years from now. It’s designed so that the president of the United States, as important as he or she may be, is only a passing mile-marker on the much longer road to your goals and dreams.

As we approach another election, keep this in mind: tune out the noise. Be aware of these misconceptions and avoid them. Our team is here to answer your questions and provide any assistance you need. If you’d like help planning for your financial future, give us a call. We’re always here to help.

Have a great summer!

1 “Election year market patterns,” ETRADE,

Questions You Were Afraid to Ask #13

The only bad question is the one left unasked. That’s the premise behind many of our recent posts. Each covers a different investment-related question that many people have but are afraid to ask. In our last post, we discussed what it means to invest in commodities and how regular investors do so. So, without further ado, let’s break down:

Questions You Were Afraid to Ask #13:
What are the pros and cons of investing in commodities?

As we covered in Question #12, a commodity is a physical product that is either consumed or used to produce something else. For example, corn, sugar, and cotton are all agricultural commodities. Pork, poultry, and cattle are livestock commodities. Oil, gas, and precious metals like gold and silver are commodities, too.

A commodity is generally seen as an alternative investment. Traditionally, large institutions and professional traders are the most likely to invest in commodities, but regular people can, too. Like every type of investment, though, there are both potential benefits and risks that come with commodities. Some of these are very specific to commodities.

First, let’s look at some of the pros of investing in commodities:

Diversification. As you know, all types of investments will rise and fall in value at different times. That’s why it’s important that your portfolio consists of diverse asset classes, each driven by different factors. (Financial advisors like us refer to this as having low correlation, meaning price changes in one asset don’t affect the price of another asset.)

Typically, commodities have a low correlation to stocks and bonds. Every type of commodity is affected by different economic factors. Most of those don’t usually affect, say, stocks. For example, while changing interest rates can have a major impact on stocks, they don’t have a direct effect on cotton prices. And though a hurricane in the Gulf of Mexico can dramatically impact oil prices, it usually doesn’t mean much to the overall stock market.

For these reasons, investing in commodities can add valuable diversification to your portfolio.

Diversification is important because it can help cushion your portfolio from major volatility. If one asset class takes a hit, the others could help compensate. However, it is important to note that diversification doesn’t eliminate risk.

Hedge Against Inflation. During periods of high inflation, the price of most consumer goods and services will go up. While that can make for an unpleasant-looking receipt at the grocery store, it can be a boon to commodity investors. That’s because the price of many commodities tends to go up with inflation. As a result, investing in commodities can help “hedge” – or lessen – the risk of investing in other asset classes that may be negatively affected by inflation.

Potential for Significant Returns. Commodities can also – potentially – produce meaningful returns. Certain types of commodities will occasionally rise drastically in demand, taking their price up with them. As a result, investing in the right commodity at the right time can certainly help investors generate a significant profit!

Of course, that same potential is also behind some of the downsides to investing in commodities:

Volatility. Commodities can be extremely volatile. As you’ve no doubt seen, the price of any commodity (say, oil, or gold) can fall remarkably fast if the demand for those products falls far below their supply. For these reasons, you should only invest in commodities if you can afford to take on the…

Multiple Risks. As we mentioned, all types of investments come with risks. However, the risks associated with commodities are particularly large and varied. For example, some commodities – especially agricultural ones – are vulnerable to weather. Others can be affected by natural disasters, military conflicts, or changing government regulations. While these same factors can certainly drive prices up, they are also just as likely to drag prices down if the wrong conditions arise. Furthermore, investors have no control over these types of risks…and they are notoriously difficult to predict in advance.

No Income. Finally, commodities do not produce any income for investors the way bonds or dividend-paying stocks do. So, investors seekingincome – especially retirees – may find that the pros of commodities are just not worth the risks when it comes to fulfilling their needs.

In the end, there’s simply no “one size fits all” type of investment, and that’s especially true of commodities. While they can be a viable fit for some portfolios, every investor must look carefully at whether commodities are right for their needs, and whether the risks associated with them are more than they can afford.

So, now you know the “how” and the “why” of investing in commodities. In our next few posts, we’re going to demystify common investment–related jargon you may hear bandied about by the media. In the meantime, have a great month!

Questions You Were Afraid to Ask #12

The only bad question is the one left unasked. That’s the premise behind many of our recent posts. Each covers a different investment-related question that many people have but are afraid to ask. In this post, let’s cover a specific type of investment that people often wonder about:

Questions You Were Afraid to Ask #12:
What does it mean to invest in commodities?

In an investing context, a commodity is a physical product that is either consumed or used to produce something else. For example, corn, sugar, and cotton are all commodities. We generally refer to products like these as agricultural commodities. Pork, poultry, and cattle are livestock commodities. Energy products, like oil and gas, are commodities, too. So are precious metals like gold, silver, and platinum.

A commodity is generally seen as an alternative investment. Alternative investments are called that because they trade less conventionally than more traditional stocks and bonds. Despite this, many people find the idea of investing in commodities to be an attractive one. For some, it’s because it makes more intuitive sense than owning shares in a company (buying stock) or lending money to an organization (buying bonds). There’s something tangible about the idea of investing in things we see and use daily. By comparison, stocks and bonds can feel a little more abstract. For others, investing in commodities is a way of adding even more diversification to a portfolio.

That said, the question of how to invest in commodities can be an overwhelming one. Most people – including experienced investors – don’t even know how to get started! So, let’s discuss some of the potential ways to invest in commodities. Then, in our next post, we’ll cover some of the pros and cons of this particular asset class.

The oldest and most basic way to invest in commodities is to physically own them. This is what traders have been doing for most of human history. Person A buys a herd of cattle from Person B, and then sells some or all of them to Person C, hopefully for a profit. Person X buys a stack of gold bars from Person Y and then sells them to Person Z. You get the idea.

This, of course, is still done today. But for most retail investors – regular folks like you and me – taking physical ownership just isn’t feasible. When you buy commodities, you must also have a way to store them. Unlike stocks and bonds, commodities take up space… usually a lot of it! You must also have a way to deliver the commodities to and fro. You’d also want to purchase insurance on the product in case something went wrong. And of course, you would need to have a lot of technical expertise to know how to trade those commodities for a fair price.

For these reasons, most investors choose one of two avenues: Buying stock in companies that produce commodities or by investing in commodity-based funds. Let’s start with the first.

Let’s say you wanted to invest in a certain type of precious metal that you feel will rise in value in the future. Obviously, for reasons we’ve already covered, you don’t want to own the metal itself. So, instead, you buy stock in a company that specializes in mining or extracting that particular metal. Should the price of that metal go up, it’s quite possible that the stock price for the company that specializes in that metal will go up, too.

Another way to invest in commodities is through commodity-based funds. You may remember our previous post on the different types of investment funds. Commodity-based funds are very similar, except they are centered around specific commodities. The fund may be comprised of a number of companies that specialize in the commodity. Some funds may even purchase and store the physical product itself if they have the means to do so. Either way, these types of funds – which can be mutual funds or exchange-traded funds – can give you exposure to whatever commodities you’d like to invest in.

There is another way that some investors participate in commodities called future contracts. These are “contracts in which the purchaser agrees to buy or sell a specific quantity of a physical commodity at a specified price on a particular date in the future.”1 So, let’s say an investor purchases a contract to buy X barrels of oil for $75 per barrel at some later date. By doing so, they anticipate the price of oil will rise above that, so their price affectively becomes a bargain. Then, when the specified date arrives, the investor accepts a cash settlement. This means the investor is credited with the difference between the initial price they paid and the current market price. This is instead of receiving physical ownership of the oil. Of course, if the price of oil goes below $75 per barrel, the investor would have to pay back that difference themselves.

Commodity futures are a complex topic, and to be honest, individual investors rarely turn to them. They are more often used by institutional investors like commodity-based funds.

So, that’s the how of investing in commodities! In our next post, we’ll get more into the why by discussing the pros and cons of commodities. As you know, all types of investments come with risks, and commodities are no exception. They’re certainly not right for everyone!

In the meantime, now you know what it means to “invest in commodities.” We look forward to diving even deeper into this topic in our next post.

1“Futures and Commodities,” FINRA,

Pre-Retirement Spring Cleaning Checklist

Spring is in the air, and that means it’s time for spring cleaning.  But wait!  Before you pick up that dustpan, give a thought to your financial spring cleaning first. 

What do finances and spring cleaning have to do with each other?  If you’re preparing for retirement, the answer is “A lot!” 

These days, the term spring cleaning is often used as a metaphor for getting your affairs in order.  As you can imagine, getting your retirement affairs in order is critical if you intend to actually retire when and how you want.  There are many things to keep track of, many tasks that need doing, and many decisions to make. 

So, how do you begin?  Well, when many people do their actual spring cleaning, they make a checklist.  What supplies they’ll need, what rooms to organize, what needs to be mopped, vacuumed, dusted…it’s the most efficient way to clean.  We suggest doing the same for your finances.  So, without further ado, here is a sample Spring Cleaning Checklist to help you better prepare for retirement. 

Pre-Retirement Spring Cleaning Checklist

  • Contribute the maximum amount to your IRA if you have one.  Remember, an IRA is a valuable way to save for retirement in a simple, tax-advantaged way.  For 2024, the annual IRA contribution limit is $7,000 up to age 49, and $8,000 for those 50 and older.1 
  • Review your 401(k) and increase your contributions if necessary.  How has your 401(k) been performing?  Do you understand how your money is being invested and why?  Are you contributing enough to take advantage of any employer matching?
  • Start looking at your existing expenses.  Which are likely to continue after retirement?  What expenses can you remove right now?  This is a good way to find extra ways to save for retirement, and it will make your life a lot simpler once retirement comes. 
  • Make sure you know where all your estate planning documents are.  You should have a copy of your will, power of attorney, advance medical directives, letter of instructions, and other documents in a secure but easily accessible place.  Make sure your spouse (or other loved ones) knows where these documents are kept. 
  • Review your current insurance policies.  Are there any potential gaps you see?  (For example, Critical Illness and Long-Term Care insurance are two types of policies many people don’t have but are often extremely valuable for retirees.)  

But most of all …

  • Make a list of your top retirement concerns.  Is there anything you are confused or nervous about?  If so, start getting the answers you need now instead of waiting till you’re already retired.  Remember, you want to enjoy your golden years, not stress over them. 
  • Similarly, make a list of any new goals or dreams you have for retirement.  What will it take to achieve or afford them?  Are you on track?  If you’re not sure, it’s time to start planning. 

Spring cleaning is never the most fun thing in the world, but it’s often one of the most beneficial.  Just as you probably enjoy living in a clean, organized home, you’ll enjoy the peace of mind that comes with getting your finances in order.  Trust us: if there’s one thing we’ve learned in all our years of helping people plan for retirement, it’s that a little organization today can make for a much happier retirement tomorrow. 

Of course, if you need help with any of the items on this checklist, please let us know.  For example, if you aren’t sure how your 401(k) is doing, we’d be happy to help you analyze it.  If there’s a valuable estate planning document you don’t have, we can point you in the right direction.  And if you have any questions or concerns about retirement, the chances are good that we have the answers. 

In the meantime, we wish you a happy spring—and a happy spring cleaning! 

1 “401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000” Internal Revenue Service, accessed November 9, 2023.

Questions You Were Afraid to Ask #10

The only bad question is the one left unasked. That’s the premise behind many of our recent posts. Each covers a different investment-related question that many people have but are afraid to ask.  So far, we’ve discussed the essentials of how the markets work, the differences between various types of investment funds, and the ins and outs of stocks and bonds. 

A few months ago, however, an acquaintance of ours asked us a question not about investments but investing.  Specifically, she wanted to know our thoughts on the modern trend of using mobile investing platforms — aka “investing apps.” 

It’s a terrific question, because the use of such apps — and the number of apps available — has exploded in the past few years.  So, in this message, we’d like to continue our series by answering:

Questions You Were Afraid to Ask #10:
What are the pros and cons of investing apps? 

Mobile investing apps enable people to buy and sell certain types of securities right from their phone.  They have provided investors with a quick and easy way to access the markets.  For new investors who are just getting started, these apps have made the act of investing more accessible than ever before. 

That’s a good thing!  Even today, many people only invest through an employer-sponsored retirement account, like a 401(k).  That’s because they may lack the resources, confidence, or ability to invest in any other way.  But not everyone has access to a 401(k).  And while 401(k)s are a great way to save for retirement, many people have other financial goals they want to invest for, too.  Mobile apps provide a handy, ready-made way to do just that. 

Continuing with the accessibility theme, many apps enable you to invest right from your phone, anytime, anywhere.  In addition, many apps don’t require a minimum deposit, so you can start investing with just a few dollars.  Finally, the most popular apps often charge extremely low fees – or even no fees at all – to buy or sell stocks and ETFs. 

Many apps also come with features beyond just trading.  Some apps will help you invest any spare change or extra money, rather than let it simply lie around in a bank account.  Others enable you to invest automatically – daily, weekly, bi-weekly, monthly, etc.  That’s neat because investing regularly is a key part of building a nest egg. 

It’s no surprise, then, that these apps have skyrocketed in popularity.  In fact, app usage increased from 28.9 million in 2016 to more than 137 million in 2021.1  Part of this surge was undoubtedly due to the pandemic.  With social distancing, many used the time to try new activities and learn new skills from the safety of their own home…investing included. 

But before you whip out your phone and start trading, there are some important things to know, first.  Investment apps come with definite advantages…but also some unquestionable downsides.  When you think about it, an app is essentially a tool.  Like any tool, there are things it does well…and things it can’t do at all.  And, like any tool, it can even be dangerous if misused. 

The first issue: the very accessibility that makes these apps so popular is also what makes them so risky.  When you have a tool that provides easy, no-cost trading, it can be extremely tempting to overuse it.  Researchers have found that this temptation can lead to overly risky and emotional decision-making, as investors try to chase the latest hot stock or constantly guess what tomorrow will bring.2  The result: Pennies saved on fees; fortunes potentially lost on speculation. 

The second and biggest issue is that while these apps make it easy to invest, they provide no help with reaching your financial goals.  No app, no matter how sophisticated, can answer your questions.  Especially when you don’t even know the questions to ask.  No app can hold your hand and help you judge between emotion-driving headlines and events that necessitate changes to a portfolio.  No app can help you determine which investments are right for your situation.  Just as you can’t hammer nails with a saw, or tighten a bolt with a screwdriver, no app can help you plan for where you want to go and what you need to get there. 

Take a moment to think about the goals you have in your life.  They could be anything.  For instance, here are a few our clients have expressed to me over the years: Start a new business.  Visit the country of their ancestors.  Support local charities and causes.  Design and build their own house.  Play as much golf as possible.  Volunteer.  Visit every MLB stadium.  Send their kids to college.  Read more books on the beach.  Tour national parks in a motorhome.  Spend time with family.

Achieving these goals often requires investing.  But there is more to investing than just buying and selling stocks.  More to investing than simply trading.  Investing, when you get down to it, is the process of determining what you want, what kind of return you need to get it, and where to place your money for the long term to maximize your chance of earning that return.  It’s a process.  A process that should start now, and last for the rest of your life.  A process that an app alone cannot handle – just as you can’t build a house with only a saw. 

So, our thoughts on mobile investing apps?  They are a tool, and for some people, a very useful one.  But they should never be the only one in your toolbox. 

In our next post, we’ll look at two other modern investing trends. 

1 “Investing App Usage Statistics,” Business of Apps, January 9, 2023.

2 “Gamified apps push traders to make riskier investments,” The Star, January 18, 2022.

Understanding the Market Correction – 2023

You probably saw the news: On October 27, the S&P 500 officially slid into a market correction.

A correction is when the markets decline 10% or more from a recent peak.  In the S&P’s case, the “recent peak” was on July 31, when the index topped out at 4,588.1  On Friday, the index closed at 4,117 – a drop of 10.2%.1 

Market corrections are never fun, and there’s no way to know for sure how long one will last.  Historically, the average correction lasts for around four months, with the S&P 500 dipping around 13% before recovering.2 Of course, this is just the average.  Some corrections worsen and turn into bear markets.  Others last barely longer than the time it took for us to write this message.  (On Monday, October 30, for example, the S&P actually rose 1.2% and exited correction territory.3) Either way, corrections are not something to fear, but to understand – so that we can come through it stronger and healthier than before. 

To do that, we must understand why the markets have been sliding since July 31.  We use the word “slide” because that’s exactly what this correction has been.  Not a sharp, sudden drop, but a gradual slide, like the bumpy ones you see on a playground that rise and fall on the way to the ground.   While the S&P 500 dropped “at least 2% in a day on more than 20 occasions” in 2022, that’s only happened once in 2023, all the way back in February.4    

At first glance, it may seem a little puzzling that the markets have been sliding at all.  Do you remember how the markets surged during the first seven months of the year?  When 2023 kicked off, we were still coming to terms with stubborn inflation and rising interest rates.  Many economists predicted higher rates would lead to a recession.  But that didn’t happen.  The economy continued to grow.  The labor market added jobs.  Inflation cooled off.  As a result, many investors got excited, thinking maybe the Federal Reserve would stop hiking rates…or even start bringing rates down. 

Fast forward to today.  The economy continues to be healthy, having grown an impressive 4.9% in the third quarter.5  Inflation is significantly lower than where it was a year ago.  (In October of 2022, the inflation rate was 7.7%; as of this writing, that number is 3.7%.6)  And the unemployment rate is holding steady at 3.8%.7  But the markets move based either on excitement for the future, or fear of it – and these cheery numbers no longer generate the level of excitement they did earlier in the year. 

The reason is there are simply too many storm clouds obscuring the sunshine.  While inflation is much lower than last year, prices have ticked up slightly in recent months.  (We mentioned the inflation rate was 3.7% in September; it was 3.0% in June.6)  As a result, investors are now expecting the Federal Reserve to keep interest rates higher for longer.  Seeking to take advantage of this, many investors have moved over to U.S. Treasury bonds, driving the yield on 10-year bonds to its highest level in 16 years.  Since bonds are often seen as less volatile than stocks, when investors feel they can get a decent return with less volatility, they tend to move money out of the stock market and into the bond market.

As impressive as Q3 was for the economy, there are cloudy skies here, too.  This growth was largely driven by consumer spending – but how long consumers can continue to spend is an open question.  Some economists have noted that Americans’ after-tax income decreased by 1% over the summer, and the savings rate fell from 5.2% to 3.8%, too.5  Mortgage rates are near 8%, a 23-year high.8  Meanwhile, home sales are at a 13-year low.9  All this suggests that the Fed’s rate hikes, while cooling off inflation, have been cooling parts of the economy, too.

Couple all this with violence in the Middle East, political turmoil in Congress, and a potential government shutdown later in November, and you can see the problem.  Despite the strong economy, investors just aren’t seeing a good reason to put more money into the stock market…but lots of reasons to think that taking money out might be the prudent thing to do.  It’s not a market panic; it’s a market malaise.    

So, what does this all mean for us? 

We mentioned how the markets operate based on excitement for the future, or fear of it.  But that’s not how we operate.  We know that, while corrections are common and often temporary, they can worsen into bear markets.  Furthermore, any decline can have a significant impact on your portfolio, and by extension, your financial goals.  So, while our team doesn’t believe in panicking whenever a correction hits, neither do we believe in simply standing still.  Instead, we’ll continue to analyze how both the overall market – and the various sectors within the market – are trending.  We have put in place a series of rules that determine at what point in a trend we decide to buy, and when we decide to sell.  This enables us to switch between offense and defense at any time.  This, we feel, is the best way to keep you moving forward to your financial goals when the roads are good…and the best way to prevent you from backsliding when they’re bad. 

In the meantime, our advice is to enjoy the holiday season!  Our team will continue to focus on investments, so our clients can focus on why they invest: To create happy memories and live life to the fullest with their loved ones.  Happy Holidays! 



1 “S&P 500,” St. Louis Fed,

2 “Correction,” Investopedia,

3 “Stocks rebound to start week,” CNBC,

4 “S&P falls into correction,” Financial Times,

5 “U.S. Economy Grew a Strong 4.9%,” The Wall Street Journal,

6 “United States Inflation Rate,” Trading Economics,

7 “The Employment Situation – September 2023,” U.S. Bureau of Labor Statistics,

8 “30-Year Fixed Rate Mortgage Average,” St. Louis Fed,

9 “America’s frozen housing market,” CNN Business,


Questions You Were Afraid to Ask #6

Earlier this year, we started a series of posts called “Questions You Were Afraid to Ask.”  We look at a common question that many investors have but feel uncomfortable asking.  Because when it comes to investing, the only bad question is the one left unasked! 

So far, we’ve covered a variety of topics, including:

  • How the Dow Jones, S&P 500, and NASDAQ indices work and which companies they include.
  • How the values of these indices are calculated.
  • How stocks work, and how they differ from bonds.
  • How investment funds work, including the differences between passive and active funds.
  • The pros and cons of mutual funds, exchange-traded funds, and hedge funds. 

As you can see, when it comes to investing, there’s a lot to know, a lot to consider, and a lot to choose from.  And while choice is always a good thing, many investors often come to us with their heads spinning because they’re not sure where to start, what to do, or which option to choose.  They all come with some variation of the same question.  The question we’re going to answer right now. 

Questions You Were Afraid to Ask #6:
How do I know which investment options are right for me?

When it comes to this question, we have good news and bad news. 

The bad news is that there is no one-size-fits-all answer. 

The good news is that there is no one-size-fits-all answer. 

Yes, you read that right. 

To illustrate what we mean, think about your clothing for a moment.  Do you buy one-size-fits-all attire?  Of course not – and there’s a reason for that.  “One-size-fits-all” wouldn’t look very good.  It wouldn’t feel very good.  And it simply wouldn’t work for every person and every lifestyle. 

In life, we have a variety of different clothes we can choose from.  We make those choices based on several factors.  Climate: pants or shorts.  Employment: jeans or slacks.  Occasion: a day at the beach or a day at a wedding.  Personality: colorful vs dark, brazen vs muted.  Figure: from extra-small to extra-large.  You choose your clothes – and your style– based on what’s right for you.  Based on your wants, your needs, your nature.  Investing, believe it or not, is much the same.  There is no one-size-fits-all.  No single “best” option.  Only the best for you, based on your wants, your needs, your nature. 

This might seem like a no-brainer, but it’s critical all the same.  That’s because, as an investor, you will often hear the media say otherwise.  You will hear people claim that the Dow is more important than the S&P (or vice versa).  That stocks are better than bonds, or bonds are safer than stocks.  That passive is better than active (or vice versa), or that ETFs are always better than mutual funds (or vice versa). 

As we’ve seen, the truth just isn’t that simple. 

In these posts, we’ve answered six questions many investors are afraid to ask.  Now, we have six more for you to consider.  Six questions you must not be afraid to ask.  Questions only you can answer.     

Those questions are as follows: Who, What, When, Where, Why, and How. 

Who am I?  Are you cautious by nature or a risk-taker?  Are you a family-oriented person, or more of a lone wolf?  An adventurer or a caretaker?  Someone with a few simple wants, or big, bold dreams?  Or – as many people tend to be – are you a mixture of all these things? 

What kind of lifestyle do I want?  Simple or extravagant?  Always trying new things, or staying in your comfort zone?  One focused on work and personal accomplishment, or one focused on family and community?  Or again – and I can’t stress this too much – a mixture of these things, depending on what stage you’re at in life? 

When will I most need money?  Do you need it soon because you’re buying a new home or starting a new business?  Or do you need it later when you’re about to retire? 

Where do I see myself in ten years?  Or twenty?  Life is all about change and growth.  That means you need to ensure you’re investing for long-term growth to reach your long-term goals. 

Why do I need to invest?  To help send your kids to college?  To retire?  To see the world?  To give to charitable causes?  To feel like you always have a safety net? 

How will I pay for retirement?  This is key.  Because, regardless of your other goals, there’s probably going to come a time when you want to stop working.  But you can’t just pick a day to not show up at work.  Retirement creates a massive lifestyle change, one that will be quite upsetting to your finances if you don’t prepare for it. 

It’s these questions that should determine the right investment options for you.  The types of assets you invest in.  How much risk you take on.  Whether your portfolio is simple or complex.  Active versus passive.  You get the idea.

So, here’s our suggestion: Take some time to think about these questions.  Then, communicate your answers with a professional you trust.  Together the two of you can create an investment plan that’s as specific to you as the clothes you wear.  A plan designed to get you where you want to be.  We hope you’ve enjoyed learning a bit more about how investing works.  We hope we’ve been able to answer some questions you may have pondered over the years.  Most of all, we hope you can use this information as a springboard to ask more questions down the road.  After all…

When it comes to investing, the only bad question is the one left unasked!

Questions You Were Afraid to Ask #5

And…we’re back!  A few months ago, we started a series of letters called “Questions You Were Afraid to Ask.”  Each month, we look at a common question that many investors have but feel uncomfortable asking.  Because when it comes to investing, the only bad question is the one left unasked! 

In our last post, we looked at two categories of investment funds – passively managed funds and actively managed.  Both come with their own pros and cons.  But regardless which categories you choose to invest in, there are many types of funds within those categories.  This month let’s look at three of those types.  This is important information to know, because many IRAs and 401(k)s will give you the option of choosing from at least two of them.

Questions You Were Afraid to Ask #5:
What Differentiates Mutual Funds, Exchange-Traded Funds, and Hedge Funds?

Let’s start with mutual funds, one of the oldest and most common ways that people invest.  Here’s how the Securities and Exchange Commission (SEC) defines mutual funds:

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.1

As we’ve already covered, mutual funds can be either actively managed or passively managed.  Regardless of which umbrella the fund falls under, though, many investors flock to mutual funds because they offer several potential benefits:

  • Simplification.  Mutual funds can simplify the process of investing because instead of devoting time to researching dozens – or even hundreds – of individual companies to invest in, the fund does it for you.  (Note, of course, that you or your financial advisor should still research which fund is right for you.) 
  • Diversification.  Mutual funds often invest in a wide range of companies and industries to meet the funds stated objective. This could lower your overall risk.  This means that if one company/industry does poorly, you may not experience the same kind of loss you would if you invested all your money in that company or industry.

There are potential issues with mutual funds, though.  For example, sometimes, it can be difficult to understand what or how the fund actually invests  (Mutual funds can differ drastically depending on their objectives, investing style, time horizon, and other factors.)  Mutual funds are required by law to provide a prospectus to investors that explains how the fund works, but if you don’t know what you’re looking at, this information may confuse more than enlighten.  This is why it’s important to do your homework.  (And by the way, everything in this paragraph is true for ETFs and hedge funds, too.) 

Mutual funds can also sometimes come with more expenses than other funds, too. They might include management fees, purchase fees, redemption fees and tax costs.  These expenses can eat into your returns, thereby lowering your overall profit. 

Finally, mutual funds may not be a great choice if immediate liquidity is a high priority.  All mutual fund trades run at the end of day. So, for example, if you wanted to sell a mutual fund at the beginning of the day, hoping to avoid what you think the market will do, you will still get the end of day price. For this reason, some investors turn instead to…

Exchange-Traded Funds

ETFs, as they are often called, can be actively managed.  More often, however, they track the companies in a specific index, just like an index fund.  (See our last post for more information on index funds.)  Otherwise, ETFs differ from mutual funds in a few ways.  For one thing, the shares each investor has in an ETF can be traded on the open market.  That means you can buy or sell your shares in an ETF just like you would an individual stock.  You can’t do that with regular mutual- or index funds.  That’s a big advantage for investors who value flexibility and liquidity. 

Most ETFs also come with lower expenses than mutual funds.2 ETFs fully disclose all holdings held. This makes it easier to see exactly what you are investing in. It also makes it easier to see where you have overlap.

But of course, nothing’s perfect.  Since ETFs can be traded like common stock, that might lead to trading too often. You may find yourself paying more than you anticipated in trading fees.  Then, too, some ETFs are thinly traded, meaning there’s just not a lot of activity between buyers and sellers.  This could make it difficult to sell your shares. 

Hedge Funds

Most people will never invest in a hedge fund.  They’re generally not an option when investing through a 401(k) or IRA.  But we include them here because we often get asked about them – and for good reason!  You often hear about hedge funds in the media, and they’re the subject of multiple films.  While mutual funds and ETFs can be either passive or actively managed, hedge funds are always active.  The idea behind hedge funds is that the manager can use all sorts of strategies and tactics to help investors beat the market while “hedging” – hence the name – against risk.  Hedge funds often invest in non-traditional assets beyond stocks and bonds, too.

The reason hedge funds are not an option for most investors is because of the huge cost associated with them.  Legally, to invest directly in a hedge fund you must be an accredited investor. Meaning, you must have a net worth of at least $1 million or an annual income over $200,000 to invest in one.  Plus, you must be willing to stomach paying all sorts of fees that are much higher than your average mutual fund.  For these reasons, while hedge funds may be right for some people, they’re simply not necessary for the average investor to save for retirement or reach their financial goals.     

Whew!  We’ve thrown a lot of information your way over the past few months, haven’t we?  That’s why, for our final post of the series next month, we’re going to look at the most important question of all: How to know which investment options are right for you.   Have a great month!

1 “What are Mutual Funds?” Securities and Exchange Commission, 2 “ETFs vs Mutual Funds,” Kiplinger,

Questions You Were Afraid to Ask #4

A few months ago, we started a series of  posts called “Questions You Were Afraid to Ask.”  Each month, we look at a common question that many investors have but feel uncomfortable asking.  Because when it comes to your finances, the only bad question is the one left unasked! 

In our last post, we looked at the differences between stocks and bonds.  But these days, most “regular” investors – i.e., non-professional – have neither the time or expertise to research and select individual stocks.  (Or bonds, for that matter.)  Furthermore, doing so can subject your portfolio to increased risk and unexpected tax consequences.  That’s why investors usually rely on a different method: Putting their money into some type of fund

An investment fund is when a group of investors pool their money to invest in the same portfolio of stocks or other securities.  There are two major advantages of funds: Cost and simplicity.  By pooling your money with other investors, you can gain access to a diverse basket of stocks for less than if you bought each stock individually.  Funds also make it simpler for investors to get started, since they don’t have to research and select each individual company. 

These days, most people invest either through an employer-sponsored retirement plan, like a 401(k), or an Individual Retirement Account (IRA).  Either way, this usually involves selecting between one or more funds to invest in.  But here lies the problem for many people, even the financially savvy: How do you know which funds to choose?  And what’s the difference between them, anyway?    

Both in this post, and in next month’s, we’re going to address that issue.  We’ll start with one of the most common questions I get, especially from beginning investors:

Questions You Were Afraid to Ask #4:
What’s the Difference Between Passively Managed and Actively Managed Funds?

If you’re investing in, say, an IRA, most of the fund choices you’ll see will fall under one of two categories: Passive vs Active. 

Let’s start with the latter.  An actively managed fund is exactly what it sounds like: A fund where a manager takes an active role in selecting which securities to buy or sell, and when. 

Different managers have varying styles and philosophies.  For example, some may specialize in finding companies they believe are undervalued, which means they can be bought at what is believed to be a good price. 

Others may try to find companies they think are likely to grow by a significant amount.  Some managers may specialize in certain industries or market sectors.  You get the idea.  Either way, with active management, you are paying for one of two things:

  • The possibility that the fund will “outperform” the market.  This means the fund could do better over a specified period than a benchmark index – like the S&P 500 – that it measures against. 
  • The possibility that the manager will be able to protect you against undue risk or limit losses during times of market volatility.  (Note that this idea more generally fits the purpose of hedge funds than the standard mutual funds you’ll usually see in your IRA or company 401(k).  We’ll cover these types of funds next month!) 

The possibility of outperforming the market comes with some tradeoffs, however:

  • Actively-managed funds often come with more – and higher – fees than passively managed funds.  That’s because the manager must charge for his or her services. 
  • While it’s possible for a manager to outperform, it’s also possible to “underperform.”  When that happens, you are essentially paying more for less. 

Now, let’s look at passively managed funds.  Here, there is no “active” or research-based management decisions to the buying or selling of holdings.  Instead, the fund invests in a specifically designed portfolio and then stays put.  The fund may “rebalance” at some other set time frame, often quarterly or annually. This is to reset to its original objective or to match its index better. Otherwise, everything is held for the long-term. 

These days, many passive funds are index funds.  This is when the fund’s portfolio is built to try to match a target index, like the S&P 500.  So, if you essentially want to replicate a broader stock market, again like the S&P 500, index funds could be the way to go. 

Passive funds come with the following advantages: 

  • Typically, much lower cost, especially with index funds.  Because there’s nobody actively picking stocks, the fund could come with fewer expenses, and thus, lower fees. 
  • However the target index performs, with occasional variances, that’s how you’re likely to perform, too.  Given that indices like the S&P 500 have historically risen in value over the long-term, that could make index funds a good option for those who want to invest and forget it for a long period of time.

On the other hand…

  • There’s little chance of outperforming the market.  That’s an issue if you need more aggressive returns.  In addition, index funds come with no specific protection against extreme volatility.

Note that when you make your selections in a 401(k) or IRA, you can tell whether a fund is active or passive by reading its summary.  (More on that in a future post.)  We should also note that passive vs active doesn’t have to be a binary choice.  Many investors take advantage of both options in their portfolio! 

While most funds are either active or passive, there are many types of funds within those two categories.  Next month, we’ll look at a few of those types, including mutual funds, hedge funds, and exchange-traded funds. 

Have a great month!