Heard on the Street…

True story: this week my 7-year old son and I were driving home from church in a silent truck.  Then, all of a sudden, he yelled out “Everybody knows that!”.   Of course I replied asking, “Everybody knows what?”  His answer: “In 15 minutes you can save 15% or more on car insurance.”  Admittedly, this was not quite what I expected.  Then a few seconds later came his follow-up, “Dad, what’s a percent?

Many times we believe something just because we hear it over and over, regardless of whether we fully understand it or take time to research its validity.  Believe it or not, this happens in the investment world as investors buy into the “hottest stock tip” or become frightened after listening over and over to doomsday predictions.  Regardless of their specific situation or well developed plan, it somehow becomes easier to stray off path when the “noise” gets louder – whether from family, a friend’s so-called “successful investment story” or the news and media.  Remember, you must maintain faith in your plan.

Playing the “what-if” game can be dangerous just like following the latest trend can leave you at risk.  There’s a time to turn down the volume… and when things seem just too good to be true, don’t hesitate to ask your advisor.  It can be good to get a second opinion or an objective viewpoint before making a clouded or emotional decision that you come to regret down the road.

Keeping the summer financially sound

The summer months typically include vacation, a little time off from work, or hopefully some time to just relax.  You can use these moments to refuel and even travel a bit.  However, the summer can also lead to increased expenditures, and for many, a time when they prefer to “take a break” from their finances.  Here are some practical tips that can help you stay the course with your finances during the summertime:  1) utilize automatic bank drafts to invest regularly, 2) set up automatic bill pay to avoid late charges or missing bills, and 3) avoid making unnecessary impulse purchases.  It’s also a good time to review your semi-annual statements and call ahead to schedule a future appointment with your advisor or Certified Financial Planner™ to review your accounts after the break.

Balancing Act

Chuck Swindoll once said, “The longer I live the more I appreciate balance, and yet the more I see of extremes.”  Most of us do appreciate balance.  And most of us do see the extremes around us because they typically reveal something unexpected, or perhaps even dangerous.  This naturally grabs our attention, at least for the moment.

As an investor, you have likely experienced times when the market seems to be overreacting to something.  During these times it’s often best to step back and turn down the volume on the TV set.  Remember, if you developed an investment strategy and the appropriate level of risk tolerance in your plan, then you’ve already prepared for extreme times.  In other words, you have “balanced” your portfolio based on risk, goals and time horizon.  This balancing act can help you get through these times with a degree of confidence that comes from being prepared.

And don’t forget, just like in life, we need to “rebalance” our investments from time to time.  When your situation changes, or as you get older, you will likely change your goals and adjust your risk tolerance accordingly.  Don’t fail to consider key changes in life and in turn adjust your investment portfolio.  A periodic rebalancing can help smooth out the bumps in the road and help to keep you on track.

Learn From Your Mistakes

The only way to avoid mistakes is to avoid doing something.  And even in this scenario, one can argue there is a greater mistake by incurring opportunity cost – meaning there is a cost to not doing something.  I believe this is why my Dad always encouraged me to learn from my mistakes, to keep trying, and to do my best to do better “the next time around.”

Likewise, when investing, the only certain way to avoid making a mistake (to avoid a loss) is not to invest, and that could be the worst mistake of all.  Many have told me over the course of the last year they wished they hadn’t stopped investing.  Some did it out of fear, and many just out of uncertainty.  When we invest and things don’t go as planned, it’s important to learn from this – about our tolerance for risk and more about our investment profile.  But it doesn’t mean we should stop investing.  And when losses occur, if we turn this into a learning experience it can help protect us from taking on too much risk in the future, or from making the same mistake twice.

Don’t become discouraged.  Instead, invest early and often to help accumulate savings for the goals you have… whether a home, paying for an education, or retirement.  And don’t stop!  Over time, make adjustments as needed by working closely with your advisor and by learning from your mistakes (and also the mistakes you see others make).

Turbulent Times

In life we all experience times of trouble or difficulty.  In fact, life tends to cycle from good times to bad and back again.  But when rough times come, seldom is it a good thing to panic… to react by making decisions out of fear or emotion, or even worse, to run from the trouble at hand.  One thing I’ve learned recently is when life has it’s difficult times, we are wise to lean into those troubles and work through them.  And we aren’t successful in this by doing it alone… friends help, mentors, family and even God is there with us in the midst of our troubles.

Financially speaking, we must realize that our investments will also face turbulent times.  Just as in life, markets cycle and various investments go in and out of season.  The real question is when the volatile times come, how do we handle them?  A little encouragement is to avoid two common mistakes: don’t react on emotion, and don’t try to face these times alone.  When working with a financial advisor you aren’t alone.  They can provide objectivity on your portfolio and help you through choppy markets.

The other lesson learned is that we do eventually get through the rough waters (at some point). Of course, stock markets don’t recover overnight.  On average one 20% correction occurs every five years, but their recovery times vary.  According to Bloomberg, in 1974 the market suffered a -37% loss and took over five years to recover… but from 1981-1982 the market suffered a -25% correction and only took 83 days to recover.  And of course we are recently familiar with the corrections from 2000-2002 and also in 2008.

So what do we take away from this?  In the tough times don’t panic and avoid making quick, emotional decisions.  Remember the proverb that states, “The plan of the diligent lead to profit as surely as haste leads to poverty.”

XYZ Strategy #1

As a kid, my parents jokingly shouted “XYZ” if I ever exited the bathroom without zipping up my pants!  Let’s be honest, sometimes we get going so fast that we forget some of the most basic, fundamental needs we have.  As a Gen-X (ages 38-48) or a Gen-Y (ages 19-37) investor, did you know that you are a part of a group that boasts one of the highest earnings power?  Maybe you are moving along so fast that you need to stop to reconsider your plans for the future – something that seems way off, but in reality something that may come quicker than you realize.  Doing so can help you Zip-up (take care of) some essential needs in regard to your financial hopes and plans… these are the XYZ Strategies.

XYZ Strategy #1Develop a strong, sound savings strategy

Many Gen-X investors are doing this.  Many Gen-Y investors are starting (or have thought about it).  And some of you have an inheritance you unexpectedly received, providing a solid foundation on which to build.  Regardless of your situation, a key need for you is to develop a disciplined investment strategy.  This is how you accumulate net worth over time, and also build up what you need for retirement.  So what defines a strong savings strategy?  Here are some five basic criteria to consider.

1) Just begin – if you haven’t already, you need to start saving.  Do you realize it is much more difficult to save later on in life than it is today?  This, not to mention the opportunity cost of forfeited compounding, inflation, etc. are reasons to start today.  Plus, the math tells us that you shouldn’t be required to put aside as much now compared to waiting to start years later (when you get that pay raise, after you get married, once the car is paid off, etc.) saving for that goal.

2) Go automatic – systematic bank drafts work best and take the emotions out of investing.  There’s no second guessing and you don’t miss $’s that aren’t in your checking account.  If you get paid on the 15th and 30th each month, set up drafts for the 16th and 31st each month.  Before you realize it, the years pass and you could have significant accumulated savings that you funded without the pain of writing a check each month, or wondering if “now” was the right time to invest.  Dollar cost averaging is a proven, sound investment strategy.

3) Stick to your guns – in other words, don’t stop your plan… not when your car breaks down, not when the A/C unit stops working or the roof needs repair, not even when you have unexpected medical expenses.  That’s what your emergency fund is for.  Instead, benchmark that you won’t stop saving – and that you will even increase the amount you save every year.  When is the best time for this?… usually after your annual employment review (or bonus).

4) Spread it out – while you can’t argue with the tax-advantages of saving in a company retirement plan (401k, SIMPLE IRA, etc.) or a Roth IRA (tax-free growth over time), it is still important to diversify your savings.  Sound investors will also have taxable accounts (individual, joint, TOD, etc.) and disciplined families will have accounts set up for their children (UTMA, 529, ESA, etc.).  Not putting all your eggs in one basket doesn’t just apply what you invest in, but also to the type of accounts you are funding over time.

5) Ask for help – set aside the pride and work with an advisor.  It’s a sound way to receive professional, objective advice and it’s never a bad idea to have a second set of eyes on things.  Plus, they look at investments most every day – it’s what they are paid to do.  Let’s face it – life happens and before we know it time has slipped by, so enjoy the weekend and let your advisor worry about the investments.

Understanding Dividends

On the heels of Apple announcing they plan to start paying dividends, I hope you find this information helpful and enlightening to your situation.

Most people understand “interest” from savings accounts and CD’s. But few truly understand dividends, how they work, and the benefits long-term. So let’s try to explain.

Simply speaking dividends are payments from corporations to their shareholders (investors of the company). Prior to each dividend, the board of directors declares the amount to be paid to shareholders. Dividends are usually paid quarterly and can be distributed in cash or reinvested to accumulate additional shares. Today you may find companies or stock mutual funds that pay reasonable dividends in the range of 2% to 4% each year.

Many investors prefer stocks or mutual funds that pay reasonable and predictable dividends. These dividends can supply a stream of income compensating the investor with some form of return, while they wait for a potential longer-term overall return.

Stocks that pay dividends can generally be less volatile than companies that pay no dividends. One reason for this is that the investor is compensated for their investment risks each quarter, through the dividend, rather than waiting long-term to receive any potential benefits of growth. Keep in mind this is a general principle and is not always the case for all stocks and mutual funds. Also, savings accounts and CD’s are typically guaranteed (FDIC insured) and stocks are not. This means that the investor can see fluctuations in the value of their stocks or mutual funds. Remember, past performance doesn’t guarantee future investment returns. That said, also remember that dividends can provide some benefit in the meantime while investors wait for longer-term potential growth.

The Cost of Getting Even

It’s more and more commonplace to have a discussion with someone who must come to grips with what Dennis Gartman calls the “viciousness of percentages.” This is simply the average one needs to obtain to regain from a loss, “the cost of getting even.” Remember, a loss of -25% one year and a gain of +25% the next year does not get you back to even. Instead, this leaves someone a good bit behind “par” and the greater the loss, the greater the required return on capital to get back to even. Therefore, find below a chart that illustrates the average gains necessary to regain from a loss:

In summary, the lesson here is really quite simple: keep your losses to a minimum. In other words, what is your risk tolerance level and how long do you have to invest? Make sure these match up accordingly and don’t put too much at risk without the proper amount of time necessary to ride out short-term volatility in the market.

Re-Building Retirement Wealth, Part 3

In this part, let us remind you of the importance of attempting to grow your investment portfolio reasonably. Consider this… if you have ever played baseball, how many home runs did you hit? Or maybe as a spectator, how many home runs have your children or grandchildren hit on a consistent basis? So now you get it! Just as base hits are easier to get, a reasonable investment return probably stands a better chance to happen with possibly less risks. Let me say it again – if your retirement plan’s success depends on you hitting home runs with your investment portfolio, then stop that! Make adjustments now (save more, spend less, work longer if necessary, even consider working part-time during retirement, etc.). Keep in mind, a reasonable goal may be more successful if no more than a 4% to 6% long-term result could get the job done.