Why There Are No Financial Planning Quick Fixes

Decision making in the financial world can be challenging. You have so much information coming at you so fast, it’s difficult to process and think through all of it. But we can improve our financial thinking if we simply adhere to core principles relevant to every important area of life.

When we internalize that core truths of business, relationships and life are also applicable to investing and money management, we have an advantage. We’re less likely to be persuaded by harmful mental errors that threaten our long-term wealth. (For more, see: Financial Planning: It’s About More Than Money.)

Falling Prey to Mental Error

Clients, employees, colleagues and myself - we’re all prey to mental error. And one of the most common of these errors is the idea that a person can get something for nothing. Most people want the benefits before the work, the rewards without the risk. Given how much our society spends on lottery tickets, quick-fix diets and the like, it shouldn’t surprise us that our natural inclination is toward solutions that promise the benefit without the sacrifice.

Imagine you observe a person very skilled at what she does. She has become a master of her craft. There’s a tendency for us to believe she’s simply gifted. But we must be cognizant of what we do not see - years of experience, practice, preparation, long hours and mistakes that built the skill set. Achievement in any endeavor doesn’t just happen. Purpose, commitment, focused action, resilience and repetition of tedious tasks - these are qualities that build success. Or as Carol Dweck put it, “We like to think of our champions and idols as superheroes who were born different from us. We don’t like to think of them as relatively ordinary people who made themselves extraordinary.”

This relates to investment and financial planning because, by default, we want the easy road. For whatever reasons, we desire the final product but not the toil it requires. This is my alternate definition of insanity: desiring what does not exist. The symptoms are as follows:

• Focusing on near-term returns rather than result over entire lifespan.
• Looking at historical returns as an expectation for future returns (i.e. fixating on past results over the fundamental investment process).
• Unknowingly ignoring what we don’t know (i.e. tax consequences, long-term income potential, downside risk, etc).

The signs are similar in managing a business. I speak with at least one person a week requesting benefits without sacrifice. In other words, they want us to pay up for their talents before they’ve developed those talents (or proven they have them). They want us to fund their idea, introduce them to our clients, or pay them a salary but not be held to measurable standards. All of this because people tend to overestimate their capacity (or the time needed to build a meaningful skill set), misunderstanding that they must first prove they have developed a skill set that adds value before they can be paid for it. (For more from this author, see: Protecting Loved Ones Financially After You’re Gone.)

Something for Nothing Doesn't Exist

The point being the sooner we realize we cannot get something for nothing, the sooner we can begin to make real progress. In financial planning terms, we must realize:

1. We cannot reap the rewards without accepting some risk.

2. We cannot build true success without building a valuable skill set.

3. We can only build a skill set by putting in the time and effort required.

“Don’t tell me how talented you are. Tell me how hard you work.” – Arthur Rubenstein

This letter is not intended to be investment advice, and does not offer to provide investment advice or sell or solicit any offer to buy securities. Under no circumstance should this letter be construed as an offer to provide investment advice or sell or solicit any offer to buy securities or other investments. Weise Capital Advisors is a division of Capital Markets IQ, LLC an SEC-registered investment advisor. No financial, legal, or tax decisions should be made without thorough consultation with properly credentialed and experienced advisors. Weise Capital Advisors, LLC does not give tax or legal advice. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

CR: https://www.investopedia.com/advisor-network/articles/why-there-are-no-financial-planning-quick-fixes/

Why Investors Can Be Their Own Worst Enemy

Investors often think they are doing better than they actually are. But the reality is that most investors are actually underperforming their benchmark. Two recent articles regarding behavioral finance — Which Investor Personality Best Describes You? and 8 Common Investor Biases That Impact Investment Decisions — detail a concept which is the thought that our own instinctive behaviors are the biggest challenge to us as investors. Another topic that we have written on is the issue with trying to “time” the market. What people often don’t realize is that these two concepts have more in common than you might think.

For over two decades, financial research firm Dalbar has been analyzing investor returns. It recently published its 22^nd annual Quantitative Analysis of Investor Behavior study that compared these investor equity fund returns versus the market benchmark. The results showed significant underperformance from investors. Dalbar points out that “for the 30 years ended Dec. 31, 2015, the S&P 500 index produced an annual return of 10.35%, while the average equity mutual fund investor earned only 3.66%. The gap of 6.69 percentage points represents the diminished returns.”

So why is this the case?

As advisors, we have long preached the importance of cost and the large effects it can have on returns. While cost is a factor in investor underperformance, there are other factors that play even a larger role. The study showed that the biggest contributing factor to equity investors' underperformance over the past 20 years is voluntary investor behavior. What does that mean? Let’s look at a couple of examples of investor behavior that contributes to underperformance. (For related reading, see: Understanding Investor Behavior.)

1. Panic selling: The No. 1 rule in a market collapse is not to panic. Markets can be erratic with times of larger-than-normal volatility. Responding emotionally is never a good idea. Start by understanding what your risk tolerance is. At that point, make sure you understand your investments and what their purpose is in your portfolio. Finally, look at your portfolio as a whole and make sure it is aligned properly with your risk tolerance and goals.
2. Trend chasing/herd mentality/FOMO (Fear of Missing Out): As the phrase goes: what you see is what you believe. When investors see a stock continue to go up, or everyone around them is talking about buying that stock, it is easy to follow the crowd and jump in without thinking. History has shown us that past performance is no guarantee of future returns.
3. Overconfidence: Many investors feel they perform better than what is actually happening or real. This can cause investors to believe they can accurately time the markets. (For related reading, see: How to Make Your Nest Egg Last? Don't Sell Stocks When They're Down.)

Source: BlackRock; Informa Investment Solutions

Telling investors about these issues is one thing. Actually seeing the fixes put into practice is another challenge. The key point to remember is that we are often our own worst enemies when it comes to managing our own investments. Having a great financial and investment plan is irrelevant if you don’t have the mindset to follow through and stick to it. Becoming self-aware of these issues is a great first step. (For related reading, see: 6 Questions to Ask a Financial Advisor.)

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.

CR: https://www.investopedia.com/advisor-network/articles/060816/why-investors-can-be-their-own-worst-enemy/

8 Questions to Ask a Potential Financial Advisor

There are many types of financial advisors. Or is it financial planner? Certified financial planner? Investment advisor? Wealth manager? This is where things can become confusing. The financial industry has a whole lot of people calling themselves different things and purporting to provide a wide range of services. Unlike attorneys or CPAs who have state bodies regulating their profession, anyone can call themselves a financial advisor, financial planner or any number of other titles. “Buyer beware” couldn’t be more apt.

These are the questions I’d tell my mom to ask any financial advisor she was interviewing:

Question 1: Are You a Fiduciary?

Here’s how to eliminate 90% of potential financial advisors. There are two broad categories of advisors—fiduciaries and non-fiduciaries. Simply put, fiduciaries are legally obligated to put their clients’ interests first, whereas non-fiduciaries can offer advice that is not in your interest as long as it is “suitable” to you. Clearly it behooves you to work with an advisor who will always put your interests first—ahead of their own interests and of the firm they work for. Surprisingly (or maybe not so surprisingly), almost all of the big brokerage firms you see advertising on TV are not fiduciaries. They can put their (financial) interests ahead of the client, and it is perfectly acceptable as long as they meet the minimum requirement of it being suitable to you. Don’t settle for suitable. Hire a fiduciary.

Question 2: Are You a Certified Financial Planner?

The certified financial planner (CFP) designation is earned by passing a comprehensive exam, completing a series of courses, agreeing to a code of ethics, and having three years’ worth of professional experience in financial planning. The CFP mark is arguably the most recognized comprehensive financial planning designation available. Are there other designations? Yes, literally hundreds. Some are good and some border on the inane (e.g., life underwriter training council fellow, chartered mutual fund counselor, etc.). A CFP shows that the advisor has at least a basic level of comprehensive planning—an understanding of tax, estate planning, investments, insurance, college and retirement planning, and cash-flow management. Are there bad financial advisors with the CFP? Yes. Are there good financial advisors without the CFP? Yes. But as a rule of thumb, I highly recommend the advisor you work with be a CFP. (For related reading, see: Why Financial Planners Need to Earn the CFP Mark.)

Question 3: What Advanced Education or Training Do You Have?

The CFP designation represents the minimal amount of training from which to begin your advisor search. It’s like thinking you’re qualified to race in the Indy 500 because you have a driver’s license. It’s a good starting point, but with your financial life on the line, don’t settle for the minimum. Look for your advisor to have advanced designations or degrees including a JD (law degree), CPA/EA (tax), CFA/CIMA (portfolio design and investment analysis), master’s degree in tax, financial planning, economics or finance, an MBA with an emphasis in finance/investments, or the PFS/CPWA (financial planning). Additionally, because sudden wealth is a highly specialized field, look for those financial advisors who have experience in and focus their practice on serving sudden-wealth recipients. (For related reading, see: The Alphabet Soup of Financial Certifications.)

Question 4: How Long Have You Been Working as a Financial Planner?

Psychologist Anders Ericsson has studied what makes great performers such great performers. His conclusion? Practice. Lots of practice, actually. The 10,000 hours of practice rule has emerged as a rule-of-thumb for how much practice is required to develop an expertise in a field of study. It often requires at least 10 years in one’s profession to begin to have mastery. Again, this is a generality, but if I’m hiring a doctor or any specialist, I will only hire someone with at least ten years of experience, and when you are hiring a financial advisor, attorney or CPA, I strongly recommend you do the same.

Question 5: How Do You Make Money?

There are many different ways in which to pay for financial advice. You can pay by the hour, based on a percentage of assets the advisor manages for you (AUM or assets under management), a flat monthly retainer, commissions or any combination of the above. Commission-only advisors—nowadays usually stockbrokers and insurance salespeople—should be avoided. Their entire financial livelihood is based on selling you something. You want your advisory team to be objective and to be your partner, not your adversary. Stick with a fee-based advisor who charges an AUM fee and may receive incidental commissions on insurance products or a fee-only advisor who receives no commissions.

Question 6: Do You Have Any Regulatory Issues?

Do a background check on a potential financial advisor to ensure there are no regulatory or legal infractions against him or her.

Question 7: Can You Send Me Your Form ADV?

Every registered investment advisory firm must complete a document that discloses details about the firm, their clients, their experience and other valuable information. This is a treasure trove of information as you evaluate advisors. Things to look for are an experienced team (at least 10 years of experience), good education and credentials, a focus on serving clients similar to you (e.g., retiree, business owner, high net worth, sudden wealth) and no negative legal issues. Request a copy of the firm’s ADV form.

Question 8: Does Your Firm Hold My Money?

The answer you want to hear is no. Why? If the advisor who is managing your investments is also the custodian (the firm that holds the money), there is a great chance for fraud. Since they hold the money they can create inaccurate monthly statements. 

Your money should be held at a separate and unrelated firm from your investment advisor. Keep your assets at an unaffiliated company who will send you statements so you can see exactly what is happening in your accounts. (For related reading, see: Ethical Standards You Should Expect From Financial Advisors.)

By asking these eight simple questions, you will have a much better understanding of the financial industry and the type of financial advisor you should hire to be part of your team. Investing and retirement planning is difficult. The only method to successfully navigate your way through the complexity is to have a team of experts who are the best at what they do, and a good financial advisor is critical to this.

(For more from this author, see: The Six Biggest Sudden Wealth Mistakes.)

This article is adapted from the book, "The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth Into Lasting Wealth."

Investment advisory services are offered by Financial Management Network, Inc.(“FMN”) and Pacifica Wealth Advisors, Inc. (“PWA”). Securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC. FMN Capital Corporation is affiliated with Financial Management Network, Inc. Securities are not FDIC-Insured, are not bank-guaranteed, may lose value. Information herein is taken from sources deemed reliable and neither FMN, PWA, nor FMNCC are responsible for any errors that might occur. Neither asset allocation nor diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk. FMN, PWA, and FMN Capital Corp. do not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.

CR: https://www.investopedia.com/advisor-network/articles/8-questions-ask-potential-financial-advisor/

An Introduction to Asset Allocation

When you approach your financial planner, a term that most of you might have heard from him/her would be “asset allocation.” In this article, you will learn about asset allocation, the importance of asset allocation, different asset allocation strategies and the benefits of asset allocation in portfolio management.

What Is Asset Allocation?

Asset allocation is one of the most important steps in your portfolio management process. The initial step for the financial planner is to determine your required rate of return based on your financial goals, risk tolerance and time horizon. The second step is to ascertain capital market expectations, as well as the expected return and expected volatility of each asset classes.

There are two categories of asset classes:

1. Traditional asset classes include stocks, bonds, and cash
2. Alternative asset classes include mutual funds, commodities, real estate, private equity, hedge funds

The third step is asset allocation, in which the financial planner develops a strategy of how much money to  invest in each asset class for you to achieve your return objective at a risk level that you are able and willing to accept. The premise of asset allocation is that each asset class has a different risk and return characteristic, thus providing the investor with risk diversification benefits. (For related reading, see: Which Investor Personality Best Describes You?)

For instance, a 20% stock / 80% bond portfolio will provide lower risk and return and a more regular cash flow than an 80% stock/20% bond portfolio. It is also important to note that the latter is a riskier portfolio and is more suitable for young individuals in their twenties who have a longer time horizon and can tolerate stock market volatility. On the other hand, the first portfolio is more suitable for individuals who are nearing retirement and cannot withstand a drastic decline in their portfolio.

Why Is Asset Allocation Important?

As explained above, the most significant benefit of asset allocation is that it provides diversification and helps the investor manage the risk of his/her portfolio. While most people do understand this concept, they would still focus on which investment would outperform or whether equity markets would trend up or down. Although these are important considerations, many professional money managers believe that asset allocation is the most important decision for the investors. (For related reading, see: Why You Should Diversify and Rebalance.)

According to Sheryl Rowling, a certified public accountant and principal at Rowling & Associates, with asset allocation strategy “you have different pieces of the pie, and all those pieces react differently to different occurrences in the market.” She added, “Some pieces go up while other pieces go down, so you will still get the average return of the market, but you won't have the extreme ups and downs.”

What Are Different Asset Allocation Strategies?

As previously mentioned, the most important factors in determining the asset mix are risk tolerance and time horizon. An individual with a longer time horizon and higher risk tolerance should automatically tilt his or her portfolio toward stocks. According to a traditional rule of thumb, the percentage of stock allocation should be equal to 100 minus your age. So if your age is 25, then 75% of the portfolio should be allocated toward stocks. Over the years, many experts have expressed concern over using this rule as they believe it results in extremely conservative portfolios for retirees.

Also, following the aforementioned rule deprives an individual of venturing into other asset classes other than stocks and bonds. For instance, during high inflation, stocks, bonds, as well as cash and cash equivalents tend to underperform. To combat inflation (in financial terms we can say to hedge inflation risks), individuals can invest their money in real estate and commodities to achieve low variability in their portfolio returns.

Therefore, it is important to take a holistic approach in developing an asset allocation strategy. Here are two types of asset allocation strategies:

1. Strategic asset allocation: This strategy is a disciplined approach that involves assigning weights to different asset classes on the basis of an investor’s risk and return objectives and the capital market expectations. It is based on Modern Portfolio Theory, which assumes that every investor is rational and shows risk aversion (i.e. desire for high returns with the lowest possible risk). Every financial planner would customize this strategy according to your needs and factor it in your financial plan. This is also called a “policy portfolio.” The financial planner would also assign a maximum permissible range for each asset class, e.g., if stocks have an allocation of 50% in your policy portfolio, the financial planner can assign a permissible range of 46% to 54% for your stock allocation. This means that any time the stock percentage ventures outside this range, your portfolio will have to be rebalanced. If it goes below 46%, then you will buy additional stocks and if it goes above 54%, you will have to sell stocks. (For related reading, see: Diversification and Lessons from a Normalizing Market.)
2. Tactical asset allocation: While strategic asset allocation is implemented over the long term, tactical asset allocation allows investors to make short-term deviations from asset weights assigned in strategic asset allocation strategy. These short-term deviations are achieved by implementing a moderately active strategy. For example, your financial planner expects domestic stocks to outperform in the future as the Federal Reserve is about to announce rate cuts. He/she may ask to take out money from cash and cash equivalents and invest more money in domestic stocks for six months. However, the portfolio will return to the strategic asset mix after six months.  

The Bottom Line

Asset allocation is the most important part of the portfolio construction process. It can be strictly passive in nature or can become a very active process. The asset mix decision heavily depends on an individual’s age, risk tolerance, goals, time horizon and capital market expectations. It is important to note that an asset mix for one person may be completely inappropriate for another.

CR: https://www.investopedia.com/advisor-network/articles/080416/introduction-asset-allocation/

Which Investor Personality Best Describes You?

According to many studies, our different personality traits and preferences, along with a range of emotional and mental behavioral biases, have a strong impact on the way we invest. This is commonly referred to as behavioral finance. As part of a two-part series on Behavioral Finance, we will start by exploring the different personality types of most investors. When it comes to money and investing, there are many factors that contribute to the “how” and “why” of important financial decisions.  

Investor Personality Types

There are four different types of investors, according to the CFA Institute, each with their own distinct behavioral biases. Understanding your own investor personality type can go a long way toward helping you determine and meet your long term investment goals, as well as producing better returns. (For more from Brad Sherman, see: 6 Questions to Ask a Financial Advisor.)

Which of these profiles best describes you?

Preservers

Preservers are investors who place a great deal of emphasis on financial security and on preserving wealth rather than taking risks to grow wealth. Preservers watch closely over their assets and are anxious about losses and short-term performance. Preservers also have trouble taking action for fear of making the wrong investments decisions.

Common Issues with Preservers: An investment strategy should take into account short-, mid- and long-term goals. By overemphasizing short-term returns, an investor risks making an emotional decision based on the short-term performance, which may end up being more detrimental to them in the long run. 

Accumulators

Accumulators are investors who are interested in accumulating wealth and are confident they can do so. Accumulators tend to want to steer the ship when it comes to making investment decisions. They are risk takers and typically believe that whatever path they choose is the correct one. Accumulators have frequently been successful in prior business endeavors and are confident that they will make successful investors as well.

Common issue with Accumulators: Overconfidence. We recently wrote a blog on the issue with stock picking and active management. Overconfidence is a natural human tendency. As investors, accumulators consistently overestimate their ability to predict future returns. History has shown that it is impossible to predict markets at large scale, yet accumulators continue to try and do so and expose themselves to extreme risk. 

Followers

Followers are investors who tend to follow the lead of their friends and colleagues, a general investing fad, or the status quo, rather than having their own ideas or making their own decisions about investing.  Followers may lack interest and/or knowledge of the financial markets and their decision-making process may lack a long-term plan.

Common Issues with Followers: The herd mentality is a concept of investors piling into the same investments as others. This is often the basis of investment bubbles and subsequent crashes in the stock market. When you are a follower, you are typically following fund managers who have tools and recourses to act on new information in a fraction of a second. By the time the average investor “follows” them into a position, it is often too late. It is always important to understand your investment decisions and how they fit into your overall plan. (For more, see: The Importance of Diversification.)

Independents

Independents are investors who have original ideas about investing and like to be involved in the investment process. Unlike followers, they are very interested in the process of investing, and are engaged in the financial markets. Many Independents are analytical and critical thinkers and trust themselves to make confident and informed decisions, but risk the pitfalls of only following their own research.

Common Issues with Independents: Similar to overconfidence bias associated with accumulators, independents face similar issues with relying too heavily on their own train of thought. We as humans have ability to convince ourselves that we are correct or that we don’t need guidance, even when that is not the case.

So, what kind of investor are you?

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.

CR: https://www.investopedia.com/advisor-network/articles/051116/which-investor-personality-best-describes-you/

5 Money Decisions You Might Regret Later in Life

The room for error in most money decisions can leave you feeling pressured to make all the right moves now. The good news is we can learn from other people’s experiences to help us make better choices today so we don’t end up saddled with regrets about how we used our money in the past.

Here are five common money mistakes and how you can avoid them:

1. Prioritizing Stuff Over Experiences

We see a huge amount of advertising for things to buy every single day. It’s hard to avoid “retail therapy” as a self-soothing technique. Here’s the problem: it doesn’t work.

There’s a wealth of research that shows spending money on material things not only fails to make us happy, but can leave us feeling downright miserable. If you want to spend and don’t want to regret the purchase, use your money to buy one of two things:

• Experiences, not things
• Services that create more time in your day

2. Not Defining Your Values

This might not sound like a money decision, but understanding your values can directly impact how you use your money and how happy those purchases make you. When you understand your values, you can make sure your spending and how you use your money aligns with what’s most important to you. This can help you prevent making regrettable money decisions.

Pressures from your family, friends or social expectation are real and massively influential. When you don’t know your own values, it’s easier to end up making financial decisions that aren’t right for you.

For example, if you know you value adventure and personal growth, you’re in a better position to not feel pressured to buy a home before you’re ready. Without those priorities in mind, you might end up buying a home because everyone says it’s better than renting, even though it doesn’t suit your unique needs. (For related reading, see: Are You Ready to Buy a House?)

Know what’s important to you. Define your values and align your spending and financial goals with them to help you avoid big financial decisions you’ll regret down the road.

3. Borrowing From or Cashing out Your 401(k)

Borrowing money from your 401(k) is almost never a good idea. The best advice around this topic? Just don’t do it.

Create an emergency fund instead that you can dip into should you need to pay for an unexpected expense, like a medical bill or car accident. Your emergency fund will help you avoid debt, and it provides a cash cushion you can use freely without disrupting your retirement savings. (For related reading, see: How to Build an Emergency Fund.)

When you leave your current job and start a new position, take your 401(k) with you. Either rollover your old 401(k) into your new employer’s plan, rollover the account into an IRA or leave it where it is, if that’s an option. Cashing out your old 401(k) will leave you with a big tax bill, undercut your savings and diminish your opportunity to earn compound interest on your 401(k). Keep it invested, don’t borrow against your retirement.

4. Giving in to Lifestyle Inflation

You’ve come a long way—no more ramen for dinner! You earn a good income and can enjoy a more expensive lifestyle because you work hard and deserve it.

But “I deserve this” can be a gateway to lifestyle inflation, or lifestyle creep, which is when your spending constantly increases to keep pace with your earnings. It puts you on a savings treadmill, where you never get any closer to your long-term goals.

Increasing your spending on track with your earnings prevents you from saving, investing and earning wealth. It’s not enough to avoid spending more than you earn; you want to spend way less than you earn. Minimizing your expenses gives you more to save and invest, along with more choice, freedom and flexibility in the future. By practicing more frugal habits now, you can do more with the money you choose to save and invest. (For more from this author, see: 5 Ways to Stop Living Paycheck to Paycheck.)

5. Not Saving Right Now

When you’re in your 20s and 30s, you have a massive advantage on your side when it comes to saving and investing: time. The sooner you start, the more you can benefit from compounding returns on your investments. Take a look at the following example that shows the exponential effect of compounding.

Let’s say Joe and Dan are both 25 years old right now. Joe decides to save $500 per month into investment accounts, and continues to do so until age 63. Dan, on the other hand, chooses to wait before he begins. He waits until he’s 40, when he's earning a higher income, can contribute more ($1,250 per month), and retirement is closer on the horizon.

If Joe and Dan both start with $1,000 to open their brokerage accounts and Dan contributes $750 more per month, who comes out ahead in the end at age 63 if we assume a 7% return for each investor?

	Age to Start Investing	Starting Investment Amount	Monthly Contribution	Balance at Age 63
Joe	25	$1,000	$500	$1,048,445.39
Dan	40	$1,000	$1,250	$806,282.64

Even though Dan contributed much more per month, he ends up with a quarter of a million dollars less than Joe. Dan had to work a lot harder than Joe to try and make up for lost time—and still came out behind.*

If you want to avoid money decisions you might regret later in your life, know that the best time to start saving was yesterday. The second-best time to start? Right now.

(For more from this author, see: How to Create a Budget You Can Actually Stick With.)

* Hypothetical (chart/situation) for illustrative purposes only and does not represent actual or future performance of any specific product or investment strategy. Investing involves risk, including risk of loss.

PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of these web-sites provided here, you are leaving this site. Our company makes no representation as to the completeness or accuracy of information provided at these sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, sites, information and programs made available through this site.

Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc. Member FINRA, SIPC, and Registered Investment Advisor. AspenCross Wealth Management is independent of Signator. 1400 Computer Drive Westborough, MA 01581

CR: https://www.investopedia.com/advisor-network/articles/5-money-decisions-you-might-regret-later-life/

Why Now Is Best for an Investor Life Boat Drill

One of the illogical realities of the investment business is that it enjoys a unique distinction - when our inventory goes on sale, there a very few buyers. Plaster a “30% off” sign on shoes, cars, or refrigerators and shoppers willingly take advantage of the deal. Put that same “30% off” sign on the S&P 500and buyers go wanting.

Investors have enjoyed a long period, approaching 100 months, without a 20% decline in the S&P 500 index. The VIX Index, an accepted indicator of stock market volatility, is currently trading around 10, very close to historical lows. Despite political turmoil at home and abroad, saber rattling from North Korea, and the ever-present threat of global terrorism, the stock market has continued a steady climb. (For more, see: Are Equity Markets Overvalued?)

Cause for Concern

Given all the positives, why should advisors and investors be concerned? A lack of normal volatility in the market may have created a false sense of complacency among investors, especially younger investors who haven’t experienced typical equity market swings. The average intra-year decline in the market going back to 1980 is about 14%. However, the last seven years that average has been less than 9%, and the market hasn’t been in negative territory at all in 2017. That’s not a prediction, just perspective.

I believe the most important trait successful investors possess is rational optimism. While the long-term return of capital markets are almost assuredly something above the rate of inflation, the near-term direction is impossible to predict. I’d contend it’s far better to provide clients with some perspective on market declines before they occur. The time to count the life boats is before they are needed.

An Investment Life Boat Drill

What does an investment life boat drill entail? For starters, a review of one’s investment objective or asset allocation. Some clients have a tendency to shift their risk appetites in tandem with the direction of the market, preferring more equity exposure when skies are clear and less when storm clouds are on the horizon. We advise clients to set an equity allocation they can stick with in good times and bad and periodically rebalance. This helps clients to buy low and sell high.

Secondly, does the client have sufficient cash reserves to weather a 10% or greater market decline? Our firm encourages retired clients to maintain 12-18 months of living expenses in a cash reserve fund. Should the equity market decline more than 10%, we suspend portfolio distributions and use the cash reserve account for living expenses. Since 1960 the average bear market (>20% decline) has lasted about 16 months. Using the cash reserve account during market declines helps our clients avoid selling assets at depressed prices and helps maintain investment discipline.

Finally, it’s important to remind clients that capturing capital market returns requires embracing volatility. Returns above the risk-free rate require, by definition, taking risk. If equity returns were risk-less they’d certainly be a lot lower. We like to show clients how volatility gradually smoothes out over longer time periods with monthly, quarterly, yearly and 10-year period charts. This visual helps reassure clients that whatever happens in the future, it’s something we’ve likely experienced before.

CR: https://www.investopedia.com/advisor-network/articles/why-now-best-investor-life-boat-drill/