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Latticework Wealth Management, LLC

Monthly Archives: February 2014

What is the 800-Pound Gorilla in the Room for Retirees? It is 12.5.

26 Wednesday Feb 2014

Posted by wmosconi in active investing, active versus passive debate, asset allocation, bonds, business, Education, Fiduciary, finance, financial advisor fees, financial planning, Individual Investing, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investment advisory fees, investments, math, passive investing, personal finance, portfolio, risk, stocks, volatility

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bonds, business, Certified Financial Planners, CFP, finance, Financial Advsiors, financial planning, individual investing, investment advisory fees, investments, personal finance, Registered Investment Advisors, retirement, RIA, stocks, volatility

The 12.5 I am referring to is 12.5%, and it relates to investment advisory fees.  I have discussed the effects of investment advisory fees at length in previous posts.  In general, most individual investors pay fees to financial services firms that are too high in comparison to the value provided in many cases.  For example, the vast majority of individual investors do not need complex, strategic tax planning, estate planning and legal advice, or sophistical financial planning.  However, the firms that most people invest with offer those services within the fee structure.  There is very little in the way of options to select a larger wealth management firm that will provide only asset allocation advice at a reduced fee because the individual investor does not need the other services when it comes to tax, legal, and sophisticated financial planning.  I wrote an article several months ago in regard to how you can look at the value added by your financial professional.  It is worth a review in terms of what he/she can do for you that you cannot simply do yourself using a passive investing strategy.  Here is the link:

https://latticeworkwealth.com/2013/10/26/are-your-financial-advisors-fees-reasonable-are-you-actually-adding-more-risk-to-your-ability-to-reach-your-long-term-financial-goals-here-is-a-unique-way-to-look-at-what-clients-pay-for/

I would like to focus on a different way of looking at investment advisory fees.  My primary focus will be on retirees; however, the logic directly applies to those in the wealth accumulation phase of life trying to save for retirement.  As I have mentioned previously, the standard fee for investment advisory services is normally 1% of assets under management (AUM).  This structure simply means that an individual investor pays $1 in fees for every $100 invested.  Another way to look at it is that you will pay $10,000 annually if your account balance is $1,000,000 ($1,000,000 * 1%).  I would like to go through an illustration to show what this means in terms of your investment performance, overall risk profile, and the ability to reach your long-term financial goals.

Most individual investors do not write out a check to their financial professional.  Rather, they have the investment advisory fees paid out of the investment returns in their portfolios.  My example does not make any difference how you pay your fees, but it can be somewhat hidden if you are not writing out a check.  The fees just appear as a line item on your daily activity section of your brokerage statement; most investors skim over it.  In order to make the mathematics easier to follow, I am going to use a retiree with a $1,000,000 account balance and a 1% AUM fee annually.  My entire argument applies no matter what your account balance is or your AUM fee.  You just need to insert your personal account balance and AUM fee which may be higher or lower.  So let’s get started.

In my hypothetical scenario of a $1,000,000 portfolio subject to a 1% AUM fee, this retiree will have to pay $10,000 to his/her financial professional for investment advisory services rendered.  Well, we can look at this fee from the standpoint of the portfolio as a whole in terms of investment performance necessary to pay that fee.  The portfolio will need to increase by at least 1% to pay the fee in full.  Now most financial professionals will tell clients that they can expect to earn 8% per year by investing in stocks.  So using that figure (which is close to the historical average), we can get to the fee by allocating $125,000 of the overall portfolio to stocks in order to increase the portfolio on average by 8% to be able to pay the $10,000 fee ($125,000 * 8% = $10,000).

What does that mean in terms of your overall portfolio allocation to stocks?  You can imagine that, whatever your total allocation to stocks is, 12.5% of that amount is invested simply to pay fees.  For example, if you are just starting out in retirement at age 65 and have 60% allocated to stocks, 12.5% of the expected return (8%) from stocks in your total  portfolio will go to pay your annual investment advisory fees and 47.5% of the expected return (8%) from stocks in your total portfolio will add to your account balance. 

The math works out this way:  $1,000,000 * 60% = $600,000 // $600,000 (invested in stocks) * 8% (expected return from stocks) = $48,000 // $48,000 – $10,000 (AUM fee at 1%) = $38,000.  An alternative way to do the math is to take the total allocation to stocks and subtract the necessary allocation to stocks to pay the AUM fee, and that result is the investment return for the year that remains in your account balance which is $38,000 (So take 60.0% – 12.5% = 47.5% // $1,000,000 * 47.5% * 8% = $38,000).

The paragraph above has major impacts for your portfolio.  Firstly, it illustrates how much additional risk you are taking on in your portfolio as a whole.  In order to breakeven net of fees, you need to invest 12.5% of your portfolio into stocks.  Retirees are in the wealth distribution phase of life, and most are living off the investment account earnings (capital gains, dividends, and interest) and principal.  Since retirees have no income from working and will not be making any additional contributions, they are impacted greater than other investors in the way of volatility.  Stocks are more volatile investments than bonds but offer the promise of higher returns.  It is the simple risk/reward tradeoff.  Second, it shows that the higher the fees for retirees the more vulnerable they are to volatility as a whole.  Since retirees need to withdraw money on a consistent/systematic basis, a higher allocation of their portfolio to riskier investments are more vulnerable than other investors that have longer timeframes prior to retirement (wealth accumulation phase). If there are major downturns in the stock market, retirees still have to withdraw from their accounts in order to pay living expenses.  They do not have the luxury of not selling.  Yes, a retiree could sell bonds instead of stocks but then the allocation of stocks has to rise by definition as a percentage of the entire portfolio.

There is a way to rethink the investment strategy for a retiree.  In today’s investing environment, there are many more investment offerings that offer financial products at much lower expenses than traditional active mutual fund managers.  These include ETFs and index mutual funds.  The expenses typically are less than 0.20% (in fact, most are significantly lower than this).  Additionally, there has been the proliferation of independent Registered Investment Advisors (RIAs) and Certified Financial Planners (CFPs) over the past 10-15 years who charge fee-only (hourly) or flat fee.  Most of these financial professionals charge significantly lower fees than the traditional 1% AUM fee.  In fact, it is possible to cut your fees by 50% at least.  Now the flipside may be that you might not have the ability to consult with some about certain sophisticated tax, legal/estate, and financial planning strategies.  However, most retirees do not need that advice to begin with.  The average retiree only needs a sound asset allocation of his/her investment portfolio given his/her risk tolerance and financial goals.  To learn more about independent RIAs and CFPs, I have included these links:

1)       RIA – http://www.riastandsforyou.com/benefits-of-an-ria.html

 

2)      CFP – http://www.plannersearch.org/why-cfp/Pages/Why-Hire-a-Certified-Financial-Planner.aspx

The main benefit in terms of reducing fees is not only that the retiree keeps more money, but, more importantly, he/she can reduce the overall risk of the portfolio.  Let’s go back to our hypothetical example of a retiree with a $1,000,000 who is charged a 1% AUM fee or $10,000 per year.  If the total investment advisory fees are reduced by 50%, the total annual fee is 0.5% or $5,000 per year.  What does this mean?  In our first example, the retiree had to allocate 12.5% of his/her portfolio of stocks to pay the $10,000 annual AUM fee (assuming an 8% expected return).  If the fees are 50% less, the retiree now only has to allocate 6.25% of the portfolio to stocks in order to pay the annual investment advisory fees ($1,000,000 * 6.25% = $62,500 // $62,500 * 8% = $5,000).

Now if we go back to the longer example of a simple 60% stock and 40% bond portfolio, the retiree in this case is able to invest 53.75% in stocks and 46.25% in bonds and still pay the annual investment advisory fees.  The math is as follows:  ($1,000,000 * 53.75% = $537,500 // $537,500 * 8% = $43,000 // $43,000 – $5,000 new annual fees = $38,000).  You will note that the retiree has $38,000 in his/her portfolio after the annual fees are paid out.  This dollar amount is equal to the other hypothetical retiree who had to pay a 1% AUM fee.  The example illustrates that both investors have the same expected increase to their portfolio but the retiree with the lower fees is able to get to that figure with a portfolio that is less risky because he/she is able to allocate 6.25% less to stocks.

Another way to look at this scenario is that the retiree in the second case with 50% lower fees could have alternatively chosen to reduce his/her stock allocation by 5%.  For example, the retiree could have started with a portfolio allocation of 55% instead of using the 53.75% stock allocation.  In this example, the retiree would have an expected return after fees that is $1,000 higher than the retiree from the first example and take less risk.  The math is as follows:  ($1,000,000 * 55% = $550,000 // $550,000 * 8% = $44,000 // $44,000 – $5,000 = $39,000 // $39,000 – $38,000 = $1,000).  The retiree in this example would have a higher expected return from his/her entire portfolio of 0.1%.  While this figure might not sound like much, the more important point is that this return is achieved with less risk (only 55% allocation to stocks versus a 60% allocation to stocks).

A financial professional might argue that he/she is able to create an asset allocation model for an average retiree that will end up having investment returns higher than that recommended by the independent RIA or CFP.  Of course, this might be the case.  However, in order to have the retiree be indifferent between the two scenarios, the portfolio recommended by the financial professional charging a 1% AUM fee must be able to return 0.5% more annually at an absolute minimum.  Now this does not even consider the riskiness of the retiree’s portfolio.  In order to have a portfolio earn an additional 0.5% per year, the client will have to accept investing in riskier asset classes.  Therefore, given the additional risk, the retiree should require even more than an additional 0.5% overall return to compensate him/her for the potential for higher volatility.

As you can see, the level of fees makes a big difference.  The more you are able to cut the fees on your retirement account (and any account for that matter) the less risky your portfolio can be positioned.  In the aforementioned example, the overall reduction in the exposure to stocks can be a maximum of 12.5% to stocks.  Now the average retiree will most likely not want to forgo any investment advice from a financial professional.  However, in the case of person able to lower his/her investment fees by 50%, he/she was able to reduce his/her investments in stocks by 6.25% (12.5% * 50%).  In fact, you can figure out the possible reduction in exposure to stocks by multiplying the 12.5% by the reduction in fees you are able to achieve.  For example, let’s say that you are able to reduce your investment fees by 70%.  You would be able to reduce your allocation to stocks by 8.7% (12.5% * 70%).

The entire point of this article is to show you how you can be able to reduce the volatility in your portfolio and not sacrifice overall investment returns.  If investing in stocks during your retirement years makes you nervous, this methodology can be used to help you sleep better at night because you have less total money of your entire retirement savings allocated to stocks.  However, you are not sacrificing investment returns.  Always remember that in the world of investment advisory fees, it truly is a “zero sum game”.  All this means is that the investment advisory fees are reducing your net investment portfolio gains.  The gain in the value of your portfolio either goes to you or your financial professional.  The more you learn about how investment advisory fees, the types of financial professionals available to advise you offering different fee schedules, and how the financial markets work, the more gains you will keep in your portfolio.

The Results are in for my January CNBC Experiment: It Proves Nothing and Everything. What?

18 Tuesday Feb 2014

Posted by wmosconi in Uncategorized

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In case you missed it, I wanted to share my CNBC experiment. I hope it was instructive.

Cheers,
Will

Latticework Wealth Management, LLC

Sometimes the most important lessons in the individual investing sphere are complicated and simple at the same time.  At the very beginning of January, I recommended a little experiment that related to the financial market coverage on CNBC.  The specific details of this “thought experiment” can be found in the original blog post from January 1st:

https://latticeworkwealth.com/2014/01/14/happy-new-year-beginning-thoughts-and-information-for-international-viewers-2/

The brief version of the exercise related to watching Monday and Friday coverage of the current events in the global financial markets during the month.  The simple exercise was to watch CNBC’s Squwak Box every Monday during the course of the month.  The second part was to watch the last hour of the Closing Bell segment.  What was the logic?  The Monday show is a three-hour program, and there are many current issues considered and opinions from various market participants (e.g. traders, money managers, economists, investment strategists, research analysts, etc.).  Monday is…

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Not all Index Mutual Funds and ETFs are Created Equal: Part 2 of 2

12 Wednesday Feb 2014

Posted by wmosconi in active investing, active versus passive debate, asset allocation, bonds, business, Consumer Finance, Education, enhanced indexing, finance, financial planning, Individual Investing, investing, investments, passive investing, personal finance, portfolio, risk, stocks, volatility

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active investing, active versus passive, active versus passive investing debate, asset allocation, bonds, business, education, enhanced indexing, ETF, ETFs, finance, financial planning, individual investing, individual investor, investing, investments, passive investing, portfolio, portfolio management, stocks

The exponential growth of passive investment vehicles over the past ten years has been astonishing since the infancy of index investing that Vanguard made so famous back in the early 1980s.  In the first part of this discussion, I spoke at length about the need to really read the prospectus or fact sheet of an Exchange Traded Fund (ETF) or an index mutual fund.  Two similarly sounding investments may actually have quite different underlying components.  I utilized two different emerging market stock ETFs to demonstrate the difference, and they were the iShares MSCI Emerging Markets Stock ETF (Ticker Symbol:  EEM) and the Vanguard FTSE Emerging Markets Stock ETF (Ticker Symbol:  VWO), respectively to show why this is true.  The main issue in this case was that one considers South Korea to be a developing economy (EEM), and the other (VWO) does not.  Therefore, a large component of your investment allocation in your portfolio to emerging market stocks may be more heavily weighted toward South Korea than you at first thought (over 15% in fact).  For the details of the discussion, you can click on this link:

https://latticeworkwealth.com/2014/01/28/not-all-index-mutual-funds-and-etfs-are-created-equal-part-1-of-2/

The second issue that I hinted at in part 1 relates to the definition of passive investing.  The active management versus passive investing debate has been raging on for over 30 years with proponents on both sides of the fence.  In its most general form, passive investing is choosing to invest in all stocks or bonds tied to a particular index, such as the S&P 500 Index, Russell 2000 Index, MSCI EAFE Index, or the Barclays Aggregate Bond Index.  The investor in this case decides that he/she would rather participate in the investment performance of all the components of the index rather than picking the best stocks or bonds themselves.  Active managers strive to beat the investment performance of a particular index by scouring the quantitative and qualitative data about each particular stock or bond.  These professionals believe that they have the ability to make superior investment choices and do better than average (i.e.  just settling for the investment returns of the index less the expenses of the ETF or index mutual fund).  I spoke at length about active and passive investing in one of my earliest blog posts.  Here is the link to that more involved discussion to get further detail:

https://latticeworkwealth.com/2013/07/05/difference-between-active-and-passive-investing/

A new type of investment vehicle has sprung up during the development of the ETF industry, and it is referred to as “enhanced indexing”.  The idea is that you can approach the debate by using a hybrid view of sorts.  Enhanced indexing is investing in a particular index but not investing in all the stocks or bonds or choosing to weight the stocks or bonds differently than the index does.  These ETFs offer the ability to use the asset manager’s proprietary strategy to pick the “best” members in the index.  There are many managers that do this, and two of the most popular are offered by the WisdomTree company and Dimensional Fund Advisors.  The ETF and mutual funds offered by these companies follow a similar philosophy with different approaches.  However, each company strives to outperform the index that their portfolio managers select.

There is nothing wrong with any of the offering of these companies.  In fact, many of their investment vehicles have had superb performance over the years.  This salient point is that they are really “blurring” the line between active and passive investment philosophies.  Using a more strict definition of passive investing, the investor knows at the outset that they will underperform the index by the amount of fees (and “tracking error” – a concept I will not go into specifically in this post) assessed to the ETF or index mutual fund.  However, they will not significantly underperform because all the components of the index are always held.  An active investment vehicle has the ability to outperform or underperform an index after fees are assessed each year.  Investors in enhanced indexed ETFs or mutual funds fall into the latter category.  Once the asset manager makes a decision to pick the “best” components of a particular index, they are moving into the realm of active management.  One of the appeals of this investing strategy to individual investors is that you can still beat the index.  With that being said though, you are taking the chance that the investment will underperform what the passive ETF or index mutual fund delivers in terms of investment returns.

Enhanced indexing may seem like a great way to “have your cake and eat it too”, but, at its core, active management (either by way of a proprietary computer algorithm, back tested studies, qualitative metrics, or some other method) nonetheless.  Many individual investors fail to recognize that they are really choosing an active strategy, although some professionals would argue that it is more sophisticated than the approach of traditional active managers.  As long as you are aware of this fact at the beginning, there is nothing wrong with that.  In fact, many investment advisors use a combination of active and passive investment vehicles when building a portfolio for their clients.  For example, it has been shown that there may still be inefficiencies in micro cap (normally stocks with a market capitalization below $1 billion) stocks because very few Wall Street analysts follow the companies and provide investment recommendations.  On the other hand, there are a plethora of Wall Street analysts who follow the largest companies in the US, so it becomes much harder to know more than other investors.  Thus, some financial professionals will advise a certain portfolio allocation to passive ETFs and another piece of the portfolio will go to active managers.  This type of approach is a hybrid approach.

In the case of enhanced indexing (or “smart beta” funds – similar type of concept that I will not elaborate more on in this discussion), the individual investor is allowing the asset manager to make active selections which is much more akin to active investing.  The key is to know that you run the risk of two things.  First, the particular investment vehicle may do worse than the corollary strictly passive ETF or index mutual fund in terms of investment returns.  Second, the asset manager may not always be fully invested in the index at all times as well.  Therefore, you may have a higher allocation to cash than you initially wanted.  Now if the asset manager sells stocks to raise cash before a downturn in stock prices, the individual investor will not lose as much as other market participants.  The flipside is that the individual investor fails to participate fully in any stock market rally.  This second part is emphasizing that the asset manager may lag the investment performance of the benchmark index even more so than the passive ETF or index mutual fund.

The important thing is to simply know up front that passive investing involves average underperformance at the outset.  However, you are assured of at least capturing the lion’s share of the investment returns.  Any other investment vehicle may do better or worse over the long term which is the main concern of an individual investor.  If the enhanced indexing investment strategy yields lower long-term investment returns for your portfolio, you have paid money to “lose” money on a relative basis.  What I mean by this is that, as an individual investor, you could have just invested in the entire index of stocks or bonds at a very low cost by doing absolutely nothing.  If the enhanced index manager outperforms the index after fees are taken into account, that investment decision was a wise one.  However, history has shown that active managers tend to lag their proper benchmark over the long term (usually defined as 5 years or more).

It may be enticing to try to combine the best features of the passive investing and active investing philosophies.  With that being said, individual investors need to realize that any departure from the strict definition of passive investing increases the odds that the manager will have an investment return different than the index.  If your investing time horizon is 5, 10, 15, 20 years or more, the active mangers (either in its pure form or via enhanced indexing) has a more difficult time outperforming the index year in and year out to provide the individual investor with performance above and beyond what the “stodgy”, old passive ETFs or index mutual funds offer.  I would characterize this more as “buyer beware”.  The main takeaway is not that these are “bad” investments at all; rather, it is a conscious choice to depart from the passive world of investing and move to the active side.

The Results are in for my January CNBC Experiment: It Proves Nothing and Everything. What?

07 Friday Feb 2014

Posted by wmosconi in asset allocation, beta, bonds, business, Consumer Finance, currency, Education, EM, emerging markets, Fed, Fed Taper, Fed Tapering, Federal Reserve, finance, financial planning, foreign currency, forex, fx, Individual Investing, interest rates, investing, investments, math, NailedIt, personal finance, portfolio, rising interest rate environment, rising interest rates, risk, statistics, stock prices, stocks, Suitability, volatility, Yellen

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bonds, business, cnbc, currency, education, EM, emerging markets, finance, financial planning, forex, fx, individual investing, interest rate risk, interest rates, investing, personal finance, rising interest rates, stocks, thought experiment, volatility

Sometimes the most important lessons in the individual investing sphere are complicated and simple at the same time.  At the very beginning of January, I recommended a little experiment that related to the financial market coverage on CNBC.  The specific details of this “thought experiment” can be found in the original blog post from January 1st:

https://latticeworkwealth.com/2014/01/14/happy-new-year-beginning-thoughts-and-information-for-international-viewers-2/

The brief version of the exercise related to watching Monday and Friday coverage of the current events in the global financial markets during the month.  The simple exercise was to watch CNBC’s Squwak Box every Monday during the course of the month.  The second part was to watch the last hour of the Closing Bell segment.  What was the logic?  The Monday show is a three-hour program, and there are many current issues considered and opinions from various market participants (e.g. traders, money managers, economists, investment strategists, research analysts, etc.).  Monday is critical due to the fact that the market participants cannot trade on Saturday and Sunday.  You might think of it as “forced” time to think and/or reflect about how current events are affecting investment opportunities and risks.  Friday’s reflections from the same market participants is focused more on trying to explain the “vagaries and vicissitudes” (i.e. volatility of the stock market and changing opinions) of the markets ups and downs over the course of the week.  Furthermore, many commentators and guests try to explain why the predictions on Monday did not or did match up with the ideas expressed at the beginning of the week.

The overall point of this experiment was to “drive home” the fact that trying to time the market or predict its direction over the short term is extremely challenging and can seem hopeless.  Toward the end of December, the general investment thesis for the majority of money managers was that the stock market was poised to have a very positive January due to the fact that the financial markets did not really dive after the Federal Reserve announced the reduction of the tapering program, commonly referred to as QE (quantitative easing).  Additionally, the main belief was that bonds were one of the least attractive investments to own.  Most people assumed that the 10-year US Treasury Note was headed up to the 3.0% level.  Things seemed pretty simple and not too many headwinds in the near future.  So what happened during January?

The main event that most people remember was the currency difficulties of a number of emerging market countries.  The financial media focused a lot on the Turkish lira (TRY) and the Argentine peso (ARS).  Turkey had political problems, and Argentina has a huge problem as it relates to political leadership (or the absence thereof) and dwindling currency reserves.  There were other currencies that experienced trouble as well like the South African rand (ZAR).  The other important development was that the Japanese yen (JPY) reversed its direction and strengthen versus the US dollar (USD).  Oddly enough, the Argentine Merval stock index was one of the best performers over the course of the month.  No one saw this coming to such an extent.  You might term this an exogenous event as anything that occurs outside of your current model to build a portfolio or invest in individual stocks/bonds.  It is largely unknown and hard to predict.  (As an aside, this is NOT the same thing as a “black swan”.  That term is overused and conflated with many other things.  Refer to Dr. Nassim Taleb for a further definition of the termed that he famously coined years ago).  These events tend to be unknowns and have a greater impact because the general level of the perception of risk changes almost instantly and affect market sentiment and momentum.  Market participants need to alter their models rather quickly in order to account for the occurrence of these events.

The other big event was the movement of the yield on the 10-year US Treasury note.  Instead of following a general path of rising, the interest rate actually fell.  The yield on this instrument drifted down roughly 40 basis points (0.4%) from the 3.0% level.  What most people fail to realize is that interest rates go down if economic data turns out to be worse than expected normally (e.g. December jobs of 70,000 and the lowest labor force participation rate since the 1980s), but, more importantly, there is a “flight to quality” phenomenon that occurs over and over again.  There tends to be a bit of a “mini panic” when unexpected and impactful events occur.  If all else fails, institutional investors like hedge fund managers tend to buy US Treasury bills, notes, and bonds for safety.  The additional demand causes bond prices to go up and, by definition, yields will go down.

The combination of bad economic data and dealing with the currency woes in the emerging markets causes many short-term traders and speculators to buy these risk-free assets and figure out how to trade later.  It is sort of an example of reflexivity.  The bottom line for individual investors is that many sold bonds and purchased dividend stocks instead.  The exact opposite happened:  bond yields went down and dividend stocks sold off.  The worst short-term investing strategy was to search for yield in the stock market rather than the bond market due to rising interest rates.  For more information you can refer to one of my former posts on how to look at the various risk factors associated with bonds.  Trust me, there is a lot more to bonds than simply interest rate risk.  Here is the link to a former blog post that addresses this very issue:

https://latticeworkwealth.com/2014/01/02/a-bond-is-a-bond-is-a-bond-right-should-you-sell-bonds-to-buy-stocks/

There were many other smaller events that happened over the course of the month that affected the general volatility experience in the financial markets.  At the end of the day, even the “experts” had a monumental task trying to explain all the macroeconomic events, currency movements, and interest rate implications throughout January.  If the task was so difficult for them, it is normally advisable for individual investors to not follow the market daily and get caught up in temporary “greed and fear” of traders and speculators.  Investment ideas and predications can change from day to day and even minute to minute in the short term.  It is much more important for individual investors to develop a long-term financial plan that will allow them to reach future financial goals.  You then blend that with your risk tolerance.  For example, how likely would you have been to sell the positions in your portfolio given the volatility experienced during the course of January?  An outlook of five years is normally a great start for that plan.  If you look out into the future with a longer timeframe like an annual basis in terms of adjusting the components of your asset allocation, you are less likely to constantly trade the securities in your personal portfolio.  The frenetic pace of traders/speculators and the volatility of the stock and bonds markets makes it seem that you MUST do something, anything!

If you would like to learn a bit more about behavioral finance, you can refer to this blog post from last year (note context of examples referred to is from August 2013 when the piece was published):

https://latticeworkwealth.com/2013/08/04/todays-news-should-prompt-you-to-adjust-your-entire-investment-portfolio/

One of the most important things to learn in investing is how to control your emotions.  It is easy to map out your investment strategy and risk tolerance on paper.  Many asset managers who have experienced a multitude of secular bull and bear markets refer to this phenomenon as your EQ versus your IQ.  Thus, when actual “money” is involved, volatility and uncertainty in the financial markets brings forth challenges that even the best money managers have a hard time keeping up their nerve.  The other takeaway is that people’s investment recommendations can change on a dime.  Market participants can be very hopeful on one day and think the sky is falling the next day.  Trying to time the market is so difficult that you end up developing a portfolio allocation for your investments that assumes that general events with transpire.  All the planning in the world cannot account for all possibilities of geopolitical and global events that might really cause the market to go down more than normal in a short time period.

The whole point of this “thought experiment” was to encourage you to take a long-term view of investing in the financial markets.  It is a lot less stressful, less complicated, and tends to lead to better overall investment returns (i.e. you do not “sell low and buy high” as much because everyone tells you to).  For more information on stepping back and thinking about the long term, I have included a final blog post.  You always need to remember that your financial professional (or yourself if you manage your own investments) who advises you about investment decisions is forever impacted by the start of their investment career.  They tend to be biased and make investment recommendations based upon how things used to be when they started in the business.  It is very hard to separate your “biases” from the present day.  Here is the link:

https://latticeworkwealth.com/2013/08/18/before-you-take-any-investment-advice-consider-the-source/

Well, I hope you learned a few things by participating in my experiment and maybe even had a little bit of fun.  Please feel free to leave a comment or send me an email directly at latticeworkwealth@gmail.com with more specific feedback and/or questions.  Sometimes you can learn a great deal just by being an observer of financial market volatility.  What is the nothing part of this learning journey?  The moral of the story is that everyday guests appearing on CNBC or other commentators will let you know that the stock market with either go up, go down, or stay unchanged.  Obviously everyone knows that simple concept to begin with.  Thus, it is hard to choose who to listen too because of so many divergent opinions.  Lastly, you should realize that this same experiment would have worked with the other business networks and large financial news publications like the Wall Street Journal, Financial Times, Barron’s.

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