What’s the Market Going to Do Next?

April 28, 2017

One of the questions I’ve been getting asked A LOT recently is what I think the stock market is going to do. My usual answer is that it’s going to go up, and it’s going to go down. The only thing I don’t know is how much it will go in either direction or when the tide will turn. In essence, I’m useless when it comes to predicting the future movements of the stock market. That usually leads to a conversation around their retirement timeline, their ability/willingness to absorb losses in the stock market and their opinions about the future.

It was right after one of these calls that I read this story about a hedge fund manager who is giving back $1.25 BILLION in cash to the investors in his fund! That’s astounding, primarily because that’s over a billion dollars that the fund will no longer get paid a fee to manage. Even a small fee on over a billion dollars is a pretty big amount of money to give up.

Why is he doing this? He’s concerned that the stock market is overvalued and that he can’t find the right investments to buy in order to give his investors the type of returns he would like to provide. Now, let’s not shed any tears for him. He’s still got over $16 billion invested, and I’m pretty sure that’s enough to keep the lights on and food on the table.

But it is tangible evidence of someone believing that the stock market might be a bit overpriced right now. There are also managers who believe that the market, because of economic growth, job growth and corporate earnings – is poised to move upward for quite some time. (I’m still solidly in the camp of “I don’t know which way the market is going.”)

But whether the market goes up or down or sideways in the next few months to the next 3-5 years shouldn’t prompt you to take any action. The key to long term wealth building (and that’s why we all invest) is to pick a strategy and stick to it in good and bad markets. Investors who did nothing in response to the market collapse of 2008 were better off within a few years than the day before the crash. Those who moved everything out of stocks as the market tanked or after the market tanked may still not be whole.

The first thing you can do is to understand who you are as an investor. Here’s a quick investment risk quiz that can help you figure this out and gives you some hypothetical portfolios that might be appropriate for your particular risk tolerance. When your overall risk level changes due to changing time horizons, retirement goals, age, family circumstances, etc, it’s time to reallocate your long term investments.

When pressed for time, I ask a one question risk tolerance quiz. “On a scale from 1 to 10, where 1 is the most conservative investor in the world (money in the mattress) and 10 is the most aggressive (willing to put all of your money on a couple stocks and see what happens) – what number would you give yourself?” If someone answers 3 or 4 then 30-40% of their long term investment portfolio could be allocated toward high growth/high risk investments like stocks.

It’s by no means a comprehensive approach, but it has a very consistent answer with the other quiz above as well as other similar quizzes. In a former role, I had about a dozen clients take 5 or 6 different risk profile quizzes. They all came out with roughly the same answer and it was pretty darn close to the one question risk quiz.

So in spite of the fact that a hedge fund manager is giving back a big chunk of money to investors because he thinks the market is overvalued and other managers are incredibly optimistic about the markets moving forward, your goal as an investor is to understand who you are, get to an asset allocation that is consistent with your time lines and goals, and don’t get too high when things are good or too low when things are bad. From my experience, emotions are the enemy of good decision making and this applies to investing as well. Markets, like many things in life, are cyclical and if you’re patient and consistent, good things usually happen.

 

Anatomy of an Investment Mistake

July 22, 2016

I saw an email from a soon-to-be-retired employee recently, saying that he thought that he made an investing mistake and was looking for some help in correcting it. Here’s the mistake he made. When the stock market tumbled for a couple days because of the British exit from the E.U. (Brexit), he jumped out of the stock market. He moved his portfolio from 60% stocks/40% bonds and cash to 100% stable value because he was afraid the market would continue to drop like it did in 2008.

Well, after two days of going down, the market went back up and within two weeks, it was higher than it was the day before Brexit. The question he asked was “When should we get back in: when it drops to the level when we got out or lower?” There are a few flaws in his thought process.

Issue #1: Selling (or buying for that matter) based on emotions and news events usually ends poorly. In not too distant memory, we have seen the dot-com bubble burst, 9/11, Enron, the housing market collapse, the stock market collapse of ’08 and an economy that is 7+ years into one of the most lackluster recoveries ever, and the stock market is near all time highs! Markets go up. Markets go down. But over time, there has historically been an uptrend given enough time.

One of the things I tell people when they are worried about how the market will respond to a news event is “emotions are the enemy of good decision making.” Yeah, it’s not inspirational. It doesn’t rhyme, and it’s not all that compelling as a standalone statement. But it’s true, and I’ve seen it have horrible consequences for people time and time again.

If you are thinking about changing your investment mix based on a news event, don’t! Go take a nice walk, turn off the TV, play your favorite tunes and let some time pass. Markets overreact…in both directions. If there is a huge sell-off on Monday, chances are that logic and reason will come back into the market, and there will be a few up days after a massive sell off.

Cool your jets and maintain your long term asset allocation. Talk with a financial professional if you have one in your life. Don’t let your emotions be the enemy of your decision making process.

Issue #2: In his question, he assumes that the market will, one of these days, be lower than when they sold off the stock portion of their accounts.  It may never be that low again. People who sold in ’08 and wanted to buy back in when the market got that low again are still sitting around waiting for that to happen. Their wait may be eternal (or not).

The logical flaw in this argument is a lot like the “sunk cost fallacy.” You’ve already made the sell decision and are now tied to the results of that decision emotionally. Looking into the rear view mirror isn’t helpful in this case. Look forward. It’s a difficult skill to apply, but don’t allow yourself to fall into the sunk cost fallacy.

Issue #3: The reason he sold off a big chunk of his 401(k) and went to stable value is that he is considering retirement in the not too distant future. It makes sense to want to be more conservative in that case but it’s too drastic of a change. If he had been considering retirement for some time now, maybe a few years ago would have been an appropriate time to start making small changes to his long term asset allocation.

For instance, I meet annually with someone who has a retirement goal of 12-15 years. She was 100% stocks and 0% bonds and cash when we first met 5-6 years ago. Rather than selling her existing holdings, she changed her future 401(k) contributions to 75% bonds/cash and 25% stocks. She recently moved future contributions to 100% bonds/cash, and when she hears that the stock market hits a new high, she moves 1% of her account to stable value. Her goal is to be at 50% stocks, 50% bonds/cash at and during retirement.

Do you know your long term asset allocation preferences? Do you have a plan in place to shift from where you are now to where you want to be when you’re 98 years old? Review your asset allocation today, see if it’s consistent with your investment risk tolerance and then develop a plan to get from point A to point B over the course of time. Remain patient and don’t let emotions get in the way.

Over the course of time, we all make mistakes. I have, you have, and the odds are high that we’ll make even more in the future. But some mistakes are preventable, and we can hopefully learn from the mistakes of others so that we don’t make them as well. If you can remain emotionally detached from your investments when bad news is happening, avoid the sunk cost fallacy and have a clear vision about your long term investment strategy (and stick to it), you will put yourself in a great position for long term financial success.

 

 

Investing Made Easy

July 18, 2016

Can investing be easy? How can you become a more informed, savvy investor without learning a lot of extra financial jargon? Investing really doesn’t have to be that hard. Consider following these three simple principles:

Know Yourself

Successful investing starts with knowing yourself: how you like to make decisions, whether you like advice or you like to do it yourself, and what you do when the going gets rough. The first step is to figure out your investing risk tolerance, which is how much of your invested money you’d be willing to risk losing in order to make a profit. Try and quantify that in real dollar amounts, e.g., you have $1,000 to invest, and you’d be willing to risk it going down to $900 (a ten percent loss) in order to have a good shot at ending up with $1,150 (a fifteen percent gain).

Would that change if your investment was $10,000 or $100,000? Are you a conservative, moderate or aggressive investor? Make sure to take a risk tolerance questionnaire like this one to double check your assumptions.

The next step is to ask yourself how involved you want to be in the day to day management of your investment portfolio. Are you more of a “hands-on” or a “hands off” type? A hands-on investor is actively involved in designing a portfolio, setting target weights for different types of investments and monitoring/re-balancing the portfolio regularly. A hands-on investor may favor individual stocks or actively managed mutual funds or setting up their own asset allocation (mix of investment types) of index mutual funds. The hands-off investor is looking for a one-stop shopping solution and is more likely to favor pre-mixed portfolios like target date mutual funds or use a robo-advisor to set the strategy and automatically re-balance.

Finally, ask yourself if you like to do it yourself or if you’re the sort of person that likes advice. There are many options for do-it-yourself folks, including low-fee financial services firms where you can invest on your own without an advisor. If you are the type who likes having a coach, consider working with a fee-only CERTIFIED FINANCIAL PLANNER™, professional who is paid only by clients and not by commissions or brokerage fees. Make sure to check your advisor’s background with FINRA or with the SEC if they’re a registered investment advisor.

Set a Clearly Defined Goal

When will you need to use the money? Certain types of investments are better suited to certain time periods due to their levels of risk. If you need access to the funds in less than three years, stick with very low risk investments like savings accounts, money market funds and CDs. A stock fund is no place for your savings for a home down payment!

If you will use the money in three to seven years, consider adding some high quality bonds or bond funds. Adding in stocks makes more sense for goals of seven to ten years or longer, like your retirement account. The longer your time horizon until you need the money, the more you can consider adding stocks and stock mutual funds to your portfolio.

How much do you need your investment to be worth in order to make your goal? That’s called your “investment return.” Take the home down payment scenario: The most important thing is that you don’t lose any money, and your investment return is secondary. However, with a large, far-off target like retirement, you may need to achieve a 6-7% average annual return in order to meet your goals.

Match Investments to Your Goals and Preferences

Your investments should match when you need the money (time horizon), your required growth (required return), your investment risk tolerance and whether you are hands-on or a hands off investor. According to fellow CFP® Kelley Long, choosing investments is a lot like choosing a pizza.  You can customize it to fit your tastes.

For a longer term, aggressive investor, you could consider adding 5 to 10 percent in stocks to a typical portfolio mix (for example, moving to a 70% stocks/30% bonds instead of a 60/40 mix). A more conservative investor would add 5-10% to their bond allocation (a 50/50 mix using the previous example). The bottom line is that with some easy tweaks, you can customize your investment portfolio to suit your tastes.

How do you make your investment decisions? Email me at [email protected]. You can also tweet them to me @cynthiameyer_FF

 

How to Protect Your 401(k) After Brexit

June 27, 2016

Will the “Brexit” affect your 401(k)? Global stock markets fell on the news that voters in Great Britain voted narrowly to leave the European Union. Investors don’t like uncertainty, and there will be plenty of that during the next few years as Great Britain and the E.U. sort out the terms of their divorce. Employees are worried, calling our Financial Helpline to ask whether they should react now to protect their retirement savings. Here are some questions to ask to determine what action, if any, is needed:

Does my overall portfolio match my risk tolerance?

Does all the news about the Brexit have you compulsively checking your portfolio during the day? Are you tempted to throw in the towel and put everything in the lowest risk investment possible? If that’s the case, then maybe it would be a good time to double check your investment risk tolerance.

Try downloading our risk tolerance and asset allocation worksheet, a questionnaire which help you determine your risk tolerance and time horizon to get an idea of what investment mix is best for you. Compare the results to your current portfolio mix. If they line up, you don’t need to re-balance. If there is a big discrepancy, you may want to make some changes. This blog post from my colleague Scott Spann, PhD, CFP® offers some guidance on choosing the right investments in your 401(k).

Keep in mind that investing in stocks and bonds always involves some financial risk. Bad days or even years in the stock market are completely normal. However the risk of not investing in stocks and bonds means that the money you save will lose purchasing power over long periods due to inflation (the rising cost of living).

Is my stock portfolio well-diversified by sector?

My fellow planner Cyrus Purnell, CFP® noted that, “Even if you have the right mix of stocks, bonds and cash, it is worth checking to see if your holdings are sector heavy. The Brexit shock is beating up some sectors more than others. If you have stock funds that are focused on financials (banks, brokerage firms and investment managers), you may see more than the average downturn.” International funds focused on Europe are also likely to have some hiccups as Brexit gets sorted out. “If you are running into high concentrations of sectors, consider indexing,” he added.

When is the last time I ran a retirement calculator?

The reason you’re investing in your 401(k) is to build a nest egg for retirement. Measure your success against whether or not you are on track to achieve your retirement goals, not from the highest balance on your 401(k) statement. Now is a great time to run an updated retirement calculator to see if you are on track, given your savings and reasonable projections for your rate of return and inflation. You can use our Retirement Estimator for a basic check in to see if you are on track. You can also use the calculator to model different scenarios using different rates of return to see what happens.

Be realistic in your estimates: recent research from the McKinsey Global Institute suggests investors lower their expectations for average annual US stock returns to 4 to 6.5%. It’s better to use a conservative expected rate of return. If you’re wrong about it, you’ll be happily surprised, but if you’re right, you’ll be adequately prepared.

Do you have a personal finance question you’d like answered on the Monday blog? Please email me at [email protected]. You can also follow me on Twitter at @cynthiameyer_FF

 

Don’t Make These Common Investing Mistakes With Your 401(k)

March 17, 2016

In our CEO’s new book, What Your Financial Advisor Isn’t Telling You: 10 Essential Truths You Need to Know About Your Money, Liz Davidson writes about how the best place to invest your money is often where you made that money: your workplace. While most people generally understand the value of contributing to their retirement plan, there’s a lot of confusion about how they should choose investments. Here are the biggest mistakes I see people making: Continue reading “Don’t Make These Common Investing Mistakes With Your 401(k)”

Can You Put Your Investment Plan On A Note Card?

August 10, 2015

Does investing seem complicated? Despite the presence of overly complicated financial strategies and the often vexing financial jargon used by financial professionals, investing does not have to be so complex.Investing is simply a balancing act where the challenge is to find the ideal balance between risk and reward. Continue reading “Can You Put Your Investment Plan On A Note Card?”

There’s No Such Thing As A “Safe” Investment

June 23, 2015

There is so much information regarding the best investment mix for your financial goals. I challenge you to watch one episode of Squawk Box and see how long it takes for your head to spin with all of the conflicting information. On top of everything, everyone has a different idea about risk. I was talking with my colleague, Kelley, and asked her to share her perspective on how people should look at risk. Below is her guidance. Continue reading “There’s No Such Thing As A “Safe” Investment”

What’s Your Real Risk Tolerance?

October 23, 2014

With panic sweeping the stock market, it’s time to check your risk tolerance score. (You did take a risk tolerance quiz like this before investing your money, right?) The whole purpose of determining your risk tolerance is to use it as a guideline to create a mix of investments that you can “tolerate”…in other words, that you won’t bail out of during times like these. After all, if you do bail out and fail to get back in the market in time (and if you figure out a way to time the bottom, please let me know), you’ll miss the eventual recovery and turn a temporary loss into a permanent one. Continue reading “What’s Your Real Risk Tolerance?”

Online Investment Platforms: Wave of the Future or a Passing Fad?

July 07, 2014

Last week, we looked at how the asset allocation process doesn’t have to be an overwhelming task and that a variety of options exist to create a diversified portfolio.  As we continue to examine different ways to create an investment plan that matches your life goals, it is important to understand where you can turn to for asset allocation guidance.  After all, financial literacy research studies demonstrate that most people do not have the financial knowledge and confidence to manage their own investments. Continue reading “Online Investment Platforms: Wave of the Future or a Passing Fad?”

Are You Choosing the Right Investments in Your 401(k) Plan?

June 30, 2014

It can be hard to figure out if the investment selections within your retirement plan investments are a good fit for your personal goals. The concept of diversification is usually represented by the phrase “don’t put all your eggs in one basket.” It makes perfect sense but how do you know which baskets are the best fit and how much do you put in each basket?  Continue reading “Are You Choosing the Right Investments in Your 401(k) Plan?”

Understand the Facts About Target-Date Funds

December 02, 2013

During a recent series of retirement workshops geared toward early and mid-career employees, I received numerous questions regarding the role of target date funds in their 401(k).  This brought up an interesting discussion about hands-on vs. hands-off investing options. Target-date funds are supposed to provide simple solutions for people seeking an all-in-one fund that is diversified.  Yet, a tremendous amount of confusion surrounds these seemingly basic asset allocation tools.  Furthermore, not all target date funds are created equal so it’s essential to first look under the hood if target date funds are a part of your investment plan for retirement. Continue reading “Understand the Facts About Target-Date Funds”

Automatic Enrollment Does NOT Mean Automatic Retirement

November 27, 2013

As Thanksgiving approaches, what are some things you have to be thankful for? Your health? Your family? Your friends?  How about a new job?  According to the most recent data released by the Bureau of Labor Statistics, over 200,000 people entered the workforce in October.  Whether they are entering the workforce for the first time or found a new job after previous employment, many will be automatically enrolled in their new employer’s 401(k) plan. Continue reading “Automatic Enrollment Does NOT Mean Automatic Retirement”

When It Comes to Investing, Don’t Just Follow the Money

January 16, 2013

This week, USA Today came out with an article on how more money poured into stock mutual funds in the last week than any other week in the last eleven years.  Now at first glance that may come as good news as investor confidence seems to be returning in the wake of a resolution to the fiscal cliff dilemma, but before you jump on the stock market bandwagon, remember the words of renowned investor Warren Buffett.  When asked about his philosophy on investing, he is known to have said he is greedy when others are fearful, and fearful when others are greedy.  In other words, Warren Buffett, one of the greatest investors of all time, has a tendency to go against the flow when it comes to investment decisions. Continue reading “When It Comes to Investing, Don’t Just Follow the Money”

What to Do With $100,000 in Today’s Economy

October 29, 2012

I actually get this question quite a bit on our financial helpline and in our worksite financial planning sessions, not so much that someone got an inheritance (though I did get that last week), but many people simply want to know how they should allocate their assets in their own 401(k).  The question doesn’t have a quick and easy answer and answering involves asking a series of questions first because investing starts with you – the investor. Obviously, an aggressive investor is going to have a very different investment mix than a conservative investor.  A fifty year old may have a very different investment mix than a twenty year old no matter what the current economic outlook.  Here are some questions I always start with: Continue reading “What to Do With $100,000 in Today’s Economy”

What Your Employees Don’t Know About Target Date Funds Could Hurt Them

June 12, 2012

Some of the most common questions that I’ve been receiving from employees during recent retirement planning workshops relate to confusion around the proper use of target-date funds. Ironically, these investment options are designed to simplify rather than complicate the process of saving for retirement. When used correctly, target date funds can help employees allocate and re-balance their investment assets appropriately to achieve their retirement goals with one stop diversification.  In fact, more than three-quarters of all 401(k) plans now offer target-date fund options for plan participants and in many plans, they serve as the default investment for automatic enrollment. Continue reading “What Your Employees Don’t Know About Target Date Funds Could Hurt Them”

Will It Ever Come Back?

December 30, 2011

No, this isn’t an advice column for your love life that’s going to tell you, “If you love something, let it go.  If it comes back, blah blah blah…”  Nor is this the story of a man’s hairline, because clearly the answer there is NO!  This is my favorite story of 2011 mixed with a frequently asked question from my 1-on-1 sessions with employees of one of the companies I visit regularly. Continue reading “Will It Ever Come Back?”

Nine Key Financial Steps That Procrastinators Miss

October 17, 2011

Yesterday I went to get a mammogram; the annual “boob smashing” is what I call it.  The process isn’t fun so for any of you who haven’t had one, a mammogram basically consists of smashing your breast between two plates painfully stretching your skin along the way, then you are left standing there while the technician walks away.  She ducks behind a machine that reminds me of the wizard of oz behind the curtain.  She then tells you not to breathe (oh sure, relax!!) and hold perfectly still, all the while you are held captive in a strange kind of vice.  If that isn’t enough, they do it again from a different angle and on the other side.  Continue reading “Nine Key Financial Steps That Procrastinators Miss”

The Investment Strategy That Actually Made Money in 2008

October 06, 2011

Last week, I wrote about some common ways to diversify your investments and make sure you don’t get caught up following the herd into the vicious “greed, hope, and fear” cycle that can lead to buying high and selling low. But even if you followed one of those strategies, you still probably haven’t been too happy with your portfolio’s performance lately. Your “early retirement plan” may have started looking like the “never retirement plan.” Is there a way to earn that 8-10% average return without all that risk? Continue reading “The Investment Strategy That Actually Made Money in 2008”