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We wanted to provide a quick ’shout out’ to our esteemed Portfolio Analyst, Mark Hoppe, for learning on late Monday that he was among the 39% of world-wide candidates that passed Level II of the Chartered Financial Analyst exam. We empathetically watched him study diligently for an obnoxious amount of hours during the first half of the year, and were excited to learn that he passed the second of three exams with flying colors. The Chartered Financial Analyst designation is, in own my words, “the gold standard of the investment world.” Here is an simple overview from the CFA Institute site:
The CFA Program is a graduate-level self-study program that combines a broad-based curriculum of investment principles with professional conduct requirements. It is designed to prepare you for a wide range of investment specialties that apply in every market all over the world.
Nearly 90,000 CFA charterholders work in over 130 countries
Over 100 universities use parts of the curriculum in their courses
Numerous regulators accept the CFA charter as a proxy for many licensing requirements
Global media recognition of the CFA charter and CFA Institute events
If you are looking for an investment credential that will earn you instant credibility and respect anywhere in the world, look no further than the CFA charter.
Awareness of the CFA charter has grown considerably since it was first offered in 1963 as a means for investment professionals to prove their expertise and demonstrate their commitment to integrity.
Our friend Carl Richards, writing for the NYTimes.com Bucks blog, does an excellent job of speaking to the ‘waiting-until-I-get-back-to-even’ mistake many investors make. It’s called anchoring. Essentially, we create a value in our mind for an investment we want to receive before selling. The following are some excellent examples of how this can hurt you more than simply cutting your losses:
One of the more common behavioral mistakes we make when it comes to investment decisions is the tendency to anchor to a certain value or price. When we focus on, or anchor to, a price, it can lead to costly blunders. Here are a few examples:
1. You pay $800,000 for your home, and a few years later you need to sell it. We have a tendency to feel like we should at least be able to get what we paid for it. So you insist upon listing it for $800,000, even though the market value is less than that. You pass on offers around $775,000 and then ride the market all the way down to the point where you are just hoping to get $650,000 a year later. Now that first offer looks like a dream.
The reality is the market doesn’t care what you paid for you house. It doesn’t care how much you put in to it or what it cost you to landscape. All that matters is what it is worth today.
2. You buy a stock for $50 a share, and six months later it is $30. You decide that you really shouldn’t own it anymore but you want to wait until you “get back to even” before you sell. This idea of holding on to an investment that is no longer appropriate, or may have been a mistake in the first place, until you get back to even makes no sense. The fact that you paid $50 has no bearing whatsoever on what you should do now.
In fact, I think it is fair to say that getting back to even is never a good reason to hold on to an investment. If you find yourself saying that, it’s time to re-evaluate.
3. Your portfolio was worth $500,000 at the top of the tech bubble in early 2000, and you still think about that value each time you open your statement and see that it’s worth less than that. You just want to get back to your high-water mark of $500,000.
This may not have any impact on your decisions, but it sure is affecting your life. I know people like this, still holding on to a value in the past. It is like that guy next door who is still telling stories of his glory days in high school football.
The past is the past. All that matters now is making the correct decision for today.
Since the beginning of May, let alone since the final quarter of 2007, the market has been volatile, to say the least. One of the biggest issues we see during this time is people will stop their contributions when the market takes a down turn, and then contribute again once the market is doing “better.” Unfortunately, as with the other achilles heels we have discussed, this is the exact opposite thing 401(k) investors should do.
It’s perfectly understandable why people do this, asking themselves, “why invest in something that is ‘losing’ money?” When the market is going down, you might have heard people say it’s on sale. However, it can feel hopeless as your contributions may look like they are evaporating as soon as you toss them into your 401(k). The most important thing to remember is you are buying an asset when you contribute to your account. They are called shares of the investment funds you have access to in your plan.
Shares are owned by you. If the market goes down, your contributions should be purchasing more shares for the same amount of money you always contribute. The more shares you own, the better, so investing during a down cycle in the market is a very good thing.
If the market decreases by 20% like the real estate market has in the past few years, you do NOT lose your shares. Instead, they simply decrease in value. For example, just because the value of your home has decreased by potentially 20% in the past few years, that doesn’t mean your garage will be gone when you get home. The physical asset is still there, it is simply devalued.
The following slides are from our Myths and Tips for Investing in Volatile Markets presentation. Make sure you take a look at the final slide illustrating the exponential growth in your account from investing through the down market. The shares you purchased at the ‘bottom’ are the ones that appreciate the most. In this case, the pain of the downturn can pay off in a big way for you once the market rebounds.
Our friend Carl Richards wrote yesterday on this subject at the NYTime.com Bucks blog, and it is very good advice. We have seen people follow guidance from the likes of the Jim Cramers, Suze Ormans and Dave Ramsey (though we are big fans of his debt reduction advice), which more often than not steers people into an inappropriate portfolio. Many 401(k) providers will even provide some general guidance as well, but they leave investors to figure out the ideal recipe (asset allocation) to create from their plan’s ingredients (investment options). Understanding some basics such as age and your prospective time horizon for retirement are easy, but understanding your risk tolerance can be tricky. Additionally, here is an easy way to distinguish general guidance from specific, personal advice:
Advice will tell you specifically which funds in your 401(k) plan you should be invested in as well as what percentage. Guidance only speaks to the types of investment options.
The following are some key excerpts from the Bucks blog post by Carl Richards:
It is dangerous to mix investing with entertainment. The classic example is thinking that Jim Cramer is your investment adviser rather than some sort of circus clown.
But what can be even more dangerous is taking what’s meant to be general financial information and acting on it, without first taking the time to figure out if it applies to your particular situation.
Making important decisions about how to invest your life savings seems to be getting more and more complex as the amount of information continues to grow.
Take this article, “A Market Forecast That Says ‘Take Cover,’” that appeared in the The New York Times this weekend. It offers up advice from a market watcher who suggests that individual investors “move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come.”
The article has been among the most e-mailed articles for several days, so it’s clearly getting a lot of attention. But the question is what you’re supposed to do with information (general advice) like this. Should you follow this advice to “take cover,” regardless of your age, unique goals and family situation?
The financial press, personal finance bloggers and best-selling authors are all sources of information. But don’t confuse information with the real work of figuring out how it applies to your very unique situation. I know many of the best personal finance bloggers. As good as many of them are at providing a filter for information, and even providing general rules of thumb, you are the only one who can figure out how it applies to your life.
The reason is simple: planning for your financial future is personal. It has to be. A good plan will be unique to your situation, and what is right for your situation may be a disaster for your neighbor. So read as much as you want, but then make sure you spend the time to figure out how it applies to you before you make important decisions about your life savings.
The following are some highlights discussed in the July ‘10 Research Newsletter from John Whaley, CFA, AIF, Director of the BeManaged Research Department.
The following are some of the highlights discussed in the June ‘10 Research Newsletter from John Whaley, CFA, AIF, Director of the BeManaged Research Department.
Government Finance Bubbles Hit World Equity Markets
Carl Richard’s latest article illustrates a very interesting perspective on investing. The following sums it up pretty well,
We’re quick to focus on the reward but fail to appreciate the consequences of our choice. If an investment performs well, we like to think, “I picked a winner.” If it’s the reverse, and the investment fails, it’s someone else’s fault.
This reminds me of the time that I was mowing the lawn as a child and I hit a sprinkler head with the mower. I remember running inside to tell my mom that the lawnmower had hit the sprinkler head. She patiently taught me that lawnmowers don’t hit sprinklers, 10-year-old children do.
We do the same thing when it comes to investing. If we haven’t done our research (figured out where the sprinklers are) and we behave poorly (run over the sprinklers), we’re not going to like the results.
And we can’t blame the investment for our decisions. At some point, we must accept responsibility. Otherwise we’ll keep making the same mistake since we’re blaming the investment rather than accepting responsibility for our choices. And if that’s the case, we’d be better off in a certificate of deposit.
It’s understandable. We look to invest in something different in our 401(k), and what is the most accessible bogey to judge the funds in your plan? Past performance. They tug at the foundation of human nature, greed and fear. Our friend Carl Richards wrote an excellent piece in the NYTimes.com Bucks Blog on this topic:
Whenever a mutual fund advertises performance, the Securities and Exchange Commission requires that it includes the disclaimer that “past performance does not guarantee future results.”
A new study by researchers at Arizona State University and Wake Forest Law School suggests that this warning is not enough. They recommend something a bit stronger: “Do not expect the fund’s quoted past performance to continue in the future. Studies show that mutual funds that have outperformed their peers in the past generally do not outperform them in the future. Strong past performance is often a matter of chance.”
Despite the warning from the S.E.C. and pretty conclusive evidence that past performance has very little predictive value, most of us still use performance as the predominant factor in choosing our investments.
This is one of those times in investing where our experience in almost every other area of life works against. If you’re going to hire contractors to remodel your house, one of the first things you do is look at other houses they have done. It seems reasonable to expect that the work they do on your house will be at least as good, if not better.
When it comes to mutual funds, however, the past has almost no predictive value. People have spent years looking for a way to identify mutual funds that will do well going forward. They have looked at almost every factor you can think of: education, experience, hair color and, of course, past performance.
The only factor anyone has found with any predictive value was the internal costs of the fund. The higher the costs, the worse the performance. This is a case where you often get what you do not pay for.
Despite all the evidence to the contrary, we still scour the annual lists of “Ten Hot Funds to Own Now,” which are often based on past performance, looking for a place to put our life savings. We still look in the rear-view mirror. Think about the last time you made an investment decision. Did you look to the past for some prediction of the future? After all, how much sense would it make to invest in a fund that had performed poorly?
But finding the next Peter Lynch is an almost impossible task. Focus instead on finding a low-cost investment that you can stick with over the long haul.
The following are some of the highlights discussed in the May ‘10 Research Newsletter from John Whaley, CFA, AIF, Director of the BeManaged Research Department.
US Stocks Up, Foreign Stocks Down in April
What Does the Hertz Purchase of Dollar/Thrify Tell Us?
When we hear about 401(k) investors moving all or a portion of their account to an IRA, the question becomes, “What did they invest you in?” Now, with the new tax law that enables investors to more easily convert their traditional IRA assets to a Roth IRA, brokers, insurance agents, and other financial product salespeople are drooling. Why? They have another pool of money, and a large one, to roll into their annuities and other such products that pay out very large commissions, yet may not be in the best interests of the investor. This point is well illustrated in the following article by Kathy Kristof of MoneyWatch.com:
Kathy Kristof
A change in tax laws has crooks, con artists and insurance agents gleefully plotting out strategies to nab your retirement dollars by luring you into discussions about “Roth conversions.”
I got a glimpse of one such dangerous trap when I was, once again, invited into an “insurance agents only” webinar this month that was promoted with the line: “Learn how you can turn Roth IRA conversions into annuity gold!”
Experts in finance will tell you that one of the dumbest things you can do is buy an annuity with your retirement money because annuities are almost always loaded with high fees that will rob you of hundreds of thousands of dollars in wealth. I’ll get to the specifics later, but someone with $100,000 to invest for 20 years is likely to end up $250,000 poorer by choosing an annuity over a simple index fund in their IRA. But selling annuities on retirement money is a great deal for an insurance agent because he or she earns a commission that often amounts to 5% to 7% of your assets. Where do you have most of your assets? Most likely in your retirement account.
In a conference call on January 7th, a California insurance salesman named Doug Warren, who has dubbed himself “Mr. Roth IRA,” told his audience of insurance agents (and me) that offering informational seminars on Roth conversions was a gold mine.
“The reason to get involved in this [Roth conversion] market is because it’s a tremendous prospecting opportunity,” said Warren.
By discussing Roth conversions, which are all over the news, Warren says you can lead people into your office, break down their resistance to a sales pitch by providing unbiased information about the costs and benefits of a Roth conversion and then go in for the kill with your product pitch.
“I don’t care whether the client converts or he doesn’t,” he said in the webinar. “The important thing is that you pivot to your product sale.”
To understand how he’s going to do this so smoothly that even a smart investor might be tempted to buy into his pitch, a little background is necessary.
How does this affect 401(k) investors? Some 401(k) plans allow for what is called an in-service withdrawal. Depending on how they plan was designed, in-service withdrawals allow the investor to roll out a specific amount (usually a percentage) into an IRA, usually after they reach a specific age. We have seen first hand how this is marketed by product sales people, who start salivating over that big nest egg that can now be tapped for their interests. Therefore, some are promoting the tax and investment benefits of a Roth conversion in an effort to earn greater commissions, as the article above states.
Consider This Before You Decide:
Be Careful – If a situation sounds too good to be true, it probably is.
Guarantees - If at any point the word “guarantee” or “minimum return” comes up, consider it a serious red flag.
Fees and Commissions – If a financial advisor is unwilling to demonstrate on a formal document how much they will be compensated, then simply walk away.
Your Interests or Theirs? – Ask this simple question: “Will you sign a document demonstrating you will act as a fiduciary, putting my interests first?” If not, this probably is not going to turn out to be a good relationship for you.
Talk to Your Accountant – A Roth conversion has serious tax consequences, so make sure someone that understands what that could mean to you helps you through the decision.
The following is a good video on the pro’s and con’s of Roth Conversions:
We wanted to provide a quick ’shout out’ to our esteemed Portfolio Analyst, Mark Hoppe, for learning on late Monday that he was among the 39% of world-wide candidates that passed Level II of the Chartered Financial Analyst exam. We empathetically watched him study diligently for an obnoxious amount of hours during the first half of the year, and were excited to learn that he passed the second of three exams with flying colors. The Chartered Financial Analyst designation is, in own my words, “the gold standard of the investment world.” Here is an simple overview from the CFA Institute site:
Since the beginning of May, let alone since the final quarter of 2007, the market has been volatile, to say the least. One of the biggest issues we see during this time is people will stop their contributions when the market takes a down turn, and then contribute again once the market is doing “better.” Unfortunately, as with the other achilles heels we have discussed, this is the exact opposite thing 401(k) investors should do.
When we hear about 401(k) investors moving all or a portion of their account to an IRA, the question becomes, “What did they invest you in?” Now, with the 
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