Scary Headlines and bad advice.

I was listening to the car radio the other day and hear an ad by someone who was predicting the end of the financial word. After listing the all the things that will go wrong, he promised that if you invested with him you could enjoy all the gains of the stock market but would not risk losing a penny.

Sound too good to be true? Of course it is, but it works by appealing to people who want to believe that there’s such a thing as a free lunch.

I was reminded of that radio commercial when I read this article by Gil Weinreich at Seeking Alpha:

All investors are looking for astute analysis, but in order to appreciate it when you see it, it is worthwhile considering what bad analysis looks like. Jeff Miller does just that, critiquing analysts who make spurious connections between long-term economic trends and specific portfolio recommendations. I’ve seen scary headlines to this effect offering “sell now”-type advice in 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017 up until today. Even though such analysts had all kinds of valid concerns, investors following the serial bad advice have missed out.

When seeing representative articles from this genre, I ask myself what manner of benevolence prompts a writer to offer ever fresh warnings of doomsday. What’s going on with these analysts? Jeff hits the nail on the head. I quote in pertinent part:

Their business model seems to be one of supporting the insatiable appetite for confirmation bias from investors who have misjudged the market. Unfortunately, many average investors stumble on these sources and take the material seriously. They do not know about past errors or track records.

You never see a retraction or admission of an error. The only clue is that these sources monetize their audience with a ‘solution’ to fear – gold, annuities, a no-fail trading system, or some other seductive, high-commission product.”

The point is a critical reader must understand not just what an author’s main point is, but what is his interest in writing the article. This is not to say that someone with a point of view and a business interest should be ignored. Such a combination often prompts very good content. But understanding these elements can help you evaluate the analysis. Is it tendentious or is it instructive? Strong financial communicators educate; salesmen agitate.

There is so much bad advice generated by the media that it pays to ask what’s in it for the advice-givers. Too often it’s a fat commission on a product that is deceptive.

 

Harsh Lessons In Modern Con Art

There have been a lot of articles about the fact that Seniors are often the subject of financial fraud, and it’s true.  But you don’t have to be old to get scammed.  Most of Bernie Madoff’s victims were rich, successful and relatively sophisticated.

Here is the story of financial writer, public speaker and financial thought leader, Mitch Anthony, who was scammed out of $1 million and whose mother lost her life savings.  It’s an object lesson.

As I sit down to write this article, I know it will likely be the most difficult composition of my writing career—difficult because it dredges up a miasma of regret, embarrassment, sadness and anger like nothing else I’ve experienced in life. I was conned out of almost a million dollars.

I will survive. But my mother was also conned—out of every penny she had. Her journey would prove much more difficult. The recollection of what I’m about to detail makes me feel stupid and gullible, like a sucker who should have known better. Then there’s the exasperation and indignation of watching someone skirt justice for one simple reason: There wasn’t ample time to hold him accountable for the fortunes he destroyed and the lives he crushed.

The federal statute of limitations on financial crimes is five years. Once you discover you have been defrauded, very likely two to three years have passed. Legal proceedings will chew up a year or two. By the time prosecutors decide there is merit in proceeding, the time has almost run out, and they will cease their efforts knowing they are up against the statute. This was our exact experience. By the time I brought the fraud to the attention of the FBI, they informed me that the perpetrator was already “on their radar”—but at this point, there wasn’t enough time left to do anything, and they couldn’t afford the time and resources to waste their efforts.

The man’s name is Wendell Corey, and he touted himself as a “developer.”

Re-stating the obvious

Forgive me for stating the obvious but in my experience, it is precisely those things that are most important to restate. People need to hear what is obvious…until they finally get it.

One obvious point is that keeping physically active and mentally engaged preserves one’s health and saves money. Obvious?  Sure. Yet people don’t follow this advice, though they are far more apt to do so when they internalize what the cost of health care is.  The average person spends $275,000 on health care expenses in retirement.  So an investment in good health can play a huge role in making one’s retirement numbers work out.

A second “obvious” is the benefit of setting up multiple streams of income. If you have income from multiple sources that don’t fluctuate because of moves in the market your retirement is much safer than if you are totally dependent on your portfolio to support you.  What are those income sources?  Social Security is one source for almost everybody.  So are pensions.  Another source can be annuities.  If you can get two, three or even more paychecks every month you worry less about the market going up or down.

Third, saving 15% of your pay, applying the 4% rule and steering clear of the “retirement risk zone” that spans the five to ten years before and after retirement makes so much sense that it’s obvious.  But how many people actually follow this obvious advice?

Finally, having a plan prepared by a competent advisor who specializes in retirement planning is an obvious way of tying these points together.  A plan can take the cost of health care into account and see how the risk of a serious illness can be mitigated.  It can define the income streams you need in order to meet your basic needs and your “wish list.”  And it can determine the amount of risk you are taking to meet your retirement goals and warn you about taking too much risk.

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What a Nobel Prize Winner tells us about Investor Behavior

University of Chicago’s  Richard H. Thaler, one of the founders of behavioral finance, was awarded the 2017 Nobel Prize in Economics for shedding light on how human weaknesses such as a lack of rationality and self-control can ultimately affect markets.

People who are not financial experts frequently turn to investment advisors to manage their portfolios.     But many smart people use advisors to overcome very common psychological obstacles to financial success.

The 72-year-old “has incorporated psychologically realistic assumptions into analyses of economic decision-making,” the Royal Swedish Academy of Sciences said in a statement on Monday.

“By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes,” it said.

Thaler developed the theory of “mental accounting,” explaining how people make financial decisions by creating separate accounts in their minds, focusing on the narrow impact rather than the overall effect.

….

He shed light on how people succumb to short-term temptations, which is why many people fail to plan and save for old age.

 

It does not take a Nobel Prize to understand that people often make decisions based on emotion.  We do it all the time.  We judge people based on first impressions.  We buy things not because we need them but because of how they make us feel.  We go along with the crowd because we seek the approval of the people around us.  When markets rise we persuade ourselves to take risks we should not take.  When markets decline and our investments go down we allow fear to overcome our judgment and we sell out, afraid that we’ll lose all of our money.

Professional investment managers have systems in place that allow them to overcome the emotional barriers to successful investing.  It begins by creating portfolios that are appropriate for their clients.  Then, in times of stress, they use their discipline and stick to their models, often selling what others are buying or buying what others are selling.  This is the secret to the old Wall Street adage that the way to make money is to “buy low and sell high.”  By taking emotion out of investment decisions professional managers take a lot of the risk out of investing.

Once you sell out, when do you get back in?

I recently heard about a 62-year-old who was scared out of the market following the dot.com crash in 2000.  For the last 17 years his money has been in cash and CDs, earning a fraction of one percent.  Now, with the market reaching record highs, he wants to know if this is the right time to get back in.  Should he invest now or is it too late?

Here is what one advisor told him:

My first piece of advice to you is to fundamentally think about investing differently. Right now, it appears to me that you think of investing in terms of what you experience over a short period of time, say a few years. But investing is not about what returns we can generate in one, three, or even 10 years. It’s about what results we generate over 20+ years. What happens to your money within that 20-year period is sometimes exalting and sometimes downright scary. But frankly, that’s what investing is.

Real investing is about the long term, anything else is speculating.   If we constantly try to buy when the market is going up and going to cash when it goes down we playing a loser’s game.  It’s the classic mistake that people make.  It’s the reason that the average investor in a mutual fund does not get the same return as the fund does.   It leads to buying high and selling low.  No one can time the market consistently.  The only way to win is to stay the course.

But staying the course is psychologically difficult.  Emotions take over when we see our investments decline in value.  To avoid having our emotions control our actions we need a well-thought-out plan.   Knowing from the start that we can’t predict the short-term future, we need to know how much risk we are willing to take and stick to it.  Amateur investors generally lack the tools to do this properly.  This is where the real value is in working with a professional investment manager.

The most successful investors, in my view, are the ones who determine to establish a long-term plan and stick to it, through good times and bad. That means enduring down cycles like the dot com bust and the 2008 financial crisis, where you can sometimes see your portfolio decline.  But, it also means being invested during the recoveries, which have occurred in every instance! It means participating in the over 250%+ gains the S&P 500 has experience since the end of the financial crisis in March 2009.  

The answer to the question raised by the person who has been in cash since 2000 is to meet with a Registered Investment Advisor (RIA).  This is a fiduciary who is obligated to will evaluate his situation, his needs, his goals and his risk tolerance.  And RIA is someone who can prepare a financial plan that the client can agree to; one that he can follow into retirement and beyond.  By taking this step the investor will remove his emotions, fears and gut instincts from interfering with his financial future.

What Makes Women’s Planning Needs Different?

While both men and women face challenges when it comes to planning for retirement, women often face greater obstacles.

Women, on average, live longer than men.  However, women’s average earnings are lower than men, according to a recent article in “Investment News,”  in part because of time taken off to raise children.  What this means is that on average, women tend to receive 42% less retirement income from Social Security and savings than men.

The combination of longer lives and lower expected retirement income means that women have a greater need for creative financial advice and planning.  The problem is finding the right advisor, one who understands the special needs and challenges women face.

A majority of women who participated in a recent study said they prefer a financial advisor who coordinates services with their other service professionals, such as accountants and attorneys.  They want explanations and guidance on employee benefits and social security claiming strategies.  They want advisors who take time to educate them on their options and why certain ones make more sense.  Yet many advisors do not offer these services.

Men tend to focus on investment returns and talk about beating an index.  Women tend to focus more on quality of life issues and experiences, on children and grandchildren, on meeting their goals without taking undue risk.

If your financial advisor doesn’t understand you and what’s important to you, it’s time you look for someone who does.

How to lose $150 million

We have written a lot about planning and investing.  But there’s nothing quite as instructive as learning from mistakes.  Learning from others’ mistakes is less painful than making our own mistakes.

This sets up an example of financial mistakes I learned about recently.

Sometimes the most surreal things happen. For example, anyone who remembers the 1980s’ tennis prodigy Boris Becker may be shocked to learn that last month, in a London courtroom, Becker was declared bankrupt.

After winning Wimbledon and countless other tournaments, Becker’s personal fortune was estimated to have reached $150 million. So how could this have happened? How could he have gone from $150 million to zero, and what can we learn from it?

Sports figures often find that they have developed “posses,” hangers-on who encourage extravagant lifestyles.  Fame and fortune at an early age lead to a number of personal mistakes.  These are often combined with poor investment decisions.  In the case of Becker they include things like Nigerian oil companies, and “… a sports website, an organic food business, and more notably, a planned 19-story high-rise in Dubai called the Boris Becker Business Tower, whose backers went bust in 2011.”

This is a special problem for people who become wealthy in sports and entertainment.  Too often they turn their financial lives over to agents who get them involved in complicated schemes that go sour.

The key to gaining wealth and – most especially – for keeping it is: keep it simple.  During 30 plus years of investing the biggest mistakes I have seen made is people getting involved in complex deals, partnerships, and relationships that they don’t really understand.

We provide education for our clients on investment strategy and develop portfolios that allow people to keep what they have earned.  Don’t be like Boris Becker.

Why do smart people use financial advisors?

What is the real value to hiring a financial advisor, and who uses them?  What is the value proposition?  What makes one car with four doors and wheels worth $300,000 and other $30,000?  Although we might have an answer, the answer differs from person to person.

People use financial advisors for many reasons.  Some use them because they absolutely need them, others because they want them. Paying a fee for advice and guidance to a professional who uses the tools and tactics of a CFP™ (CERTIFIED FINANCIAL PLANNER™) and an experienced Registered Investment Advisor who is a fiduciary can add meaningful value compared to what the average investor experiences.

Many middle-class investors are anxious about their finances and are not interested in learning the details of managing their money.  This anxiety often results with money left on the sidelines because they don’t know what to do or are afraid of making mistakes. That means earning a fraction of 1% at the bank when the Dow Jones Industrial Average (DJIA) is up over 25% in the last 12 months.

There are others who are interested in learning about investing and may want to hire an advisor to “look over their shoulder.”  They want to hire an “investment coach.”

A third category are people who hire professionals because they are busy doing things that are more important to them: building a career or a business, being with family, or living an active retirement.  They hire an expert to manage their money the same way they hire a lawyer for estate planning, a CPA to prepare their taxes, and a doctor to keep them healthy.

A fourth category is people who were making their own investment decisions but ended up making a huge financial mistake.  This leads me to a story about a really smart, highly paid high tech executive who is very knowledgeable about investing; but he hired an advisor:

It’s not because he lacks the knowledge or interest, obviously. Rather, he figured out he had behavioral blind spots and understood he was at risk of great financial loss. He’s paying someone just to take that risk off his plate.

Determining your goals, controlling risk, managing portfolios well, and knowing your limitations – knowing you have “blind spots” – has led many smart people to hire an advisor.

Vanguard, the hugely successful purveyor or no-load mutual funds (that appeal to do-it-yourselfers) estimates that a financial advisor is worth about 3% net in annual returns.  They attribute this to the seven services that a good advisor provides:

1. Creating a suitable asset allocation strategy.
2. Cost-effective implementation.
3. Rebalancing
4. Behavioral coaching
5. Asset location
6. Spending strategy.
7. Total return versus income investing.

If you have an advisor but he is not meeting your objectives, ask us for a second opinion.  If you don’t have an advisor but may want one, we offer a free one-hour consultation to see if we are compatible.

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A good Registered Investment Advisor is a “Life Coach.”

People who are not familiar with Registered Investment Advisors (RIAs) too often view them as stock brokers.  They are not; they are held to a higher standard and are focused on the client, not the money.  RIAs are trusted advisors who put their clients ahead of themselves.    They are fiduciaries that are skilled in the art making good financial decisions.

Younger professionals who are building careers would do well to find an RIA as their financial guru, a “Life Coach.”  It takes time, experience and a high level of expertise to manage money well.  The young lack that expertise but have the biggest advantage of all: time.  They are in a perfect position to build wealth with the least amount of effort if they can lean on experts who can show them how to navigate the risky ocean of investing.  Just as important, they need a wise guide who can advise them on managing their income.  Too many people, even those with six figure salaries, live paycheck to paycheck.  Knowing what to spend and how to save is the role of the advisor.

This is very important for the independent professional – the doctor or lawyer.  Focused on building a practice, they need someone to advise them on managing their money wisely.

For the business owner, the entrepreneur, it’s even more important.  There is no career track and the challenge of building a business often results in poor money management.  Excessive debt can lead to bankruptcy, a common result in many industries that depend on debt financing.  A good advisor can help the business owner create a personal portfolio that’s independent of his business.  At the same time he can advise the owner the best way of financing his growth.

Once the business is established the owner needs guidance setting up retirement and benefit plans for himself and his employees.  This all part of the RIA’s skill set. And finally, as the business matures and the owner starts thinking of retirement, the advisor provides the guidance to transition the individual and his family to life beyond work.

That’s the point at which the coach gets the pleasure of knowing he’s done a good job as part of a winning team.

Dow Breaks the 20,000 level

The Dow Jones Industrial Average reached another milestone today.  The Dow broke through 20,000 as traders cheered.

For a little perspective here’s how the market reached past milestones.

A few points to remember.  There have been long periods when the Dow treated investors like riders on a roller coaster:  lots of swoops and slides only to end up where you began.  During those periods people made money with astute stock selection, not by buying “Mr. Market.”  We believe that those times will come again.

• It took from 1929 to 1954 for the Dow to regain its previous high.
• It took ten years – from 1972 to 1982 – for the market to break through the 1,000 level.

Keep in mind that the 1,000 point move in the Dow at the current level is just a little over 5% and is therefore not nearly as meaningful as a move from 1,000 to 2,000, a move of 100%.  But it’s still an important psychological barrier that had to be broken for the market to move higher.

The move makes sense from both a technical and fundamental standpoint.  Both retail and institutional investors are positive, as we have noted in the past.

The incoming Trump administration has moved with amazing speed to demonstrate their desire to increase the level of economic growth as a way of increasing job and wage growth.  They have expressed policy preferences for lower taxes, reducing regulations that stifle business development, and have been encouraging companies to build their businesses in the United States rather than overseas.

The trend is clear.  The only thing that could derail this train is a massive change in consumer sentiment or an external factor such as a war or other calamity.  The latter are known as “Black Swan” events and we must always keep in mind that they can occur.  We manage our portfolios with those possibilities in mind.

Eventually, valuations will get too high and the inevitable correction will occur.  In the meantime, we enjoy the ride while keeping a close eye on events.