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What It Take To Be A Successful Investor

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What makes a successful investor? Is it your ability to beat the market or to beat your competition?

In my opinion, being a successful investor doesn’t have to do with out-earning your peers or leaving the S&P in the dust. No, my definition is very simple.

Develop an investment plan using a variety of factors, and be able to execute and follow that plan indefinitely.

Suitability

This is step 1. You need to figure out what your “suitability” is. Your suitability will lay a very good foundation upon which you build your investment plan. Suitability involves three things:

  • Risk tolerance – This is your ability to handle drawdowns in your portfolio. If you crumble with fear every time you lose 5 percent, then you’ll probably want a fairly conservative portfolio*. On the other hand, if you have no problem seeing your portfolio drop 50 percent, then you’re ready for a more aggressive allocation.
  • Time horizon – Probably the most important factor of the three. Your time horizon is basically when you’ll need the money. A long time horizon allows an investor to take on more risk because there’s more time for them to recover from drawdowns. The inverse is true for short time horizons. You’ll want to be conservative because you have little time to earn back what’d you lost.
    • Long time horizon – 10+ years
    • Medium time horizon – 2-5 years
    • Short time horizon – Less than 2 years
  • Goals – What’s your plan? Is this savings going to be used as a down payment for a house? If so, there’s probably a minimum dollar amount you have in mind and you’ll want to tip the odds in your favor that you don’t go below that. Similarly, if this is for retirement and you have 30 years to invest, you have the green light for risk assets.

Keep in mind that all three of these things, plus one other, need to be used together when determining your asset allocation. If you are tolerant of risk, but need the money in 5 years, somewhere in the middle between aggressive and conservative is probably better. That one other thing is your behavior as an investor.

Investor behavior

The finance/investment world is coming around to this, but your psychology is a HUGE factor as an investor.

Obtaining a high return on assets is one of your goals, but it should not be the primary goal. When you create an investment plan you have to make sure it’s something you can actually stick with.

I wrote about it previously, here.

You could be tolerant to risk and you could have a long time horizon, but if you lay awake at night every time the market drops, then you need to rethink your approach.

That kind of fear and anxiety hinders your ability to follow your plan. What normally happens, is someone sets an unrealistic investment plan, one where they take on too much risk.

Thereafter, volatility picks up. They check their portfolio and it’s declined 15 percent. They wait a day and check the next.

Another 2 percent drop. Then the thought of 2008 creeps into their heads and the panic sell.

You can set up a great investment plan, but your behavior will ultimately make the decisions. Keep that in mind.

Asset allocation

Using your suitability and behavior, you can then determine your asset allocation. The types of assets you use in your allocation can vary. If you wanted to invest a small percentage of your portfolio in gold, for instance.

The three most common assets are stocks, bonds, and cash. With risks ranging from high risk to virtually (there’s always some risk) no risk.

Speaking very generally, people with long time horizons and are more tolerant of risk, have a more aggressive portfolio. The inverse is true for people with short time horizons and a low-risk tolerance.

That said, the ultimate goal is to develop a plan that meets your goals in the smoothest fashion possible.

Ignore the noise

Throughout your investment “career” you’ll run into people, friends, family, or even random people on the street that will tell you the sky is falling or that the newest IPO will go gang-busters and you need to get in now!

Put your blinders on. There are two things that hurt investors. Their own behavior and their ability, or lack thereof, to tune out what’s happening around them.

This is extremely difficult because we, as humans, have evolved to use our peers to compare or judge, our standing in society.

Stay in your lane and focus on your goals.

Never stop learning

Every single experience in your life is a learning opportunity, especially the bad one. I recommend journaling daily, recount your day, and dig little nuggets of knowledge from your experiences.

Additionally, take in some form of content every day that improves your understanding in your line of work, or in an industry that you’re interested in.

With regard to your finances, give our Toolkit page a look. There you’ll find a number of books and resources to enhance your financial know-how.

Please be advised: Everything written in this article is for informational purposes only and should not be taken as investment advice. Opinions are my own and do not reflect the opinions of this publisher or my employer.

Further reading:

The Psychology Of Money

 

My Thoughts On The Market

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Let me start by saying that I have no clue what is going to happen in the stock market in the next 12 to 18 months, what I do know are several of the factors that have a say in what happens.

If you guessed that at least one of those factors has to do with President Trump, then you’re right.

Trade

The big elephant in the room. Honestly, I have no idea how this is going to pan out. Obviously, it behooves both parties to get this rectified as soon as possible, but it makes sense for China to hold out until the 2020 elections.

If they make a deal now, the US has more leverage at the moment and will probably be on the winning side of things.

If they wait until 2020, they have a chance of getting a Democratic president elected, and more than likely, they’ll reverse course on trade.

I think the odds increase that a Democratic president will win because if a trade deal isn’t reached, the market will negatively react and if the market tanks while Trump is president, he’ll be in trouble.

The US also decided to slap tariffs on European goods. This matters because if a deal is made with Europe, that gives the US that much more leverage. They won’t need China as much, and it’s clear that China needs us. We’ll see what happens.

Interest Rates

You may have caught wind of the most recent jobs report. We added over 200,000 jobs last month, which was much stronger than expected.

You’d think that kind of surprise would be good for the market, wouldn’t you? Unfortunately, the strong jobs report signaled a stronger economy than previously forecasted.

A stronger economy gives the FED less of a reason to cut rates this month. Where it stands now, I don’t know what they will do at the next meeting.

I was certain they would cut, but that was before the jobs number. I think it will benefit us down the road if they don’t. The reasons I think that have been explained before, but I’ll give you a synopsis real quick.

Typically, in the normal business cycle, rates will start [generally] low and consistently rise in tandem with economic expansion. Once the expansion peaks, the FED will cut rates to promote borrowing, which translates into spending.

Here’s the kicker. The prime rate (the rate the FED controls and the rate that affects all other rates) needs to be at a certain level when the FED cuts. If the prime rate isn’t high enough, then the FED won’t be able to cut enough to stimulate the economy.

What does this mean?

The current economic and political environment in the US is like nothing we’ve ever seen before. Our respective parties are at each other’s throats, which doesn’t make cooperation easy.

The unemployment rate is as low as it’s been in 50 years, inflation is crawling, rates are still ridiculously low, and the market is making new highs.

The FEDs impetus for raising or not raising rates is the level of inflation. It’s lower than their 2% target so they took their foot off the gas.

We are at the end of an expansion, which means a recession is most likely on its way, if not in the works already.

If you have less than 15 years until retirement and reallocate your accounts to be a little more conservative than usual. If you have over 15 years until retirement, I wouldn’t make any adjustments (allocate according to risk tolerance, time horizon, and goals).

Keep in mind that if you shift to more conservative and the market continues to rise, you’ll lose out on some gains, but if the market tanks, that conservative tilt should help minimize the damage.

How To Cut Your Spending

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Do you know what could really help you reach your financial goals? Answer: If you had more money to work with! Cutting your spending is an integral part of your finances.

I’m not saying you need to cut out the things you love (insert Starbucks coffee, avocado toast, etc.). I’m saying you need to splurge on those things wisely, either by reducing their frequency or cutting out something else.

Let’s figure out ways we can cut our spending.

Track spending

How are you supposed to know what to cut spending on if you don’t know where your money is going?

Go back a few months and look for a “pattern.” Where is all of your money going? Bills, housing, transportation, debt payments, etc. are in their own category. Everything else that’s not considered necessary spending (minus groceries) goes in the discretionary spending category. Everything else that’s not considered necessary spending (minus groceries) goes in the discretionary spending category. Keep in mind, things will change if you’re living in an affordable city like Columbus, Ohio, rather than an expensive place like New York City.

This discretionary spending is what you need to pay attention to.

Grocery spending is necessary, but the amount can vary. Figure out what you typically spend, each month, on groceries and determine if that amount can be lowered. More often than not, it can. Just don’t go hungry.

Budget (and budget alternative)

The classic budget lists the necessary expenses (housing, groceries, debt, utilities, savings, and other bills). You then assign dollar amounts for other “unnecessary” expenses (take-out, clothes, etc.).

The dollar amount is what you’d like to spend on that item/category, and not go over. The purpose of a budget is to come to a total expenditure that’s less than your monthly income.

My approach is similar. I list the necessary expenses (excluding debt payments and savings). Just the things I need to pay (housing, streaming, utilities, insurance, and transportation).

Next is my grocery budget. This is a necessary expense, but I try to keep it relatively low. Between my son and I, the limit is $300 per month. Then I list debt payments and savings.

I calculated how much I needed to pay per month to pay off my debt by a certain date. My savings is automated and partitioned.

I have one savings account for emergencies, one for car repairs, one for holiday spending, and one for vacations. Once a week, money is automatically transferred from my checking to each savings account.

The amount of each transfer is less mathematical and is more about comfort. My retirement savings is done right away at the beginning of the month so I don’t have the chance to spend it away.

Whatever remains is mine to do with as I please.

No spend days

Have one day per week or a few days per month where you don’t spend any money.

I’ve seen some people go as far as having a no spend week! Implement these days at your discretion because obviously, you’ll still want to pay your bills and such.

Another cool idea is to restrict paying for certain items during particular times of the year. For example, you don’t buy any clothes during the month of September, or you don’t have any take-out/restaurant food in April.

Coupons/rewards/etc.

With smartphones, applying coupons to your purchases has never been easier. I use coupons.com. You can save which coupons apply to you and they can be scanned at checkout. From your smartphone!

Also, wherever you do your shopping, make sure you are a member/rewards member. There’s usually a sale for members. Excluding paid memberships (like Costco), being a rewards member is free and can save you money.

By the way, it costs money to shop at Costco, but their goods are very reasonably priced. They make their money on the memberships, and they sell all of their goods at cost. That means they sell a product at whatever price they paid to get it in the store.

Use price per unit/item

When you are making a decision about how much of something you need to buy, always use price per unit as your factor. The overall price of something may look less expensive than the bulk item, and it is at the time of purchase, but more often than not, the price per unit is lower for the bulk item.

It’ll cost you more when you check out, but through time, you’ll spend less money.

Quick hacks to cut expenses

  • Negotiate a lower interest rate on your credit cards
  • Balance transfer to 0% introductory APR
  • Personal loan to lower average credit card APR
  • Unplug unused electrical devices
  • Cancel unused subscriptions
  • Reduce entertainment expenses
  • Carpool to work
  • Keep tires properly inflated (better gas mileage)
  • Use LED light bulbs
  • Use a programmable thermostat
  • Lower the temperature on your hot water heater
  • Eat at home more/eat out less
  • Buy generic

Conclusion

Achieving financial success doesn’t have to be difficult and boring, though it does take some discipline. Small rewards are important. Without them, you’ll go crazy!

Cut the fat off of your budget, and you’ll see how much better it feels to make significant progress in your financial life.

Financial Planning For All Ages

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Don’t you hate it when you Google financial planning tips, and it spits out articles that don’t apply to you? This could be because you’re a different age than the article is directed towards or you’re in a different position.

Well, look no further. I’ve created a rough outline of how you can plan, regardless of your age or situation.

But I’ll be honest with you, a lot of this article will link to resources or previous articles that explain these topics in more detail, but I wanted to create a rough outline of how people in different age groups can plan.

Twenties

Ideally, you want to get a budget started, but nobody likes doing that. Instead, give your money a job. Figure out when you would like to have your debt paid off, then do the math to determine how much per month you need to pay.

List that payment plus housing, transportation, food, and other bills. That total tells you how much MUST go out, everything else is extra to do what you please.

In terms of saving for retirement, you have a lot of time to put money away, but if you start sooner, you’ll have to save less later. 10% of your salary is a good goal. If you can’t get there just yet, save what you can, but try to incrementally increase it over time.

Investment allocation here, as well as in your thirties and forties, should primarily be stocks. Not 100%, but definitely the majority of what you own.

Thirties

The financial plan in your thirties is similar to the one in your twenties. Pay down debt and save for retirement. However, at this point, you probably have more assets and you may have some children as well.

With the cost of tuition constantly rising, saving for their future education costs is important. The 529 is the most popular, and probably the best vehicle available to do just that. (Be advised: 529 plans do involve risk so please talk to your financial advisor prior to investing)

With more assets and children, comes more insurance. Make sure your property and belongings are adequately protected. Additionally, if your children depend on your income for support, life insurance and disability insurance are a must!

Fourties

Same story, different decade. Pay down (off) debt, save for retirement, and make sure you have adequate insurance. (Honestly, the save more, pay down debt, and have insurance is a great catch-all financial plan).

At this point, however, your retirement plans should become more detailed and concrete. Through your twenties and thirties, retirement planning essentially was just saving for retirement.

Now you should think about where you live and what you’ll do. You should also calculate if you’re on track and increase your savings if you’re behind.

Fifties

Hopefully, by the end of this decade, your debt will be mostly paid off, you have a good idea of what retirement will look like, and you’ve determined what needs to be done (if anything) for you to hit your target number.

As you age through your fifties, you should start thinking about adjusting your investment allocation. You don’t have as much time to gain back what you lose during a down market.

Reallocating to a 60/40 or 50/50 (stocks/bonds), depending upon your risk appetite, is a good way to reduce your risk and still participate in a bull market.

Sixties

Where you are at this stage in life depends on a few factors. Have you saved enough to live comfortably in retirement? Do you enjoy what you do? Are you healthy? Plans for Social Security?

If you haven’t saved enough, then you’ll probably have to work a little longer so you can save more. If you like what you do, then why not continue if you are able? If you don’t, consider a career change or (if you’ve saved enough) volunteering for a cause that’s meaningful to you.

If you are healthy, I recommend staying active and social as long as you can. Activity and a healthy social life are two of the three important variables for a fulfilling retirement.

Social Security and when to receive it is a huge decision. Obviously, I’m going to recommend waiting as long as you can so you receive a higher monthly benefit, but there are other things to consider.

Are you healthy? What’s your family history like? Do you have adequate savings/retirement income from other sources?

Health and family history help determine longevity. Poor health and/or poor family history may give you a reason to start receiving earlier.

There are calculators out the web (like this one here) that can help you discern what’s the best strategy for you. That’s to say, how do you optimize your Social Security and other retirement income so you receive the most possible?

Seventies

We’re living longer, healthier lives now, and down the road, the retirement age will probably make its way into the seventies.

If you have to work for the income, you’re not alone. As of 2017, the percentage of the population that are 70 or older and still working was 19%. Up from 11% in 1994. (Source)

My recommendation. Develop an income strategy that will a) afford you to live a somewhat comfortable lifestyle (obviously, cutbacks are necessary if money is tight) and b) help your savings last as long as possible.

There are a variety of calculators out there to help figure this out.

Conclusion

Financial planning is tough. As I said in the beginning, not many like to budget, so it’s important to give your money a job. $100 goes towards emergency savings, $1,000 to retirement, and $250 for debt repayment.

Do this, along with several of the other items I listed (as well as the ones linked below) and you’ll do just fine.

Helpful articles and resources:

What is the Coverdell ESA?

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Introducing the last account type on our quest to find the best way to save for college, the Coverdell ESA.

Without further delay, here’s what you need to know about the Coverdell ESA.

What is it?

Like the 529, the Coverdell ESA is an education savings vehicle for K-12 and secondary education. Coverdell ESA stands for Coverdell Education Savings Account.

It got its name from Senator Paul Coverdell, who introduced the legislation for a similar account, the Education IRA. In 2002, a new piece of legislation was introduced to make the account what it is today.

The 529 and the Coverdell ESA share many of the same characteristics, but there are some things that set it apart. All of these will be listed below.

Advantages

  • Savings and investments in the account grow tax-deferred and are withdrawn tax-free when used for qualified education expenses.
  • When it comes time to withdraw, those funds are not considered income, as long as you are using them for qualified education expenses.
  • Can use in conjunction with other education tax credits, like the Lifetime Learning Credit, as long as there’s no double-dipping.
  • These accounts are self-directed, so your investment options are plentiful. They include…
    • Age-based funds
    • Static mutual funds
    • ETFs
    • Stocks
    • Bonds
    • Real estate

Disadvantages

  • Contribution limit of $2,000 per child per year.
  • The funds inside the account are taken into consideration when you file for financial aid. The assets are considered their parents assets.
  • If the money is not withdrawn from the account by the time the beneficiary is 30, they could be subject to taxes and penalties.
    • After 30, the funds inside the account become fully taxable and you’re penalized 10%.
  • Like the 529, contributions to this account are not tax-deductible.

Unique Characteristics

  • Only eligible to families/individuals that fall below an income threshold ($110,000 for single taxpayers and $220,000 for couples who file jointly).
  • The contribution limit is $2,000 per child per year, so even if a family member opens an account for your child, you still can’t go over that number, or there will be a penalty.
  • Qualified expenses include…
    • Tuition
    • Books
    • Supplies
    • Equipment
    • Tutoring
    • Special needs services
  • And can also include…
    • Room and board
    • Uniforms
    • Supplementary and transportation services
  • With a 529, the account owner has control over the assets. Conversely, with a Coverdell ESA, the beneficiary has control.

Conclusion

Effectively, there are three education savings vehicles used today. The UTMA/UGMA, Coverdell ESA, and the 529 plan. I’ve written about the other two in the past so go check those out.

On paper, the 529 looks like the best option, with a high contribution limit, a large number of qualified expenses, and there’s no penalty for letting funds sit for decades.

That is all true, and honestly, I prefer the 529, but the vast, vast majority of people that are helping their children save for college will not come close to the high contribution limit.

The only drawback to the Coverdell ESA is the penalty if the funds aren’t used before 30. Other than that, I don’t think the $2,000 contribution limit is a factor because most people can’t put that much away, anyway. Not without sacrificing their ability to save for retirement, as well.

That said, they’re both great options and you can’t go wrong with either one.

What Is A 529 Plan?

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Education, especially secondary education, is getting more and more expensive. The cost of a 4-year public university has gone up 110% from 1994 to 2014 (Source).

Conversely, wages have grown an astounding 8 times slower than that (Source).

What can you do to save for college? How can you help your kids? Are there certain vehicles that work better than others?

We’ll take a look at one of those in the following article.

What is a 529?

A college savings plan that is exempt from federal taxes, if you use the funds to pay for qualified education-related expenses.

Those expenses include tuition, books, room and board, computer equipment, and necessary supplies for students with special needs, as long as the student is attending at least half-time.

Advantages

  • Funds can be used for K-12, university, graduate school, and trade schools.
  • Parents can withdraw $10,000 per student per year to pay for tuition ONLY.
  • Other people, besides the account owner, can contribute to a 529 plan.
  • If funds are used for the beneficiary you intended, they can be transferred to a family member.
  • Earnings grow tax-deferred

Disadvantages

  • Gift tax exclusions – You are exempt from paying gift taxes if you keep it under $15,000 per individual per year, or $75,000 as lump sum every 5 years.
  • A penalty of 10% will be assessed for funds used on non-qualified expenses.
  • Limited investment options – most plans offer mutual funds as investments
    • Risk-based – Aggressive, moderate, conservative, etc.
    • Age-based – You can select an age-based fund from the get-go, and the fund company will reallocate into new funds as your child gets older.
    • Self-selected

Miscellaneous

  • All plans come with federal tax advantages, but some states offer tax deductions and credits as well!
  • Every dollar in a 529 plan will deduct 5.6% from your family’s need-based financial aid
    • One way around that is to have a family member act as the custodian for the account, so it isn’t in your name
    • However, once the child begins withdrawing the funds and is still attending school, they could have 50% of their financial aid withheld because those withdrawals are considered income
  • You can open one using other state’s plans, besides your own state

Other types of accounts

  • Coverdell ESA – Similar to the 529 in that you use the funds to pay for education-related expenses, However, there is an annual contribution limit of $2,000 per beneficiary, and there’s also an income restriction (once you make above a certain amount, you can no longer contribute to a Coverdell ESA).
  • UTMA/UGMA – Stands for Uniform Transfer to Minors Act/Uniform Gift to Minors Act. I’ve written about this in the past, so if you’d like to learn more, check out the article here.
  • IRA – You can use a Traditional IRA or a Roth IRA to pay for education expenses. Similar to the 529 and the Coverdell ESA, the expenses must be qualified and the student must go to a qualified institution, as indicated by the Department of Education. The most beneficial way to use an IRA is to withdraw the funds from a Roth IRA, but only withdraw what you contributed.

Conclusion

Secondary education is expensive! If you start saving for your kids’ college right away, the compounding returns could really help you save a decent amount.

It’s important to use the right vehicle, and, in my opinion, there’s no better option than the 529.

If you’d like to learn more about paying for college, read this article here. Or if you’re a future or current student that need some finance tips, read this one here.

Be advised: Investments in 529 plans involve risks to principal and may involve additional fees such as enrollment charges and annual maintenance fees. 529 plans offer no guarantees. There are exceptions to the gift tax and estate tax exemptions; please contact a qualified tax, legal, or financial advisor for more information prior to investing.

 

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Saving Money With Regular Maintenance

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When was the last time you exercised, had your furnace worked on, or had your oil changed? Performing regular maintenance, in any part of your life, can be quite annoying at times, but it can really make a difference.

The difference can come in the form of money saved, longevity, and/or decreased stress. That said, let’s look into why maintenance is important.

Health

As a nation, the United States is unhealthy. We put junk food into our bodies and lead a sedentary lifestyle that is causing more problems than gaining weight.

Not only is physical exercise good for your body, with benefits like preventing bone loss, increasing muscle strength, improving coordination and balance, and reducing your risk of cardiovascular disease, but it also helps your mind.

Just over half of all Americans are meeting the physical aerobic exercise requirement (Source). The requirement is either 150 minutes of moderate aerobic activity per week or 75 minutes of vigorous aerobic activity per week. Not a lot, right?

Americans spend $3.4 trillion per year on healthcare (Source), and I believe this number could drop dramatically if we all just took better care of ourselves.

Bottom line, regular exercise, and a well-balanced diet can (depending on other genetic risk factors, etc.) can dramatically reduce your long-term healthcare costs.

Home

Regular maintenance of your home has a number of benefits.

  1. It saves you money because all the mechanical components are running optimally. Efficient use of utilities is less expensive. It also increases the longevity of that equipment.
  2. Maximizes your home’s value and resale potential
  3. Peace of mind knowing your home is well-cared for. Stress has negative health effects. Reducing it can improve your health and lower healthcare-related costs.

Car

Keeping your car in optimal running condition will extend its life. It also makes the vehicle more safe to operate because the odds that something breaks while driving is reduced.

A poorly tuned vehicle can use up to 50% more fuel (Source). Spending $50-$100 every three months on an oil change is definitely worth it.

For example, let’s say you fill up once per week at $25. Over a three month period, you’d normally spend $325 on gas. If you’re driving a poorly tuned vehicle, you’ll spend $487.50. Over 1 year, that’s a difference of over $600.

Budget

Creating a budget and regularly checking in to make sure that a) you’re sticking with it and b) it’s still appropriate.

Often when people start budgeting, they find themselves with more money to play with. If they have outstanding debt, they can use that extra money to pay it off.

This could free up more cash that can be used for saving, investing, or getting that cable TV back.

Another thing you should do is cut or eliminate expenses that are otherwise unnecessary. The average American spends almost half of their food budget on eating out (Source).

Investing

This section will revolve around asset allocation and not about picking stocks and the like, specifically, in ones’ retirement plan.

If you have a retirement plan (you really should) my advice is to allocate your assets according to your risk tolerance, time horizon, and comfort level (from a psychological perspective).

If you have a retirement plan through your employer, I strongly recommend utilizing a target-date fund. This takes the worry and the guesswork out of the equation.

Where was I, oh yeah, asset allocation? Unless we’re in a bear market, your stock allocation will do better than your bond allocation.

Over time, the stock part of your portfolio will take up a larger share of your overall portfolio. It’s wise to regularly (though opinions differ) to rebalance back to your original allocation, otherwise, you risk being more aggressive than you intended.

Conclusion

Whether you’re talking about your home, car, or anything else, regular maintenance can save you a lot of money.

Please visit our website to learn more and for our disclosures.

Read More:

Fuel Up and Save Big: Costco’s Secrets to Slashing Your Gas Expenses!

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Creating A Financial Plan You Can Stick To

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The more I read and the more I meet with people, the more I realize that setting up a financial plan is more than dollars and cents.

Yes, the better financial plans have your typical items. Save this much, invest in these things, and contribute to this retirement plan.

But the best plans not only have this to take care of your financial needs but they’re also set up in a way that your psychological needs are met as well.

Can you stick with it?

The best plan is anyone that you can stick with. When setting up your plan, go through it slowly. Take each item one step at a time and consider possible scenarios when determining a particular section.

For example, when setting up a plan for your emergency fund, figure out what’s realistic for how much you’ll need and how long it will take you to get there.

Also, figure out how it will be replenished if/when it’s ever used. Perhaps you’ll have an automatic deposit setup indefinitely?

Another thing to keep in mind is including some flexibility in your plan. For example, if part of the process is setting up a budget and your weakness is eating takeout, include a little bit of money for it.

I generally advocate for eating your meals at home, but if it’s inevitable that you’ll go out to eat, it’s better to include a little bit of it, rather than trying to avoid it.

Will you gasp every time the market dips?

Investing is a vital part of your financial plan. Investing is what helps your savings grow, but at times, your investments can lose value.

Our psychology plays a big role in our success as an investor. It’s said that we experience the pain of a loss two times stronger than we experience the joy of a gain.

That said, you need to plan accordingly to keep your emotions in check. If you let them take control of your decisions, you could end up selling your investments after you’ve already lost value, at which point it may be better for you to stay in.

Most investable assets are in a retirement plan of some sort, so your time horizon is, more than likely, long-term. 20+ years for instance. Your risk tolerance is the other part to take into consideration.

How much are you willing to lose until you say, uncle? In a six month period, would you have to sell after you lost 10%, 20%, 30%, or more? Your answer to this will help determine what you are able to stomach.

The next thing to do is to stress test your portfolio. The popular investing/research websites will have this. You plug in your portfolio with dollar amounts and ticker symbols, and then (depending on the site) you can select a variety of scenarios to see how your portfolio would do during that scenario.

The 2008 Financial Crisis is a common one.

Conclusion

Creating a financial plan that has the potential to meet your goals is important, and having a plan that you’re comfortable with and one that will help you sleep at night is optimal.

Make sure, when you are developing your plan, that you are factoring in your behavior as an investor and as a human. We are emotional creatures, and that makes investing a little more difficult.

If you’d like to learn more about what was discussed here and for our disclosures, visit our website.

 

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How to Make Long-Term Investing Decisions

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One of the most valuable attributes of successful investors is being able to stick to their guns and trust their analysis even when the market is tanking.

How do you invest for the long-term? Are there certain strategies and mindsets that can be used to your advantage?

We’ll explain that and more in the following article.

Know what you are willing to risk

Whether you are someone that allocates your assets between a select few mutual funds but are looking to use a small portion of your account to enhance your returns or an investor that owns a handful of stocks, you need to be wary of how much of your total portfolio is in one security/strategy.

With either scenario, the decision of how much of your portfolio you are willing to risk in an individual security is whatever you are comfortable with. Personally, if I were in your position, I wouldn’t use more than 5% in this type of situation.

Taxes matter

If you are investing in a qualified account (tax-advantaged account) taxes don’t really have any effect on whether you should buy or sell something, or what type of security you invest in.

You’re either taxed before you deposit the funds or you pay taxes when you withdraw, otherwise the account grows tax-deferred.

If you’re investing in a non-qualified account (standard brokerage/investment account) the taxes and what securities you invest in, matters.

For example, when you invest in a mutual fund, at the end of the year, that fund will pass capital gains to the investors. It’ll come in similar to a dividend, but a much bigger number (depending on the year). You have to pay taxes on that, just like you would a dividend.

Another example, if you invest in a security and sell it for more than you bought it, you have a capital gain. If you held the security for less than 1 year, it’s a short-term capital gain. If you held it for more than 1 year, it’s a long-term capital gain. A long-term capital gain is taxed at a lower rate than a short-term gain.

Asset allocation is important

Stocks/bonds/cash. They are the three most important asset classes in investing.

I’ve written about stocks and bonds before, but the cliff notes version is stocks are risky and can reward you with high returns. They get hit hard during bear markets.

Bonds are generally less risky so you usually get a lower return. However, they tend to hold up a little better during bear markets.

Depending on where you are in life and what you’re comfortable with determines how much (by percentage) you should have in each asset class.

Someone in their 20s should have almost all stocks and a little in bonds. Maybe 90/10 or 80/20. I’d only recommend cash if they were waiting for a significant pullback and wanted to put money to work at lower prices.

Conversely, someone in their 60s that has less time to make back what they lose, would be much more conservative. Their allocation could be 40/50/10 or somewhere around there.

Keep in mind these are general rules of thumb. The most important thing with any investment is your comfort level. If you are 25 and aren’t comfortable with hanging on to your stocks during a 40% decline, be more conservative.

Fees will eat your returns

There’s no denying that trading fees, advisor fees, and the various other types of fees will reduce your returns over the long-term.

On average, expense ratios on mutual funds are much higher than expense ratios on ETFs. Though I believe paying your advisor their fee (I don’t think it should be higher than 1%) is well worth the expense, not everyone needs an advisor.

If your financial situation is relatively simple, you’re comfortable and confident with how you handle things, and you don’t foresee making any significant changes, then it’s probably not worth it.

However, it might not be a terrible idea to see one every few years to have an objective set of eyes review everything.

What’s your exit strategy?

When you invest in a security, and this is more than just asset allocation, you need to have your exit already planned. Too often, people will invest in a stock, see it climb 10% higher and then fall back down. Instead of selling with a small gain or at cost, they’ll hang onto it in hopes it’ll climb back up, even if it keeps falling.

Our emotions and our behavior is our worst enemy in investing. Having a plan and a strategy in place before you even get started is a great way to help mitigate those things from getting in the way.

Regular contributions

If you have time to ride out down markets and are comfortable with the investments you chose/the asset allocation you picked, then hang onto what you have.

An added bonus is if you are regularly contributing and adding to those positions. In a down market, those securities you invested in will get cheaper. When you regularly invest at lower prices, you effectively lower your average purchase price.

Conclusion

Investing can be very difficult, but it doesn’t have to be. In my opinion, keeping your investment plan as simple as possible paired with a unique ability to keep your emotions out of the equation is a recipe for success.

For more information about investing and for my disclosures, visit www.crgfinancialservices.com.

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Personal Capital Review: What’s Good and What to Watch Out For

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personal capital review Most of us are familiar with the idea that there is no free lunch – but tech companies are very, very good at convincing us that this is not the case. If you’ve seen the news lately, you may have noticed that Facebook & Google have been in hot water because of the controversial use of their data. I don’t want to put Personal Capital in the same category, but don’t think for a second that they create and maintain all of their neat tools as a gesture of goodwill. Wondering how Personal Capital works and if it’s worth the cost? Here’s our review.

Personal Capital Review: How Does it Work?

Personal Capital’s crown jewel is an account aggregation system – a very unsexy term for something that actually does a bunch of really cool things. Essentially, you hook up all of your financial accounts – think credit cards, checking, investments, 401k from work, even your house! Personal Capital automatically crunches that data for you and lets you everything from what your total net worth is to your potential capital gains tax exposure. It’s like a financial Oracle – you after you’ve fed it your personal data, you can pretty much ask it any question you want to.

Here’s the thing – You aren’t the only one asking! Personal Capital anonymizes its data, so no one else is looking at your actual account numbers, but what they are looking at is how much you have, where you have it, and if Personal Capital can manage it. Personal Capital is actually a Registered Investment Advisor, which is a type of investment company that manages assets on a fiduciary basis (in your best interest).

This puts them ahead of traditional wealth management companies like Merrill Lynch and Morgan Stanley, but they like to sell themselves as being a FinTech company. In reality, their core business is much more similar to that of Fisher Investments, a traditional hard selling RIA firm.  A lot of Personal Capital’s senior management team came from Fisher, so it should not shock you that their company culture is similar.

The Good

  • .89% is a low price to pay for true fiduciary wealth management
  • Personal Capital uses low-cost ETFs and efficient investment vehicles

The OK

  • The amazing set of free tools is counterbalanced by the fact that all of that info is going to Personal Capital – you are a lead in their system

The Not So Good

  • The advice given is highly dependant on who you talk to
  • The financial advisors receive compensation primarily for getting new assets onto the books, not keeping existing clients happy
  • If you don’t take advantage of or don’t want the financial planning aspect, you are paying .89% for no reason
  • Vanguard has a similar experience for only .3% at higher account balances

What You Need to Know about Personal Capital

Personal Capital currently has about $8 Billion of assets under management, which is certainly more money than you or I have, but tiny compared the other giants in the investment space. What they do have, however, is over $674 billion of tracked assets via their app – assets that they’d like to get on their own platform and charge .89% to manage. Because of this, its shiny free to use tools come with a cost. Buried in the fine print which I’m sure you didn’t read is a clause that allows Personal Capital to solicit you for advisory services.

If you have more than $100,000 in financial assets linked to the platform, you’d better expect a call from Personal Capital. You can always block their number or give them a fake phone number when you sign up, but that’s not very nice, is it? Those financial advisors from Personal Capital will be calling to try and get you invested in one of the three options below, depending on how much you have.

Personal Capital operates on a 3 tiered investment plan system – but unless you’ve got over a million dollars or more to invest, there’s no guarantee you’ll talk to a Certified Financial Planner. In a world where there are over 80,000 CFPs, there’s no reason to settle for anything less. It’s important to note that Personal Capital is not a robo advisor. While the advisors will attempt to put you in a managed asset program that may trade on certain automatic triggers, there are humans involved in all investment decisions.

In fact, once you get over $200,000, they will stop investing you in an all ETF strategy and move you into a basket of individual stocks that will act like an index – which can have several advantages.  The ability to tax loss harvest at the individual stock level can increase real returns and should not be discounted. In addition, they offer full financial planning for free (which in my opinion they should position much more strongly).

Is It Worth the Fee?

The truth is that these days you can get an efficient investment allocation for pennies. If you choose the three fund portfolio, the cost for that allocation is something like .05% (the average weighted expense ratio of the funds). If you wanted to dial up the sophistication a bit, you could go to a robo advisor like Wealthfront and pay .25% (plus the expense ratio of the underlying funds) for a portfolio that trades automatically and can also tax loss harvest at the stock level – so why pay .89% for any of Personal Capital’s offerings?

Here’s the key difference – at Personal Capital you are (horror stories notwithstanding) not paying just for the investment management. Personal Capital is not a robo advisor – they even made a whole video explaining they are not a robo:

Now I tend to agree with them that one of the worst deals in finance is investing with a robo advisor. They are charging you a lot for taking a quiz once – and unlike a human advisor, no one’s there to talk you out of buying a bitcoin at $20,000 or letting you know how many years retirement you’ll postpone by if you go ahead and buy the house with the chef’s kitchen. Humans cost more than any robo (though with Vanguard’s Personal Advisor Services, not much more) but the value you get back from them is measurably higher because they serve as a wall between you and your worst impulses.

In addition to the above, a good human advisor can provide counsel to make sure that assets are correctly titled, can advise on trusts and wills, help you open a Donor Advised Fund to give to charities, review your tax return and more. Robo-advisors can only invest the money you’ve given them.

At Personal Capital they claim to offer you a ‘team’ of financial advisors at $100k, two financial advisors at $200k, and access to a Certified Financial Planner once you’ve accumulated a more than a million dollars with them. Because Personal Capital pays its financial advisors mostly for converting assets from off platform to assets under management – every minute their advisors spend talking to current clients is a minute they can’t use to convince potential new clients to join Prospect Capital. Most of these advisors are really just looking to gather up any of your assets that aren’t yet managed – providing them with additional fees and charging you more.

What About Vanguard’s Personal Advisor Services?

Most people know Vanguard as a go-to asset manager of choice for inexpensive, passively managed index ETFs and Mutual Funds. They currently have over $5 Trillion of assets under management – over $1 Trillion of which their discount brokerage account now holds.

Vanguard has taken a similar approach as Personal Capital, using this $1 trillion as a base to source clients for its own managed services program, called Vanguard Personal Advisor Services. There are a couple of key differences. Vanguard’s PAS is closer to a true robo advisor until you get to $500,000 – where you can get a CFP to do one time planning for free. At $1 million under management, you get a dedicated CFP for free.

So What Should You Do?

If you’ve got a million dollars or more, Vanguard seems like the no-brainer option to get a Certified Financial Planner (if you are ok with a call center delivering advice). If you have less than that or want a more experienced CFP focused on building a long-term relationship, try one of the many independent RIA firms out there that will treat you as a client and not a number.

You may pay more, but having a long, lasting relationship with someone who intimately knows your situation easily pays for itself when you need to make big life-changing financial decisions. If you just want investment management from a robo-advisor and to keep the pesky humans away, Schwab and WiseBanyan both offer a 0% fee algorithmic solution (though you will pay a small fee from the ETF expense ratios) – so you might as well skip robo advisors charging any price at this point.

Personal Capital is an underwhelming choice in any of these slots, so unless you really value the tools they offer, it is generally best to take your money elsewhere.

Author Info: Michael V. Spelman is a Certified Financial Planner, and co-owner of Myrmidon Private Capital, an RIA specializing in retirement planning.  He’s also president at The GUL Guy, a specialty life insurance comparison agency.