Are Your Decisions Based On Your Emotions?

We all believe that we make important decisions based on fact. Our research, typically, is quite limited. We ask our friends, neighbors, co-workers, family or a trusted adviser their opinion. If it aligns with what we believe our decision is made.

Many times, we make decisions based on current events. These short-term based decisions are very emotional and are not evidence based.

You can never overcome your own humanity. As much as we would prefer to think that we make investment decisions based purely on logic, advertiser and journalists are well aware that emotion ultimately drives most investment decisions.

As a quick demonstration, consider the statements below. See if you can match each statement with the emotion being expressed. (Answers listed in the key below.)

greed regret trust loyalty envy

  1. “It doesn’t matter how sophisticated his charts are or how much sense he makes, I just don’t feel comfortable letting him handle my money.”
  2. “I’m not sure I should have put my money in that fund. It lost 15% already. Maybe I’ll sell some of it tomorrow.”
  3. “My boss got 25% on his money. I only made 8%! I wish I got 25%.”
  4. “I’d wish I’d known that stock was going up, I would have bought more shares.”
  5. “My dad worked in that company all of his life and he left his shares to me in his will. It would be wrong to sell it just to diversify my portfolio.”

Answer key: 1. Trust 2. Regret 3. Envy 4. greed 5. Loyalty

We as people are naturally predisposed toward or against specific investing tactics. What is interesting is that no matter what our emotional tendency maybe, we can almost always find what looks like purely factual data to support our view.

It is easy to overweight information that validates our perspective while minimizing any information that goes against what we inherently believe.

The Good News: Simple awareness of your emotions when it comes to financial and investing matters can make the difference between good and bad investment decisions.

The recent up and now down markets have many investors on edge, asking….should I get out of the market for good? This is really, what the financial institutions want…they make money when money moves.

Because we make emotional decisions with our investments. We need the help and guidance of an investor coach/fiduciary adviser.

Together you and your coach will develop a customized plan for YOU. Then going forward your coach will keep you disciplined to your plan.

This is where a true adviser really, earns their fees.

As an investor you must remain disciplined to your strategy…you must own equities…globally diversify…..rebalance.

Where’s The Fire?

There has been numerous discussions about what the role of a fiduciary adviser is.

The financial services industry has been fighting the fiduciary standard for years. Well the fight appears to be over. Anyone working with someone’s retirement funds will be held to the fiduciary standard.

But what is the fiduciary standard? The answer to this question can be quite complex. Its definition is to always act in the best interest of the client. In the past the majority of the financial services industry was held to the suitability standard.

This suitability standard essentially puts the best interest of the brokerage/insurance firm first. Many in the industry have been basically financial salespeople. In that they give the client whatever they want. Regardless of whether it was in the client’s best interest.

These ‘advisors’ could sell anything as long as it was suitable. This opened the door to keep selling the latest hot product.

A true fiduciary adviser will develop a game plan for their client and provide the discipline to follow that plan.

Dan Wheeler of Dimensional Fund Advisors has a great analogy to explain what a fiduciary adviser does. Let’s assume the fiduciary adviser puts your best first.

Many investors question the value of any advisor when the market is going up. What do I need you for? They might say. And then when the market does go down. Why don’t you do something? Change something?

This is where Mr. Wheeler’s analogy comes in. Most municipalities have a fire station manned by firemen/women. When there are no fires these people provide no value. But when there is a fire these professionals go into action. They are trained to follow a process. To safely put out any fire.

This is the same for a true fiduciary adviser. When the markets are charging ahead investors wonder how their advisor adds value to their portfolio. But when the markets are declining or in a full bear market is when the fiduciary adviser adds value.

Your fiduciary adviser will keep you focused on the long term and ignore short term volatility.

This becomes a very difficult task when markets are declining or flat for many months.

It seems like the down or flat markets will never end. But they will end. When no one knows.

Keep in mind the S&P 500 has average an annual rate of return of around 10% over the last 80 plus years. And there are more up years than down years.

To succeed long term in investing you need to

  • Own equities and high quality short duration fixed income
  • Globally diversify.
  • Rebalance

This requires the help of an investor coach/fiduciary adviser to keep you disciplined when there is a fire.

Is Capitalism Evil?

Free markets are under attack. The media along with liberal politics have made capitalism the evil empire. They cast capitalist as greedy and unfeeling.

In fact everything that made America great is under attack. Our liberal leaders are trying to change everything that made us a great society. Many even say the facts prove that capitalism is wrong and socialism is the answer. I know as I am sure many of you are that ‘facts’ can be skewed to prove any viewpoint.

Taking the blubber off, Nantucket Harbor by Jo...
Taking the blubber off, Nantucket Harbor by Josiah Freeman, ?1867-?1890. (Photo credit: Wikipedia)

Capitalism and the free markets promote growth. Unfortunately the free markets do not ‘guarantee’ success. Some ideas flourish immediately, while some flounder. Some take time and require persistence.

There is a myth that pro capitalism is the same as pro business. This is a myth because capitalism promotes competition. While businesses want to limit competition. Businesses have to work harder to maintain their profits and grow.

Remember the more competitive the environment is the better and cheaper their products become.

The end beneficiary is the consumer with better products at a cheaper price. And of course added jobs.

Recently I watched the movie ‘In the Heart of the Sea. It is about the legend of Moby Dick the giant white whale. By the way I understand now why this movie was only in the theaters for a short time. Not very good.

Back then in order to power their lamps and stoves they needed oil. Well the oil then was derived from whale blubber. Can you imagine today if someone were killing whales or anything else for a profit? There would be protests everywhere.

But then it was there only source of power. So it was acceptable.

Because of capitalism another source of fuel was discovered and the business of killing whales stopped.

Capitalists are always looking for a better, more efficient way. The people working in the whaling industry were not happy. The business owners lost money and the employees lost their jobs.

As I have said some win some lose. But overall the consumer wins.

Today as it was in Moby Dick’s time no one could predict the future. If we invest our capital in a diversified manner we will succeed in the long term. However if you concentrate your assets in a single asset class, like whale blubber you will lose in the end.

The only thing that doesn’t change is that things change. However no one can tell you what will change and when.

There will be ups and downs. But patience and persistence will allow us to succeed.

Most if not all of us need the guidance of an investor coach/fiduciary adviser to find long term success.

Your coach will help you follow the three simple rules of investing..Own equities and high quality short duration fixed income…Globally diversify…Rebalance.

Stop Trying To Beat The Market.

About three weeks ago I received a call from a reporter/writer for the U.S. New and World Report. She asked me a number of questions regarding my business and my investment philosophy. She said she had looked at my website www.401kplanadvisors.com and found the posts very interesting. We talked for about twenty minutes and finally she told me the article would be published for the online version of the magazine.

After I read the article it was apparent that she read a few of my weekly posts and used the material. The link to the article is below. Please enjoy.

http://money.usnews.com/money/personal-finance/mutual-funds/articles/2015/05/11/why-investors-should-stop-trying-to-beat-the-market

For those of you who have been regular readers of my blog posts you know what I stand for. I believe the markets are efficient, in that, all knowable information is already reflected in the current price. Therefore, trying to predict future stock movements is not a prudent strategy.

This article points out the need for investors to avoid the Wall Street bullies. These bullies continue to lure investors with their ability to ‘beat’ the market. They want you to believe that they have a special talent to find the right stocks to buy, or get into and out of the market at the right time. They will show you the track records of the current ‘hot’ money manager.

All informed investors know that past performance is no indication of future results.

So please take some time and read the article. If you have any questions or comments please send them over.

Are You Investing with Peace of Mind?

What is investing with peace of mind? What does this mean? Is it the same for everyone?  Should it be the same for everyone? Hopefully over time we can learn the answers together.

Right now let’s focus on what I believe investing with peace of mind means.

1 Wall Street
1 Wall Street (Photo credit: Wikipedia)

Many believe peace of mind means no risk. If we expect to earn any real return there must be risk. Even if there is no risk of loss of principal there remains a more dangerous risk, a risk we cannot see in our statements and that is inflation risk.

Aside from this I believe investing with peace of mind means avoiding the tactics of the Wall Street bullies.

The Wall Street bullies continue to convince you to gamble and speculate with your money. They do this by bringing out the next great strategy or hot asset class or hot stock.

They make a compelling reason for you to buy right now (or sell right now) or risk missing out on getting rich quick.

If you want to invest with peace of mind avoid the following:

  • Stock picking
  • Market timing
  • Track record investing

There is and has been an alternative to the Wall Street bullies. This alternative is not about predicting the future or ‘betting’ on a future event. Academic and scientific research has taught us that the markets are efficient. In that all the knowable information is in the price of the asset right now.

The Free Markets are Random and Unpredictable.

Admittedly the markets are not perfectly efficient. There are examples of this inefficiency daily. However, it is impossible for anyone to consistently take advantage of the inefficiency and ‘beat’ the market.

When an ‘expert’ provides an example of how they ‘beat’ the market you can be assured that this is a matter of luck and not skill.

During your search for an adviser to help you invest with peace of mind make certain the adviser can articulate their strategy and back it with academic research.

Seek the help of an investor coach to help you determine the correct level of risk for YOU. Develop a prudent portfolio and keep you disciplined through the good and bad times.

Your coach will not sell you the next great strategy of hot asset class or hot stock.

A true investor coach will provide you with the correct information to invest with peace of mind. So that when the markets do go down and they will go down, you can be assured you are invested correctly.

A true investor coach will tell the investor they need to go elsewhere if they insist on gambling and speculating.

By acting as a fiduciary, an investor coach will NOT go after the sale at all costs.

To succeed long term and invest with peace of mind you must:

  • Own equities and fixed income
  • Globally diversify
  • Rebalance

You do not have to know everything about investing but you do need to know the right things.

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Americans Want New Pensions

Employees are looking for guidance in regard to their 401(k) Plan. This study confirms the need to offer professional managed portfolios. In addition the portfolios should range in risk level from aggressive to conservative. When each employee chooses their risk level the accumulated plan will represent a pension plan. Ideally your plan will only include these professionally managed portfolios. With the guidance of an investor coach your employees will experience improved results and less anxiety.

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thmb (Photo credit: Wikipedia)

Eighty-three percent of Americans report favorable views of pensions, and 82% say those with pensions are more likely to have a secure retirement, according to a research report, “Pensions and Retirement Security 2013: A Roadmap for Policy Makers,” issued by the National Institute on Retirement Security (NIRS). In addition, 84% of survey respondents say all Americans should have access to a pension to be self-sufficient in retirement.

Support was strong from both men and women (83% and 82%, respectively). Pensions may also play a factor in choosing an employer—if considering a new job, Americans report being nearly twice as likely to pick an employer with a pension than one with a 401(k) plan.

Eighty-seven percent of Americans polled contend that policymakers do not understand how hard it is to save for retirement. Millennials are highly dissatisfied, at 94%. Three-fourths of Americans say a new type of pension plan described in the survey is a good idea. More than 90% would favor a new pension plan that is available to all Americans, is portable from job to job and provides a monthly check throughout retirement for those who contribute.

Even though retirement is in the distant future, virtually all Millennials agree that the retirement system is under stress and needs repair (95%), and that lawmakers need to make retirement a higher priority (90%). They also believe that those with pensions will have a more secure retirement (89%) than those without, and 94% say the lack of pensions for Baby Boomers is creating stress for families and the economy. Millennials are especially supportive of a new pension system (84%), with 88% saying they would consider participating.

Employers can provide a more pension fund like plan within the 401(k) plan model. This includes offering ONLY professional managed portfolios. Take away too many options and improve results.

Please comment or call to discuss how this you and your employees.

Posted via email from Curated 401k Plan Content

  • Employers Making Retirement Readiness a Top Priority
  • Managed Portfolios and Your 401(k)
  • Fiscal trouble ahead for most future retirees
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Managed Portfolios and Your 401(k)

The ideal retirement plan will provide professionally managed portfolios only. By providing this type of plan your employees and yourself will realize improved results and less investment anxiety. This combined with investor coaching will result in a more pension fund like plan.

Common Sense on Mutual Funds: New Imperatives ...
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (Photo credit: Wikipedia)

How important is choice in your 401(k) options? Do you want to have a set of 10 or 20 mutual funds and investments from which you get to choose your retirement portfolio allocation?There’s a concept gaining momentum in the retirement planning sphere that reduces 401(k) investor choice. This old, revitalized idea is the managed portfolio.

Simply, it’s a portfolio comprised of several investments managed by someone else. The idea is that an expert is changing your retirement investments, as needed, when economic tides call for a reallocation. All you have to do is contribute money, and it’s managed for you.

The industry may be looking at this model because, statistically speaking, investors don’t fare as well on their own; the average 401(k) investor will benefit, in the long-term, from using expert advice in one form or another. Still, some investors enjoy spending time researching their investment options and setting their own allocation. These people may not react favorably to a 401(k) plan that eliminates their ability to self-manage.

Some employers already offer 401(k) managed portfolios, but current incarnations generally allow employees to choose whether to use the option. If you lost the option to select your own investments, would it bother you? It’s unclear whether self-management could ever be edged out.

I have to be honest. I like the idea of managed portfolios. But–and this is extremely important–it must be done well. A good managed portfolio 401(k) plan must:

–Have well-managed underlying investments. It requires good mutual funds that have performed well through market ups and downs relative to their peers in the same asset class, and a fund manager has been with the fund through these ups and downs and has managed the fund in accordance with the parameters of its prospectus.

–Only offer portfolios that are diversified across several asset classes. Retirement investors need to protect their nest eggs with investments that span multiple asset classes so that, when one class experiences volatility, the retirement portfolio can glean stability from the other asset classes.

–Offer several portfolios in order to provide appropriate options for all employees.

–Help employees to select the appropriate managed portfolio based on the individual investor’s risk tolerance, timeline to retirement, retirement goals and personal preferences. This shouldn’t be a guessing situation. Your employer or the financial services company providing the portfolios should provide a questionnaire that helps you pinpoint the appropriate portfolio for your current needs.

Employers can provide a more pension fund like plan by following these principles. This alone will improve results and reduce anxiety.

Please comment or call to discuss how this affects you and your employees.

Posted via email from Curated 401k Plan Content

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Why bad funds stay in your 401(k)

When you are dealing with actively managed mutual funds you will always have some bad funds in your portfolio. The thought that someone can predict which fund managers will beat the market seems attractive. The problem is the Wall Street bullies have convinced you that it can be done when in fact it cannot. The markets are random and unpredictable. You should invest accordingly, with the help of an investor coach.

Reach Skilled Volunteering
Reach Skilled Volunteering (Photo credit: Wikipedia)

Among funds whose trailing 3-year performance was in the lowest-ranking decile, “non-trustee” funds were almost three times as likely to be removed the following year (29.6%) as trustee funds (11.9%). Did the keeper funds reward their administrators’ faith by rebounding? Not in the short run: The researchers found that, on average, those trustee funds went on to underperform their benchmarks by 3.6% in the year after they survived the cut.What keeps slacker funds from getting expunged? As MarketWatch’s Ian Salisbury has reported, many trustee firms offer employers pre-packaged rosters of funds, an arrangement that can keep individual funds from getting closer scrutiny; the trustees also often cut employers a break on administrative costs if the employers let the trustees have more leeway in picking funds.

But there’s another factor in play: The bad funds don’t seem to bother employee-investors that much. Plan members, of course, could vote with their feet and leave these funds behind (ideally, in favor of index funds where underperformance would be less of an issue). But according to the NBER study, while 401(k) investors tend to chase good performance and pour money into hot funds, they’re less likely to pull their assets out of a poor performer—unless, of course, the trustees take it out of the plan. Evidently, inertia trumps disappointment.

Most employers do not realize that they are accountable for the funds in their 401(k) plan. These same employers, mistakenly believe the person selling them the plan are accountable for the funds in the plan. To find an adviser willing to accept responsibility for fund choices, you must have them agree, in writing to serve as the ERISA 3(38) investment manager.

Please comment or call to discuss how this affects you and your emplyoees.

Posted via email from Curated 401k Plan Content

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Too Many 401(k) Options Could Hurt You

The Wall Street bullies make money when money moves. Therefore these bullies have a vested interest in keeping you trading. Consequently 401(k) plans have been sold with many options to facilitate trading. By providing a more pension fund like plan employers will reduce employee anxiety and improve results.

Studying...
Studying… (Photo credit: fanz)

Investment Options and 401(k) PlansIyengar found the same phenomenon applies to investing in retirement plans. Many people don’t participate in their company 401(k) plans. She conducted a study and concluded that once variables like age, income and company were controlled, the biggest reason for a decline in 401(k) enrollment was the over-abundance of choices.

When a 401(k) plan offered only two investment options, 75% of employees participated. When 59 investment options were available, however, the participation rate dropped to 61%.

Expanding on this study, Iyengar examined the impact that more investment options had on the 401(k) participants’ asset allocation. For every additional 10 investment options available, the average 401(k) participant’s equity allocation fell by 3.28%. Some neglected equities altogether.

This is significant because stocks usually generate better returns than bonds or cash over long periods. Lower equity allocations can be the difference between a well-funded retirement and a 401(k) plan that comes up short.

How to Combat Choice Overload

One of the easiest ways for companies to combat choice overload is to avoid offering too many different options. Procter & Gamble increased sales of Head & Shoulders shampoo by 10% when it reduced the number varieties available from 26 to 15

The best alternative for employers is to offer a more pension fund like plan to their employees. By providing an age appropriate portfolio you will not only improve participation but also improve results.

Please comment or call to discuss how this affects you and your investments.

Posted via email from Curated 401k Plan Content

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Employers Making Retirement Readiness a Top Priority

English: Proportion of pay to save.
English: Proportion of pay to save. (Photo credit: Wikipedia)

Employees are beginning to realize they cannot rely on public pension plans for retirement security. The 401(k) plan must become more of a pension fund like plan. The less decisions the employee has to make the greater the success. Remember your portfolio si like a bar of soap the more you touch it the smaller it gets.

“Employers understand that financial wellness is more than what workers are doing today in terms of savings in their retirement programs—that it’s evaluating whether their long-term investment strategies are positioning them to be ready when it comes time to retire, and whether other priorities are getting in the way,” said Patti Balthazor Björk, director of Retirement Research at Aon Hewitt. “Helping workers get an accurate picture of their future needs and whether they are on track to meet those needs, and helping them create a roadmap for achieving those goals is paramount.”To help workers reach their retirement goals, employers continue to offer and promote the use of investment advisory tools. More than three-quarters (76 percent) currently offer target-date funds as a way to provide workers with a simple and straightforward approach to investing. Of those who do not offer target-date funds, 35 percent will likely add this option in 2013. Managed accounts and online third-party investment advisory services also continue to gain popularity (64 percent), up from just 40 percent in 2012.

“To ensure that a worker’s investment risk exposure appropriately matches their needs given their age and other factors, it is critical that 401k investors periodically rebalance their portfolios. However, we know that most rarely, if ever, do so because they are overwhelmed or unsure about their investment choices,” explained Björk. “Features like target-date funds and managed accounts take some of the guess work out of investing, which can help workers stay on track with their savings goals.”

Employers are beginning to realize that their employees need help in reaching their long term financial goals. The 401(k) plan has become the sole source of retirement for most Americans. The need for a more pension fund like plan has never been greater than now.

Please comment or call to discuss how this affects you and your employees.

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