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The Four Challenges to Building Wealth: Velocity of Money

As we continue our series exploring challenges to building wealth, we need to introduce the concept of velocity of money. In personal finance, the velocity of money refers to using your funds to build wealth more quickly by getting your money to do more than one thing at a time.

This is a well-kept secret of the financial industry and one that can transform your relationship to your personal finance.

How Can I Use My Money Now?

Accepting the status quo is not going to help grow your money and efficiently organize your personal finances. You’ve got to ask yourself “how can I use my money now to make things better down the line?”

Much of our culture and advertising is devoted to making you chase the “next great thing,” the next bit of instant-gratification, and that next hit of dopamine. While pervasive, it’s not a sustainable model for your life.

Choosing to embrace the following behaviors now while delaying those small bits of gratification will make your future life much more enjoyable:

  • Pay down debts
  • Build an emergency fund
  • Invest in your future
  • Invest in yourself
  • Save for retirement

Those choices may not offer the immediate reward promised by so much of our flawed, impulsive human nature and the marketing campaigns designed to take advantage of it. But in the long run, those small changes now will have a big impact on your life.

The Magic of Compounding

The reason why your choices today have a magnified impact on the future is because of two things: Lost Opportunity Cost and Compounding.

A dollar invested today has the opportunity to compound over and over through the years, building its overall value. You shouldn’t underestimate the awesome power of compound interest; If you’ve ever struggled with high interest credit card debt, you know how the momentum of compounding can build.

Turning this principle into a positive is why we stress the idea of “time in the market” rather than “timing the market.” Building your wealth is a process, and compounding can work for you if you consistently make intelligent choices over time.

When to Refinance Loans

If you’ve taken out loans, you’ve likely received countless direct mail advertisements for refinancing programs. While these seem like a great way to lower your payments, you must be cautious when evaluating them. Many come with early repayment penalties and fine print rules that heavily favor the program and lender rather than you.

If you have a loan you’re looking to refinance- such as your mortgage- look first for ways to remove your private mortgage insurance (PMI) after you’ve built 20% equity or more in the home. You can also look into ways to change your repayment term so that you can pay loans off sooner and save yourself thousands of dollars in interest. Any time a loan term can be updated in your favor it’s worth exploring new options. Just be sure to evaluate the entirety of your new solution and not just the face value of the monthly payment.

Make Your Money Work Harder

The real way to build wealth and increase the velocity of your money?

You have to be as demanding of your money as you are of yourself.

Are your investment and savings strategies underperforming? Update them. Is accelerating interest of outstanding debts hurting your overall quality of life? Rebalance your strategy to pay off debts sooner or explore refinancing options to ease some of the burden. Personal finance is complex, but solving issues can be as simple as acknowledging a problem exists and then finding a workable solution to that problem. We’ll discuss visibility and organization in our final post in this series, but know this: accepting lackluster performance will lead to a stressful and lackluster financial life.

Ready to learn how we can help you increase your money’s velocity to build wealth quicker and more effectively? Complete this questionnaire to see which Jarred Bunch Consulting service is right for you.

Four Challenges to Building Wealth: Rules of Financial Institutions

In continuing our exploration of the four challenges to building wealth, we’re looking into the rules of financial institutions today. We’ve written at length before about how financial institutions operate to get and keep more of your money. Take the time to educate yourself on these behaviors and how they get hold of your money and keep your finances operating in their ecosystem. These are definite hurdles for your wealth, but these principles can be adapted so you can grow your own personal finance.

Treat Your Finance Like a Bank

One way you can apply the rules of financial institutions to your own wealth growth is to remove some of the “personal” from your thinking about personal finance. Think of your funds as though you are a bank:

You want your money

  • Banks want you in their ecosystem. They want you to keep your funds with them, as much as possible. Work to hold onto your money with the same dogged determination. Eliminate high-interest debts and reduce what bills you can.

You want your money systematically

  • Sure, automatic deposits are convenient and secure, but that systematic deposit is more fuel for the bank to use while they hold your funds. Use these systems to your advantage, but keep track of your automatic payments and deposits. Cancel those you don’t use and keep your money systematically storing away for the future.

You want to hold your cash for a long time

  • Your balance year-over-year should be a gradual march upwards. Holding onto your funds and committing to the security of that growth will provide your life the security and abundance you deserve.

You want to give as little away as possible.

  • You never know when you’re going to need your emergency fund. You never know when the opportunity to invest in your dreams will arrive. Keep your funds around for when lighting strikes- good or bad.

Know All of the Details

Do you know your accounts’ rate of return? What about the annual percentage rate? Do you know if your mortgage or other loans have a prepayment penalty? Banks and other financial institutions don’t enter into a financial agreement or partnership without knowing every detail, and neither should you.

The details you don’t know can be what leads to financial disaster. Take the time to read, know, and clarify the details that the banks love to hide in the small print – it can be eye-opening.

Make Your Money Do Multiple Things at a Time

Sticking all of your savings in one account doesn’t make sense. In today’s uncertain world, you need to use a diversified strategy to make your money work harder for you. Other methods of saving your money include:

  • An Emergency Fund: This should be kept separate from your main checking and savings account. Keep the funds hard to access to prevent impulsive use and take advantage of automatic transfers to keep it juiced up. Most experts recommend that you have 3-6 minimum of living expenses in your emergency fund.
  • Investment Accounts: Exchange traded funds and mutual funds are ways to invest your money in shares of companies’ stock. You’re buying a piece of their business, in the hopes that the performance improves and more value is generated for your account over time.  
  • Retirement Accounts: 401Ks, the now-rare pension, and IRAs are types of deferred-income retirement accounts. Different types have different tax-incentives, and each offer crucial ways to build your nest egg for eventual retirement.

If you can find ways to accomplish more than one thing with a dollar, you’re hitting the big leagues alongside those institutions that are too big to fail. Spreading your investments out amongst these different accounts helps shield you from market volatility that can eat your returns, as well as providing vehicles to achieve different goals with your money.

Don’t Accept the Status Quo

The real secret to making your personal finance work as hard for you as the banks’ treasury does? Arm yourself with ambition and an abundance mindset. Know that there is always another option to explore that can benefit you in different ways. Don’t accept the current situation or enter into lopsided agreements that offer no benefit to you. If you are not growing or improving in your current financial situation, or career, or hobby, or workout routine why stay there? The world is full of alternatives worth exploring until you find something that works best for you.  

Ready to conquer the traditionally lopsided relationships between individuals and institutions? Learn more about personal finance with us at JB Wealthfit.

Investment Noise: Know It and Forget It

There’s a simple strategy for being a successful investor – tune out the investment noise. The noise that we’re bombarded with daily, from the talking heads on television and radio, to the printed press. The noise that is perfectly exemplified in the video clip above.

I’ll never forget watching that whole thing play out. Jon Stewart wasn’t the only one to come down hard on Jim Cramer – he got flack for his Bear Stearns praises right before their collapse from all sides. But again, he was just creating noise, creating hype in an already tense time, not unlike many of his media counterparts.

The Noise is Never-ending

This isn’t meant to pick on Cramer. He’s just the lucky example that I remembered when sitting down to write this article. The truth is, investment noise is endless.

Look at what took place in the last few weeks – the Dow saw its biggest drop since mid-May over the growing tension with North Korea. International markets in Asia and Europe followed suit. After these reports surfaced in the media, the VIX, a volatility index widely used to gauge market fear, soared by 44% – its highest level since Trump was elected. That’s how big of an effect investment noise can have on our sense of well-being.

It seems there’s more noise than ever right now. Noise about foreign affairs. Noise about politics. Noise about noise. There is no shortage of pundits attempting to explain how all of this swirling mayhem will impact the market and your investments.

All this noise is irrelevant to long-term investors. Since we use lifetime strategies, the noise of the day makes no impact on our investment decisions. However, even the best investors can easily get spooked by investment noise overload.

Related: The 6 Most Common Bad Investor Behaviors to Avoid

That’s because what we read and listen to ultimately affects our actions. According to a study from Pew Research, we listen for bad news almost three times more than we listen for good news. This negativity bias makes it appear that bad news overwhelms good news, even if that’s not the case in reality.

In reality, a 1% drop in the stock market is normal – even to be expected. But when it happens, the stories in the media are all negative, full of gloom and doom. The positive rebounds that follow rarely get as much attention.

Investment Noise: Know It and Know How to Forget It

For you to find true investing success, you have to know investment noise when you hear it, and be able to forget it just as fast.

Related: These 9 Principles Can Lead You to Investing Success

Shawn Achor, Harvard educator and New York Times bestselling author, has become one of the leading experts on the connection between happiness and success. His 2013 book, Before Happiness, has a key focus on noise-canceling strategies. Achor used this strategy to explore the link between tuning out irrelevant information (noise), and how this increased the likelihood of you reaching your goal.

So, if reaching your full financial potential is at the top of your list, tuning out investment noise is going to play a critical role in reaching that goal.

Achor even defines what noise is, and classifies it into these four categories:

1. Unusable. Information is likely to be noise if your behavior will not be altered by it. For instance, look at our human tendency to obsess over current events and the short-term effect it may have on your portfolio. If the event in question has no effect on your long-term strategy, then you need to ignore the noise.

2. Untimely. I can’t stress this enough – by the time you hear about it, it’s too late. You’ve missed your window of opportunity to capitalize on the market movement. Frequently engaging in stock picking or market timing will almost always cause you more harm than good. If the story could change tomorrow, it’s noise.

3. Hypothetical. This is the most popular type of investment noise. Everything you hear in the media is based on what someone thinks will happen. Listening to expert predictions and market gurus is noise 99% of the time. That’s because it’s all hypothetical until it actually happens.

4. Distracting. An easy way to tell if something is noise is if it distracts you from your long-term goals. Changing your investment allocation based on which hot stock the talking heads are endorsing today is not a long-term strategy for success. Heck, it’s not a strategy at all – it’s simply a distraction.

Why Does it Matter to You?

Successful investors don’t let noise dictate their actions. Instead, successful investing begins with a real plan. We believe that plan should be rules-based, and built on your values. This helps remove emotion and subjectivity, and provides a policy by which you can make better investment decisions. Not only that, but our strategies are designed to mitigate market volatility, which makes for a smoother investment ride. This is key in reducing your vulnerability to investment noise.

Related: The Best Way to Guide Your Investment Decisions

Stay the course, recognize and tune out the noise, and you will have better investing results for it.

Compound Interest – Myth or 8th Wonder of the World?

Einstein is credited with saying compound interest is the 8th wonder of the world. While I’m nowhere near as smart as Einstein, I have good reason to believe there is only partial truth in his statement. Specifically because of two myths surrounding compound interest that we will discuss here.

Myth #1: I will earn 7% consistently.

Mathematically, the power of compound interest is incredible. The financial industry consistently tells you to save early, save often, save (then invest) as much as you can. At an annual growth rate of 7%, you will be a millionaire at retirement. You’ve seen the graph. Just save a little each pay period, and it will growth exponentially. And they’re right…to a point.

To maximize the effects of compounding interest, two elements must exist: 1) Time. 2) Consistency.

To get the exponential growth Einstein was referring to takes years. How many years? Most likely 20+. If you are in your 20’s and methodically saving for retirement, compounding works in your favor. If you are 55 and want to retire in 10 years, it won’t help you. Most people don’t realize this until it’s too late.

Another big problem with compound growth is figuring out where you’ll get that consistent return. Interest rates are near zero and bonds aren’t returning anywhere near 7%. The stock market is the only place to achieve an annual growth rate of 7%. At least that’s what the market has delivered over the past 20 years. But does that mean you’ll get a 7% compounded return? Probably not…but, why?

The type of compounded return from the market is only seen over very long periods, at least 20 years or more. So, for long-term savings like a 401k, you can expect to achieve this type of growth as long as you leave it there. The problem is when you have to take distributions on that account. You never know what the market will be doing at that time. If it’s in a bear market, you better have another source of funds to draw from, otherwise you’ll start eating principle. This is called sequence of returns risk. You can see the grand fluctuations in the chart below.

Myth #2: It’s easy to withstand wild market fluctuations.

The other problem is whether you have the stomach to weather large drawdowns. Large, and even not-so-large, market drawdowns have a direct impact on your ability to compound returns. In the early 2000s it took several years just to get back to even. In 2008 there was such a drop that many investors sold out, just in time to lock in big losses. Withstanding wild fluctuations over a 20-year plus period is hard, very hard. You have to be true to yourself to know if you can handle it. Otherwise you’ll never see compounded returns from the market.

Why Does It Matter to You?

These are big issues for our clients. Many of whom are entrepreneurs or business owners who’ve made great sums in their businesses. While they still want to grow their investments, the overriding goal is Warren Buffet’s two rules of investing: 1) Don’t lose money. 2) Never forget rule #1.

To help our clients accomplish this we use rules-based trend following strategies. Our strategies use trends to capture upside momentum, as well as trying to limit drawdowns. This provides downside risk management with upside market potential. By providing a smoother investment ride, our investors are more likely to stick with the strategy long-term. That’s when they have a better chance to capture impressive compounded returns. That’s when they have a better chance of reaching their full financial potential.

These 9 Principles Can Lead You to Investing Success

When people talk of investing success, it’s often around some new stock picking method, or that one time they got extremely lucky and were the exception, not the rule. In a rising market like we’ve had for the last several years, there are many people who feel like successful stock pickers. There are many people who feel like they’ve gotten lucky – repeatedly. That’s because a rising tide lifts all boats.

True long-term investment success comes from a lot more than stock picking methods or luck. But no one likes to admit that – talking about discipline and smart investor savvy doesn’t always make for the best “look at me” story to tell your friends. That’s why you have to decide what’s more important to you, long-term success and a secure future, or a good story about “that one time…..”

Having sound principles to guide your investment decisions and strategy choice are one of the best ways to ensure your ability to reach your full financial potential.

Here are some of the investing principles we abide by, and educate our clients on:

1. Markets are in a drawdown more often than not. Yes, they market may be down 3% today, but that’s normal. Don’t be alarmed, but also, be prepared that you may see red once in a while. That’s why you should have an investment strategy that is designed to “miss” the worst days, and cushion the blow to your money.

2. A rules-based, disciplined approach is the best way to ensure long-term success. You should fully understand how and why you’re invested the way you are. An Investment Policy Statement is one of the best ways to do this. If your investments don’t align with your IPS, you shouldn’t invest in it. Period.

Related: The Best Way to Guide Your Investment Decisions

3. Volatility eats your returns. Not risk. Risk doesn’t drive your returns, it just affects your probability of losing money. Volatility directly affects your returns, and wild fluctuations can quickly erode your wealth. This is where diversification isn’t enough – it only mitigates risk. You must have a strategy in place that mitigates volatility as well.

Related: Volatility Gremlins are Killing Your Bottom Line

4. Buy and hold is easier said than done. “Set it and forget it’ is the mantra of many investment firms. This isn’t necessarily bad advice. Over the long-term, the market has produced a compounded return around 7%. However, the real return fluctuates between up 40% and down 60%. Most people can’t hold on during those drawdowns, and wind up selling at the wrong time.

5. It’s better to miss the worst days and the best days in the market. Buy and hold advisors say you must capture the 10 best days in the market, as that is what drives your overall return. And they are right. But, if you miss both the best and worst days, (by using a trend following/momentum strategy, for example) your return could be even better. Historically, research shows that the best days come during the worst bear markets, so we’d prefer not to participate in the full bear periods.

6. Markets are not always efficient. Markets rarely act the way text books say they should. Investors can and do act irrationally. Human behavior can and does move markets, and can cause prices to remain too high or too low for long periods of time. This is why momentum exists. Your strategy must be capable of capitalizing on these market realities.

7. Consistent returns are more beneficial than big pops here and there. Consistent returns, even if they’re lower, will increase your dollar growth over the long-term because it means you’re offsetting volatility. This makes for a much smoother, less emotional investment ride. In turn, it can prevent you from making bad decisions with your money. This is a result of a strategy that controls volatility.

Related: 4 Reasons Why Market Timing Fails as a Money Maker

8. Look at the downside first, not the upside. Every smart investor knows it’s not about your chance of success – it’s about your chance of failure. And remember, failure is not an option. Therefore, your strategy must minimize downside risk.

9. Investing costs matter. These can erode your returns as much as volatility. Your strategy should work to lower the cost of expense ratios and be tax efficient. Remember that a good advisor can be worth a reasonable fee. Just be sure they’re providing you with value-based solutions, not selling you products.

Why Does it Matter to You?

The principles listed here don’t encompass every good investing principle out there. But, if you act based on these principles, you’ll find that you’ve built a strong foundation for long-term investing success. Remember, this is your life. You get one shot, so make sure you do everything you can to make it successful, and succeed in living the life YOU want.

Our strategies are built based on these principles.

Want to see how you can minimize downside risk, mitigate volatility, increase consistent returns, and protect your bottom line? Click below.

Volatility Gremlins Are Killing Your Bottom Line

If you have an investment account you’ve no doubt heard the terms risk and volatility. Every investment has elements of each. But what does it really mean for you?

Understanding Risk

Risk is the uncertainty of loss. Risk is the likelihood that your investment will lose money. You know there is risk involved when investing in the stock market (whether through individual stocks, mutual funds, or ETFs), and you likely understand much of this risk. What may be less likely for you to understand is that increased risk does not mean increased return. It just means increased probability of losing money.

You must understand that risk does not drive returns.

As you faithfully save into your investment or 401k accounts each month (and you should be!) you may expect, and are often told, that the market provides a 7% real return on average. The actual return will fluctuate with a standard deviation of around 20%. This means the return normally fluctuates +/-20%.  Over time an investor would expect the returns to go up and down, but average around 7%. The kicker is that your wealth won’t compound at this rate, but more likely at a rate of around 5% per year. Why is that?

Wild fluctuations can kill your returns – Volatility Gremlins!

Volatility Gremlins

As a measure of risk, volatility refers to the amount of fluctuation in returns, and is typically stated as standard deviation. The lower the volatility the better. Ed Easterling, of Crestmont Research, coined the term Volatility Gremlins. Volatility diminishes compounded returns over time. This matters to you  since compounded returns are what you get to spend  (you can’t spend average returns).

As portfolio volatility increases and returns become more erratic, the portfolio’s compound returns (what you actually get) get lower and lower compared to the average returns. Here’s an example from Easterling to show the volatility gremlins “eating your returns.”

Even a diversified portfolio can exhibit large volatility spikes and variations regardless of risk. For example, the charts below show the volatility of a typical portfolio consisting of 60% stocks/40% bonds and with the S&P 500.

Why Does it Matter to You?

Controlling portfolio volatility is important for every investor – it’s what protects your bottom line. It’s especially important for retirees, or investors who are approaching retirement. As you get closer to retirement, a major investment decline means your portfolio won’t have enough time to recover, which may require you to postpone retirement to make up for the shortfall. Traditional asset allocation and diversification does very little to address volatility.

That’s why we’ve designed our investment strategies to do just that. When you reduce volatility, it increases the consistency of your investment returns, and can make for a less stressful, even enjoyable, investment ride. You can also realize higher compounded returns (we’ll discuss how volatility impacts your ability to compound returns in a future post, The Myth of Compounding).

The Results Are In: Female Investors Are Beating Men

Guys, here’s one thing you may want to rely on your wife for – investing advice. That’s right, the evidence has been mounting, and the conclusions are clear – women are better investors than men.

Surprised? You’re not alone. Even most women themselves believe they are far less superior than men when it comes to investing. There are plenty of studies to show that. But when you examine the actual performance results, women’s portfolios regularly outperform men’s.

Recently, one firm wanted to bring this knowledge to the forefront. State Street Global Advisors put up a statue of a girl facing off with the Wall Street bull. The media dubbed her as “the fearless girl.” It got a lot of attention, this girl making such a bold statement on a street where it’s considered a man’s world.

Executives from the company commented to multiple news outlets that they strategically placed the statue there on International Women’s Day, to kickstart the conversation of women and investing. In particular, the fact that women are indeed better investors than men.

Boys Will Be Boys – A Good Thing When Investing?

Terrance Odean and Brad Barber, professors at Berkley’s Haas School of Business, are some of the most prominent researchers on the gender gap in investing. Based on their research in the 90s, they found that men traded 45% more than women. This research led to their paper Boys Will Be Boys, which has been published in dozens of scholarly journals.

Actively trying to time the market commonly leads to lower returns. Odean and Barber site this as the biggest cause of the widening gender performance gap. Men’s active trading during their research period caused them to have average returns that were a full percentage point lower than women.

In comparison, they found that women tend to be better at behaving in ways that lead to long-term investing success. This means adhering to some of the golden rules of investing, such as staying in the market, weathering market fluctuations without making drastic changes, not taking unnecessary risk, and sticking to the strategy that best aligns with their goals.

Essentially, women tend to be “buy and hold” investors, heeding the advice of experts like Buffett and Bogle. They’re much better at investing than they give themselves credit for.

The Results Are In

According to research from Fidelity, women outperformed men by 0.4% in 2016. That may not seem like much, but it can add up over time. Especially given the fact that the study found women have outperformed men for the last decade. Women also saved 9% of their paychecks, compared to an average of 8.6% saved by men.

That’s how women can end up with a lot more money than men overtime.

Betterment PhD research scientist, Sam Swift, also built a similar case. In a recent study, Swift went back through 60,000 investment accounts from January 1, 2012 through January 6, 2016, and examined the account holder’s activity. Here are three key findings from the study:

1. Women logged into their account 45% less frequently than men. Less logins mean a decreased chance of seeing your portfolio when it’s down, which can lead you to make a bad decision.

2. Women take less risk than men. They had a tendency to stick with their recommended allocation model, while men deviated from the advice, usually taking more risk than suggested.

3. Women tend to be much better at staying disciplined during market fluctuations. They changed their allocation 20% less frequently.

Yet, despite the volumes that this evidence speaks, another study from Fidelity found that 8 in 10 women hold back from talking about their finances and investing, simply because they lack the confidence to do so. The majority also don’t think they’re smart enough to talk to a professional advisor on their own, and believe that they are grossly underprepared for retirement.

How can this be what women truly think, when they’re in fact the investing alpha? Welcome to the conundrum of conundrums in finance.

The Psychology Behind It All

On the surface, this evidence simply highlights the difference in performance between male and female investors. But when you dig deeper, it gives you a unique look into the psychological make-up of men and women.

Odean and Barber’s research led to an important finding – men tend to be inherently overconfident, and it shows up in their investing behavior.

This is what they believed led to men’s active trading, and in turn received most of the blame for their poor performance. Overconfidence bias has been most commonly linked to the bad behaviors of marketing timing and stock picking, which can wreak havoc on your portfolio, no matter your gender.

Conversely, the female psyche causes women to be inherently risk-averse and goal-oriented.  They are focused on the long-term rather than the short-term, and don’t feel the need to trade in and out.

This lead to better performance for women. However, women’s lack of investing confidence causes many of them to not invest, remain ultra-conservative, and avoid seeking professional help. That’s when their nature becomes destructive.

Perhaps that’s the reason the conundrum still exists – women behave in a way that leads to solid investment performance, but they think in a way that fosters little to no confidence in their abilities.

Why Does It Matter to You?

The point of the studies cited here, and this article, aren’t to dub one gender as the savvier investor. It’s also not to claim that gender is a direct driver of investment success. Rather, it’s to better understand the role psychology plays in investing, and where the strengths of each gender lie.

Each gender could learn something valuable from the other. Case in point, women need to become more confident when it comes to investing and their finances. Not because of gender equality, but because it’s vital common sense given the reality we face today. According to Pew research, 40% of women already out-earn their spouses. Furthermore, nine in 10 women will be the sole financial decision maker in their household at some point in their life.

Men could benefit by humbling themselves to the market and reducing active trading. In addition to Odean and Barber’s findings, DALBAR’s 2016 annual report on investor behavior proves that bad investor behavior is the leading cause of under-performance, and contributes to poor performance over the long-term.

In essence, both men and women would benefit by understanding that a lack of confidence, as well as overconfidence, can hurt your performance.

You get one shot at this financial journey – one. Failure is not an option. So, you need to manage your money in a way where there is a very small possibility of failure. Above all, that means taking a seat at the table. It also means staying disciplined according to your investment policy statement, and implementing an investment strategy that aims to limit downside exposure and mitigate volatility, while still capturing potential. Now, that’s a philosophy that can work no matter what gender you are.

Warning: Checking Your Portfolio Often is a Good Way to Lose Money

8 billion. That’s the number of times per day Americans collectively check their phones. Probably because smart phones have become the hub of our lives in a certain way – virtually anything you need, there’s an app for that. Including your investment performance. But frequently checking your portfolio is a good way to lose money – and it’s getting harder not to look.

Stop Checking Your Portfolio

We pride ourselves on making technology available to you that puts your entire financial life in front of you, in real-time. That makes checking your investment performance as simple as pressing a few buttons. And we intend to keep advancing that technology, to make managing your financial life as easy and convenient as possible.

With that in mind, call me crazy for what I’m about to say – You should stop looking at your investments.

There are plenty of reasons for why you should stop constantly checking your portfolio. At the top of the list is your mental and financial health. While you may think checking your portfolio often is a good habit, in reality this leads to increased stress, impulsive, emotionally-charged behavior, and poor investment performance.

The market is a volatile animal – it’s a toss-up every day whether it will be up or down. And here’s a secret – the market is in a drawdown often.

It can even fluctuate hundreds of points one way, and back the opposite way before the closing bell rings. The average daily swing for over 40 years has been +\- 1.4%. So, the more often you check your portfolio, the greater your chances of seeing it when the market is down.

And when you see negative numbers staring at you, your emotions will stop you in your tracks every time. Thanks to a little thing called myopic loss aversion.

What Behavioral Finance Tells Us

Myopic loss aversion was first introduced by Daniel Kahneman and Amos Tversky in 1984. This sliver of behavioral finance states that people dislike losing money more than they like making it. In other words, we feel the pain of a loss much more deeply than the happiness of earning.

Investors who check their portfolios often will perceive investing to be riskier than investors who don’t. According to Betterment’s data on login frequency, checking your portfolio quarterly instead of daily can reduce the chance of you seeing a moderate loss (of -2% or more) from 25% to 12%.

In a 1997 study by Kahnerman and Tversky, the idea that loss aversion reduces investor returns was confirmed once again by their research. Take this statement straight from their abstract:

“The investors who got the most frequent feedback (and thus the most information) took the least risk and earned the least money.”

In other words, the more time you spend checking and analyzing your portfolio, the more likely you are to let your emotions take control.

The Beer Goggles of Investing

Think of loss aversion as the beer goggles of investing – you’ll be more likely to see a loss the more often you check your portfolio. This can then make you think your investments are riskier than they really are. If you listen to your emotions, you can end up making some bad decisions – changing your risk tolerance, selling or liquidating funds, and so on.

And very rarely do these decisions end up helping you. Research proves that investor behavior is the leading cause of under-performance, and contributes to poor performance over the long-term.

DALBAR’s annual study of investor behavior shows that in 2015:

1. The average equity mutual fund investor underperformed the S&P 500 by a margin of 3.66%. While the broader market made incremental gains of 1.38%, the average equity investor suffered a more-than-incremental loss of -2.28%.

2. The average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 3.66%. The broader bond market realized a slight return of 0.55% while the average fixed income fund investor lost -3.11%.

3. In 9 out of 12 months, investors guessed right about the market direction the following month. However, the average mutual fund investor was still not able to keep pace with the market, based on the actual volume and timing of fund flows.

You also need to remember that your portfolio is made up of several different asset classes, according to your risk tolerance. Even when the market is “up,” one or more of the asset classes in your portfolio may be down. If you happen to be checking your portfolio at this time, these losses will bother you more than the fact that the market is up will excite you.

Decisions incited by loss aversion don’t align with your most important goals that are outlined in your Investment Policy Statement. And remember, if a decision doesn’t meet these criteria, then you shouldn’t act on it. Period.

Why Does it Matter to You?

It’s your right to be able to check your portfolio essentially on-demand. Part of your job as an investor is making sure that you’re satisfied with your results.

Our job is to help you overcome bad investor behavior, and make smarter financial decisions. To reach your full financial potential, you need to implement strategies that account for the human side of investing, and in turn, help make for a smoother ride. That’s why we created strategies designed to mitigate the impact volatility can have on your bottom line – something that traditional strategies often ignore.

Investing is uncomfortable – it’s one of the most unnatural things you will probably do in your life. You’re putting your wealth on the line, when putting your wealth on the line is something you wouldn’t inherently do. But you have to get comfortable with being uncomfortable. You have to realize that investing is a game won by checking and stressing less. Rather than struggling to fight the market and potentially causing your financial health to suffer from harmful side-effects, take a break from checking your portfolio until your advisor says it’s time for a review.

4 Reasons Why Market Timing Fails as a Money Maker

Markets will easily rattle you. A couple hundred-point swing here. A doomsday headline there. But before you go and flee the market or try to strike it big through market timing, you have to stop and consider the consequences.

The Dilemma

Market timing may be one of the most controversial topics around – many say it’s impossible, while the exact same number of people will claim they can do it perfectly every time.

It’s true that markets move in cycles and general predictions can be made about what to expect. But, this is exactly where investors get themselves in trouble. These facts do not mean that you can accurately and consistently get in and out of the market at the exact right moments.

Why, then, do investors continue to engage in this self-destructing behavior? Maybe it’s the same reason that we’re all pulled to the neon lights on the Las Vegas Strip – we all want to prove that we can win big and beat the game. Sometimes you do, and when you do, luck is almost a bigger factor than anything. But most of the time you don’t. When you don’t, it’s easy to keep pouring money into the machines to try and prevail. What usually happens is you fly home with your tail between your legs, in a deeper hole now than when you arrived.

4 Reasons Why Timing the Market Fails as a Money Maker

Here are four reasons why timing the market fails as a money maker:

1. It almost always hurts your performance over the long-term. A recent analysis of investor behavior from SigFig found that during the market correction in October 2014, roughly one in five investors reduced their exposure to equities, mutual funds and ETFs, with 0.6% selling 90% or more. While this may have seemed like a smart move to investors at the time, SigFig found that the more investors sold, the worse their investments performed. Investors who panicked the most had the worst 12-month trailing performance of all groups.

2. It can cost more than you will make. Market timing prompts investors to be active. While active investing isn’t necessarily a bad thing, it can be costly. And the more active you are, the more you will pay in costs. Every time you make a trade, you will incur fees associated with the cost of making that trade. Investment decisions also have tax consequences. If you try to time the market and make trades without regard for the tax impact, you can find any returns you may make quickly squashed by a tax bill.

3. You have to be right twice. Gambling is easy – you only have to be right once to make it big. Market timing is a different animal. You have to be right twice in order to win, because investing has two sides, buying and selling. To be a master at market timing, you have to be able to sell at the precise moment that the market has reached the top of its climb and can’t go any further. Then, you have to be able to buy at the precise moment the market bottoms out, before it rebounds. Do you have the guts to make that bet?

4. Your focus is on reward, not risk. Investors who time the market are in it to reap big rewards – no matter the risk. You’re chasing the high of making it big, of greed. When you don’t get that reward, you run into big problems. A focus on winning doesn’t prepare you for a loss. You have no exit strategy when things go south, and they often will. In case you’ve forgotten, higher risk doesn’t guarantee higher returns. It just means a higher chance of you losing your money. If you have a high probability of losing money, you better have something to catch you when you fall.

Why Does It Matter to You?

The truth is that investors who adhere to one extreme or the other – impossible or possible – regularly find themselves less successful than investors who try to find a happy medium.

Everyday market volatility can do enough harm to your returns, without you throwing in a little extra turbulence yourself from trying to time the market. In fact, volatility is what makes market timing difficult to do, because markets can rise and fall close together. Reaching your full financial potential depends on engaging in the right types of active investing, on a balancing act between your active and passive strategies. And this doesn’t include market timing. The only form of active investing proven to work is trend following. To take it a step further, indexing almost always outperforms active investing. This is why your main goal as an investor shouldn’t be to strike it rich from one big pop of luck. Rather, lower volatility and consistent returns – even if they’re lower returns – will increase your dollar growth, make for a smoother investment ride, and help you avoid bad investor behavior by keeping you disciplined.

Our investment strategies are built on these very principles. They move with the market, but can avoid the big declines. They limit investor exposure while still capturing upside potential. Remember, it’s not timing the market that drives your success, but time IN the market.

The Best Way to Guide Your Investment Decisions

Whether you’re just beginning to invest or are a seasoned investor, there’s one question that we all have. It’s a question that I guarantee you’ve asked yourself at one point or another – why do some people succeed at investing while others fail, and how can I be one of the successful people?

When it comes to investing, you can be your own worst enemy. This is because money is emotional, and when volatility strikes, it causes you to react emotionally – even irrationally or dangerously. Emotionally driven investor behavior often hurts you more than it helps you. And there are numerous emotional triggers and traps that will plague you almost daily as an investor.

Before you put that first dollar into your investment account, you have to understand this – you have to know what can deter your success. You also need to determine the best way to invest based on your personal values, wants and most important goals.

So, how can you avoid bad investor behavior? How do you know that you’re making the right investment decision? What is the overarching philosophy that’s guiding your decision making process? Easy, refer to your Investment Policy Statement (IPS).

Crafting Your Investment Policy Statement 

An IPS is one of the best ways to guide your investment decision making process. It’s one of the best ways to make sure that your personal values and most important goals are at the heart of your strategy. It’s one of the best ways to avoid bad investor behavior and maintain a disciplined approach. It’s also a great way to set expectations between yourself and your wealth manager, and to make sure all fees are completely transparent.

Drafting a basic IPS is relatively easy, and should be done in conjunction with your wealth manager. Here are the main components that should comprise your IPS:

Purpose. What is the purpose of your IPS? This should be easy, because we’ve already given you the answer. Your IPS is meant to foster a disciplined approach to investing by guiding your decision making process based on your most important goals and personal values.

Statement of Values. If can’t name your top five most important values, do that now. These are things that money enables you to do, the things that fuel your “why.” They should be defined and clearly laid out in this section of your IPS.  All of your investment decisions/actions should support these values, so this is a good way to remind yourself of what’s motivating you.

Statement of Objectives. These are defined based on your values. For example, if family is your number one value, one objective of your investment account(s) may be to send your children to college. Other elements such as time horizon, risk tolerance and performance expectations should be detailed here as well.

Duties/Responsibilities. It’s important to know what role everyone on your investing team will play. Who is on your team and what role do they play? How involved will you be? Do you want a partnership with your advisor, or do you want them to take everything off your plate? What is the duty of the actual investment manager? These are important things to stipulate. This sets expectations upfront, and enacts accountability for each team member.

Portfolio Selection. What are the actual investments that will comprise your portfolio? This should be based on previous elements, such as your risk tolerance and time horizon. Here is where you put your portfolio on paper, so that you can clearly see each individual investment and what the complete picture looks like.

Performance Monitoring. It’s important to know what dictates the selection of investments in a portfolio, and what determines their hiring and firing. This is an important question to ask and understand. This is where that criteria should be explicitly stated. Again, base decisions on facts, not opinions.

Costs. Any fees associated with your portfolio should be accurately communicated, and your advisor should be nothing less than 100% transparent with you. Period.

Review. Don’t overlook this last part. You need to stipulate how often your IPS should be reviewed. You should review your IPS annually at the least. Some people will need to review theirs quarterly. This ensures that as life changes, your investment strategies change with it.

Why Does it Matter to You?

While this is a simple template to help get you started, your IPS should be unique to you. After all, investing isn’t about a “number.” It’s about maximizing your financial potential with good habits, control, and value (what you value personally and what money enables you to accomplish). This is why you have to protect yourself against those bad decisions that can deter your success. When you have an IPS, the choice is simple – if the investment doesn’t align with what’s stated in your IPS, you shouldn’t invest in it. Period.

Investing Lessons from Market Bubbles

We all know that money plays on emotions, and that emotions drive behavior. And it says a lot about this very fact when the scientist responsible for the law of gravity can be swept up in an investment that for a time, defied the laws of science. Sir Isaac Newton may have been one of the most gifted minds in the scientific community, but in his day to day life, he wasn’t much more than a gullible participant in one of the biggest market bubbles of the early 1700s.

Even Smarties Can be Suckers

No matter how advanced your intellectual capabilities may be, there is a sobering fact that unites investors everywhere: We’re suckers for a good get rich quick strategy. Throughout history, financial bubbles have tugged at the cords of greed, seducing investors with their promises of instant gratification.

The bubble that got Newton was the South Sea Bubble of 1720. It was centered on a company that was promised a trade monopoly by the British government for taking over the debt that was the result of the war against France. The investment grapevines blazed and the press continued to fuel the fire. The South Sea Company shares grew almost eight-fold between January and mid-July 1720. But just as all good things come to an end, the bubble burst in September of that year. By October, share prices had dwindled to their January price.

So what does Newton and other investors from the South Sea Bubble have in common with investing victims of modern day bubbles? Quite a bit according to Richard Dale, a London-based economist, author and historian.

Investing Lessons to be Learned from Market Bubbles

Dale recently gave an interview to MarketWatch where he points out investing lessons from the South Sea bubble that can still apply to the modern investor/market bubble. Here are a few of them:

MarketWatch: How did Isaac Newton get lured into such a disastrous investment?

Dale: Newton invested around £3,500 in early 1720 and sold out in late April of that year having doubled his money. However, like so many others, he was induced to get back into the market in the summer of 1720 at the height of the bubble and ended up losing £20,000, around £3 million in today’s money.

MarketWatch: What modern-day financial bubble is most similar to the South Sea Bubble?

Dale: From the standpoint of the South Sea directors, the bubble represented a giant Ponzi scheme (e.g. Bernie Madoff) in that it proposed to pay dividends not from profits but from sales of new shares for cash. From the point of view of investment behavior, the bubble resembles the dot.com boom/bust when the valuations of dot.com companies lost any connection with underlying value or realistic profit projections. (The Bank for International Settlements pointed this out at the time). I don’t think much has changed. Bubbles are inherently instances of how crowds can go crazy.

It’s exactly the same mentality. ‘You gotta play the game while the game is going on.’ The fear of losing out and losing market share, that mentality of knowingly taking some pretty big risks because everyone else seems to be doing the same, seems to be a feature of markets from time to time.

MarketWatch: So it is pretty easy to get sucked into a bubble?

Dale: I think even way back in 1720, the people that got sucked in, in many cases, were very ordinary people. You didn’t have to be rich. Mini bubbles were developing. It was the poor man’s bubble. For a penny you could buy a share subscription. Everyone was being sucked in at that time…I think one of the features today is one of the ordinary returns from conventional safe investments is now so low that people are inclined to look for riskier alternatives.

MarketWatch: What are signs that an investor is involved in a venture that could end badly?

Dale: There are different things…It’s painful to watch when people are offered higher-than-normal returns, and higher returns than you could reasonably expect. They tend to fall for it time and again. That happens and people lose their money. You only offer supernormal returns if you’re offering supernormal risks.

What we’re seeing all the time with these is that …investors are offered good returns when good returns are hard to come by. That’s not going to change…Madoff was a slightly more sophisticated one because returns were not that out of the ordinary. That kind of thing is just going to go on and on. People are greedy and will jump at the prospects of better-than-normal rates of return.

MarketWatch: What else drives people to get involved in risky financial ventures?

Dale: In some cases, it is the desire to be brave and do something different, the excitement. Or it is a retired person wanting to do something interesting, make their lives rather exciting…high risk, high return. There are plenty of savvy investors who are prepared to take a high risk, but once you get to a certain stage you don’t need to do that. Some people just don’t know they’re taking the risk…a lot of people are very financially naive. It is unfortunate, but that is the case.

Why Does it Matter to You?

At their core, market bubbles from all time periods have the same effect on investors: They convince them they’re onto something groundbreaking only to have it blow up in their face. A good way to avoid being swept up in the market mania is to create an Investment Policy Statement.

This statement will guide how you invest by aligning your money with your values and goal for reaching your full financial potential. If an investment doesn’t match the criteria of your IPS – which many found in market bubbles won’t – then you shouldn’t invest in it. Period.