Investment Planning

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Saving for Tomorrow with TED Talks

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If you haven’t heard of them before, TED Talks (TED stands for Technology, Entertainment, and Design) offer a wealth of inspiration and discussion points. As their tagline says, they truly have Ideas Worth Spreading. At The Center, we regularly discuss insightful TED video talks whether they offer thoughts on personal growth, practice management or investing.

One of my favorite TED Talks was recorded in November 2011 and featured Shlomo Benartzi. Benartzi is an economist in the field of behavioral finance and his work and studies seek to help improve an investor’s chances of saving to meet goals such as retirement. Anyone who thinks that they might need to save for the future – and that should encompass practically everyone – could benefit from viewing this video. 

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the speaker and not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment decision.

Active Investment Management

What do you believe?  We spend a lot of time discussing what we believe from an investment perspective; constantly challenging our assumptions all with the goal of constructing the most efficient portfolios to fund our clients’ most important financial goals. One of our firm’s core investment beliefs is that “Active management with skilled managers can beat passive indexes in full market cycles.” 

It is our contention that there are investment managers out there that CAN outperform the indexes AND that we have the capability to search them out. No small feat to be sure – but our firm’s 27 year history is helpful.  There are plenty of studies on both sides of the aisle in the active vs. passive debate. There are advantages and disadvantages to each style. Not surprisingly, the findings are usually consistent with how the author manages money. Proponents of a passive style often focus on the efficiency of markets and investment costs.  As you might expect, active managers (i.e., consultant) have higher costs over passive index investments.  Investment expenses are one of many criteria to consider when allocating capital between active and passive investments.  Most importantly, we focus on returns after all fees and expenses. 

We had a conversation amongst our investment committee recently – our question:  “Does a belief in active management imply that there is no place for a passive investment in any category under any circumstance?” I don’t think so.  As an active management proponent I can think of at least two circumstances where a passive investment might be appropriate.  

  • If we believe (based on research I would hope) that there is an asset class that is difficult for a manager to outperform.

OR

  • If we cannot find a manager that we have a high conviction in to outperform the index. 

If one of the two criteria is met then a passive choice might be appropriate. In the end, investment strategies and vehicles are merely a means to an end. The active vs. passive debate is sure to continue.  We believe that in most environments there are active managers available that provide value after all fees and expenses.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Expressions or opinion are as of this date and are subject to change without notice.  Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.  Investing involves risk and you may incur a profit or loss regardless or strategy selected.

Invest Like a Woman

Face it, there are some things men tend to be better at and some things come easier to women.  Let’s take investing for example.  Studies have shown, time and again, that women make much better investors over the long-term than men*.    Two factors are at play here: risk and emotion. 

Investment decisions are often driven by emotion more so than anything else for individuals (and professionals too!)  And, sorry guys, but as I’m sure you are aware we women have written the book on emotional swings.  As such, we are more in tune with our emotions as we have to control these swings often.  Yes, I know it seems impossible that we are controlling our emotions but believe me, you’d hate to see us when these emotions run unchecked. 

Women tend to take fewer risks than men in many aspects of life.  Just look at my major injury history versus my husbands (not that I’m keeping score)

And that is only in the 16 years since I’ve known him! 

While taking less risk normally means less return, it does not always work out that way.

By using and managing our emotions instead of repressing them, like men stereotypically tend to, women may make better investment decisions. Because most women have fine-tuned (I’m not claiming perfected) our impulse control, we're more likely to resist overreacting which could lead to trading too much on the latest CNBC report, whether that be selling during market panics or jumping on the bandwagon too far into a rally.

I’d love to see these studies continuously revisited by the academics to see if this data holds true especially if we experience a much longer run to this bull market.  But for now it might be a good idea to get in touch with your feminine side!

*Inside the Investor’s Brain (Wiley Trading, 2007)

Boys will be boys: Gender, overconfidence, and common stock investing, by Brad M. Barber and Terrance Odean, The Quarterly Journal of Economics, February 2001.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Past performance is no guarantee of future results.

The Anxious Investor

Ripple effects from the global financial crisis and recession of 2008 are etched in our memory.  In a previous post, A Fear-Driven Investor, we discussed the tendencies investors display when decisions are driven by fear or greed.  When fearful investors can let go of what scares them about the market, the course evens. It’s not unlike letting go of fears in other areas of life. 

When I think of the fear-driven investor, I think about what happens to confidence and decision making when we feel worried and anxious. Have you ever tried doing anything when you are worried and anxious?  I think about the first time I went kayaking on Lake Huron with my sister. 

My sister was more expert than I.  I imagined a big, smooth pond and a sleek little kayak but I really had no idea what I was doing especially when the storm clouds blew in.  My idea of kayaking was to relax more and stay physically fit; however I was a bit fearful and anxious about tipping over when the waves got bigger!  

What happens to anxious kayakers?  I quickly found out! When your body is loose, you can move the boat and make adjustments.  When you get anxious and stiff, the boat becomes tippy and unstable. Once I understood how one decision affected another, I began to relax and I started doing much better.  

If you are driven by news rather than an investment plan, you may end up tipping your portfolio like I tipped my canoe. 

Want to avoid getting “wet”? Here are 3 tips for investors to help reduce anxiety and promote a smoother ride:

  • Set realistic expectations - Trying to refine the future to a point where you will never be surprised creates a headwind that is hard to overcome.
  • Understand the effect your financial decisions have on other financial issues - Focus on your own behavior, not the market’s behavior. 
  • Re-evaluate your investment plan periodically - Small and consistent course corrections are just as important as the plan.

I still kayak on occasion, and I’m always reminding myself to stay relaxed and in the flow. It’s something I remind myself on a regular basis when planning investments as well. It’s much easier to keep your boat afloat when you loosen up, especially when the investment waters get choppy.

Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Investing involves risk, including risk of loss.

Tools of the Trade

Just as Luke Skywalker had his light saber and Emeril Lagasse his garlic (BAM!), the Investment Management business has…FI 360®?? 

Most investors have heard of Morningstar, which is a financial data provider that provides data on literally millions of different investments.  This is very widely used by the investment community for up-to-date data and financial analysis on a wide variety of investment instruments.  To a lesser degree, you may have even heard of Ibbotson Associates, recently acquired by Morningstar, which has data on portfolio construction and implementation.  

Most, however, even within our wealth management profession, have not heard of another tool we use called FI360®.  This company offers a full circle approach to investment fiduciary education and support. 

This software helps us with our fiduciary responsibility to monitor our investment managers on a regular basis and gives us a red flag if there is something to be concerned about. These are some of the factors FI360® reviews:

  • Manager Tenure – alerts us to recent leadership change
  • Composition of the portfolio – alerts us if the investment is taking a larger amount of risk in some aspect of the portfolio by greatly over- or underweighting something compared to other like investments
  • Expenses – alerts us to increased or higher than average expenses
  • 1, 3 and 5 year returns – alerts us if an investment is underperforming like investments over those periods of time. 

When looking at this information on a regular basis we can understand where we need to dig deeper to make sure the investment is in the best interest of our clients’ portfolios. It’s important to look often but not too often. Keeping an eye on short-term trends can obscure more meaningful long term data. For us, that means a semi-annual review of our recommended investments using FI360® analytics. 

Keeping on top of investments requires tools of the trade. We feel fortunate to have fi360 to get the job done and hope you find the proper tools to help you achieve investment success.  May the force be with you!

http://www.fi360.com/main/about.jsp

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Logic & Taxes Don’t Mix

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A question I get a lot at income tax time is, “Can I deduct investment management fees?” While this should be a straight forward answer…we are talking about the tax code where nothing is simple.  As a law professor of mine once said, never put logic and income taxes in the same sentence.  Your tax preparer is the best person to consult with on this issue – but in the meantime, here are some guidelines:

The first place to start when trying to determine if an investment management fee is deductible or not is to determine the type of account (Taxable, Traditional IRA, Roth IRA, 401k, etc.).

Investment management fees paid in taxable accounts (such as single, joint or living trust accounts) are a tax deductible expense and reported as a miscellaneous itemized deduction on Schedule A of Form 1040.  That’s the easy part – but not the whole story. There is more to the story because not everyone can actually benefit from miscellaneous itemized deductions.  In order to benefit from your miscellaneous itemized deductions, in aggregate they must exceed 2% of your Adjusted Gross Income. As an example, if you have Adjusted Gross Income of $75,000, then the first $1,500 of miscellaneous itemized deductions are not deductible – only the balance can be deducted.  To further confuse the issue, if you are subject to the Alternative Minimum Tax some or all of these deductions could be disallowed as a tax preference.

For accounts such as Traditional IRA’s, ROTH IRA’s, and 401k’s, my interpretation of the tax code is that investment management fees paid by assets in the account are not deductible nor are they considered taxable income. In summary: not deductible (but you don’t pay income on the fee either). That said, some will argue that the fee is deductible, just as it is for taxable accounts discussed above. Lastly, some tax professionals will suggest that the fee is deductible if paid with money outside of the IRA. For example, some tax professionals will suggest that fees attributed to IRA type funds be paid via a separate check making them deductible.

As you can see, there are some gray areas on this topic.  What can you do?

  • Be sure to share the fact that you paid investment management fees with your tax preparer
  • Break the fees out by account type (taxable versus other types)

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS we are not qualified to render advice on tax or legal matters.

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Marilyn’s Book Review - The Little Book of Economics

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As the story goes, ask two economists or five what the future will bring and what is going on and you get as many answers.  Finally, there is a clear, well-written book that is concise and up-to-date giving us some insight as to why this situation exists.  More importantly, the book explains the basics of economics in a readable manner, discusses the booms and busts of the past 20 years and, in particular, the most recent downturn.  The author discusses how economic concepts and institutions affect our lives.  There are few charts and graphs, just logically written explanations infused with story examples and some humor. So, what is the book?

The Little Book of Economics:  How the Economy Works in the Real World written by Greg Ip, an educated economist and journalist.  He is the U.S. editor for The Economists and has written for the Wall Street Journal and the New York Times. This 250-page book is available at bookstores, through Amazon and can be downloaded to your Kindle or iPad.

As one reviewer said, “Finally, an economics book that is neither dull nor inscrutable and won’t put you to sleep. This little gem can turn all of us into sophisticated and educated citizens”.  I agree. 

Opinions are those of the author and not necessarily those of Raymond James.  This is not meant as an endorsement of the listed material by Raymond James.

The Gambler

While I’m not a big country music fan, one of the few country songs I can sing along to is “The Gambler” by Kenny Rogers.  While Kenny certainly knew how to make money, he also had a pretty good idea of how to keep it:  “You gotta know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run.”  There’s a valuable lesson for investors in those lyrics. 

When investing most people (and professionals too), spend a lot of time deciding which investments to buy and little time understanding when to sell.  Having a security selection process and understanding what you own and why you own it is important to the investment process, as you can read about here, but it may be even more important to successful investing to have a proper sell discipline.  

Part of your process, even before buying a security, should be to outline reasons you would hold the investment even, perhaps, through periods of underperformance and also to establish factors that would cause you to sell it in the future.  At The Center for Financial Planning, Inc. some of our potential sell reasons include: 

  • Key personnel departure
  • Attainment of your price target
  • Increased correlation to other investments; and so on.

Having these points in mind makes it easier and much less emotional when thinking about selling a position.  

While it is usually best to buy and hold over longer periods of time, it is a good idea to play devil’s advocate with your portfolio.  Have you heard of the endowment effect?  Simply put the endowment effect states that once you own something you start to place a higher value on it than others would.  A way to potentially mitigate the endowment effect is to ask yourself, “If I were to build a portfolio today would this security be part of it?”  If the answer is “no” then it may be time to sell the investment and purchase something with greater growth potential from this point forward. 

Knowing when to hold ‘em and fold ‘em doesn’t come easily. But with some thought, you can successfully time when you buy and when you sell, because you never want to have to walk away … or worse yet … have to run!

James Montier.  Little Book of Behavioral Investing.  2010

The information contained in this report does not purport to be a complete description of the developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.  Investing involves risk and you may incur a profit or loss regardless or strategy selected.  Consult a Financial Advisor before implementing any investment strategy.  Links are being provided for information purposes only.  Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors.  Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

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Three Legged Stool Strategy

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Generating income in retirement is one of the most common financial goals for retirees and soon to be retirees.  The good news is that there are a variety of ways to “recreate your paycheck”. Retirement income might be visualized using a “Three Legged Stool”.  The first two sources or legs of retirement income are generally social security and pensions (although fewer and fewer retirees are covered by a pension these days). The third leg for most retirees will come from personal investments (there is a potential fourth leg – part time work – but that’s for another day).  It is this leg of the stool, the investment leg, that requires preparation, planning and analysis. The most effective plan for you depends on your individual circumstances, but here are some common methods for your consideration:  

  1. Dividends and Interest
  2. 3 – 5 Year Income Cushion or Bucket
  3. The Annuity Cushion
  4. Systematic Withdrawal or Total Return Approach 

Dividends & Interest:

Usually a balanced portfolio is constructed so your investment income – dividends and interest – is sufficient to meet your living expenses.  Principal is used only for major discretionary capital purchases.  This method is used only when there is sufficient investment capital available to meet your income need after social security and pension, if any. 

3-5   Year Income Cushion or Bucket Approach:

This method might be appropriate when your investment portfolio is not large enough to generate sufficient dividends and interest. Preferably 5 (but no less than 3) years of your income shortfall is held in lower risk fixed income investments and are available as needed. The balance of the portfolio is usually invested in a balanced portfolio. The Income Cushion or Bucket is replenished periodically.  For example, if the stock market is up, liquidate sufficient stock to maintain the 3-5 year cushion. If stock market is down, draw on the fixed income cushion while you anticipate the market to recover.  If fixed income is exhausted, review your income requirements, which may lead to at least a temporary reduction in income. 

The Annuity Cushion

This method is very similar to the 3-5 year income cushion. A portion of the fixed income portfolio is placed into a fixed-period immediate annuity with at least a 5-year income stream.  This method might work well when a bridge is needed to a future income stream such as social security or pension. 

Systematic Withdrawal or Total Return Approach

Consider this method again if your portfolio does not generate sufficient interest and dividends to meet your income shortfall. Generally speaking, a balanced or equity-tilted portfolio in which the income shortfall (after interest income) is met at least partially from equity withdrawals.  Lastly, set a reasonably conservative systematic withdrawal rate, which studies suggest near 4% of the initial portfolio value adjusted annually for inflation. 

After helping retirees for the last 27 years create workable retirement income, we have found that many times one of the above methods (and even a combination) works in re-creating your paycheck in retirement.  The key is to provide a strong foundation – or in this case – a sturdy stool. 

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors.  Dividends are not guaranteed and must be authorized by the company’s board of directors.  There is an inverse relationship between interest rate movements and fixed income prices.  Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.

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