DENVER, Colo (March 5, 2019) – With today’s stock market swings, Steve Booren’s new book, Intelligent Investing: Your Guide to a Growing Retirement Income, will help readers understand how to retire intelligently. It will equip them with the knowledge needed to get started, as well as an easy to follow investment strategy.
https://prosperion.us/wp-content/uploads/2019/03/youtube.jpg7201280Steve Boorenhttps://prosperion.us/wp-content/uploads/2017/02/whitelogosized.pngSteve Booren2019-03-19 13:44:482019-03-19 13:44:48PRESS RELEASE: Are You Prepared for Volatile Stock Market Swings During Retirement? Steve Booren’s new book, Intelligent Investing, Shows You How
Financial advice is usually broken into three steps. First, define your goals. Where do you want to go? Next comes a plan. This is the recipe for working toward your goals with actionable and measurable steps. Then comes implementation when you start your plan.
The first two steps lay out the “What” of your financial future; the last deals with the “How.” All too often investors make it through the first steps with optimism and progress, only to be led astray with the last. This is when experts, products, advertisements, advisors, and everyone else in the financial world tell you their way is best – and all the others? Well, they just don’t measure up.
Of course, this leaves investors with a problem. Who can you trust? The stakes aren’t small. This is a life’s savings for many. It’s the money investors will rely on for the next 30-40 years or more. But with so much doubt and confusion, how are they to choose in whom to trust?
It’s a hard question. Trust is built over time. Like exercise, it takes repetition. Do what you say you’re going to do when you say you’re going to do it, and always, always, act in the best interest of the client. But relationships take time to foster. If you’re looking for help, you may not already have a trustworthy relationship with someone in finance. So in blank-slate instances like this, I think it helps to examine the agendas of everyone involved. With a clear understanding of their “Whys,” it’s easier to make an informed decision.
Who are the players on the financial scene? I think there are four big ones: financial manufacturers, media, salesmen, and advisors.
Financial manufacturers are companies that offer mutual funds, bonds or other investments. They monitor demand and develop products that people think they want. Their sales are generated by uncertainty in the marketplace. Want to switch stocks? They will sell them to you and profit from the transaction. Want to add some bonds? Again, they will sell those to you too. When your doubt leads to an action, they generate revenue. As a business, their agenda is profit – not your financial future.
So, if manufacturers profit from doubt, doesn’t it benefit them to create more of it? In the media, a 24-hour news cycle has led to a focus on the here and now. In this fast-paced environment, “talking heads” share their opinions and financial forecasts with almost zero accountability. These differing viewpoints generate doubt, questioning, and in the end, change. Consider the number of sponsored talk radio shows, many of which are really 30-minute financial commercials. These shows help fund station’s operations. Again, as a business, their agenda is profit – not your financial future.
Next, we have financial salesmen and advisors. After 40 years in this industry, I’ve seen great salespeople and great advisors, but rarely are they the same person. How do you determine which is which? Ask yourself this: is this person helping me to transact or are they helping me to get where I want to go? Do they ask questions and listen? Do they really understand my goals, my fears and risks, my most significant opportunities, and my strengths? If so, do they help me along the way?
Investments in and of themselves don’t create peace of mind, income growth, generational wealth, or a lasting legacy. Products alone won’t do this. Does your advisor solve a problem or sell you a product? Are they a fiduciary who puts your interests first – before the company they work for and their own personal interests? Who writes their paycheck? If they work for a company, you might consider where their loyalty lies: to you or the company? This was one of the driving forces behind my choice to be independent. Without a company pushing products on me, I have the opportunity to provide clients with advice that works for them.
The goal is to find someone who’s agenda aligns with your own. Retirement planning isn’t a one-time project. It’s an ongoing partnership that works to ensure you have enough money, long enough, to find the freedoms you desire. It’s a large endeavor and one that usually requires a team of people to help tackle the complexities, paperwork, and strategies needed to make it happen. In choosing members of your team, examine their agendas to decide if the foundations of trust are there. Over time, let trust develop. If something doesn’t seem right, get a second opinion. This work may seem monotonous, but it can make all the difference in your financial future.
https://prosperion.us/wp-content/uploads/2017/02/whitelogosized.png00Steve Boorenhttps://prosperion.us/wp-content/uploads/2017/02/whitelogosized.pngSteve Booren2019-03-17 13:25:112019-04-08 13:35:45Improving Investor Behavior - Doubt, Sold with a Smile
As financial advisors, we receive questions about all types of investments. Here’s one we recently heard:
I am a doctor, and many of my friends and fellow doctors are getting into real estate. There is a group that invests in local deals in our area, and it is easy. All I have to do is write a check (no property management, no upkeep, dealing with tenants, realtors, leasing agents, etc.). What are your thoughts on investing in real estate?
It could be a sign of the times or where we are in the economic cycle, but questions about real estate keep popping up, especially from investors in Colorado. This is a stark change from2008 – 2012 when no one wanted to go near real estate. That’s when prices were inexpensive and investing in real estate made sense. Today, with prices up significantly, that’s not the case.
Before I can address whether real estate investing would be a smart thing for the doctor, I ask a few simple questions:
Have you maxed out your 401(k) or SEP/IRA?
Have you maxed out a “back-door” ROTH IRA? (This can be a smart move for people wanting tax-free compounding, but are excluded from a ROTH due to high compensation or maxed out 401(k) or SEP/IRA.)
Have you paid off your high-interest debt?
Have you paid off your mortgage?
Are you funding college for your children?
Are you making contributions to a taxable investment account, and taking advantage of the lower tax rates on dividends?
Do you have enough cash for emergencies?
Do you have excess cash flow where you spend less than you bring home monthly?
If the answer is “no” to any of these questions, then putting money into real estate or any other alternative investment may not be wise. Checking off these items first is smart for most savers, especially before investing in something for which they may not have expertise, experience, or what I like to call a “Natural Advantage.”
This stems from a simple idea: understand your “Why.” What is the Why for each of your investments? What do you want to gain from each?
As with any investment, some people are interested in cash flow or income, while others may be looking for price appreciation. This is true regardless of how you invest (real estate, stocks, ownership in businesses, etc.). However, certain investments may offer strengths in one area and weaknesses in other. Investing in the S&P 500, for instance, provides price appreciation and a small dividend income. Investing in real estate keeps up with inflation on average, making it a poor choice if you’re hoping for price appreciation. Unless you’re good at timing market cycles or taking on risk with leverage such as borrowing money to make that investment, you may want to stay away from this. Interesting how people forget how leverage works against investors when prices fall.
With an understanding of your “Why,” ask yourself these questions:
How will you invest? There are many different ways to invest today. You can buy direct ownership of companies via their common stock, or through others using methods like Electronically Traded Funds (ETFs). With real estate, you can buy, own, and manage properties on your own, invest in syndicated pools, or invest in publicly traded Real Estate Investment Trusts (REITs). Anything more complicated than a REIT typically requires additional time and effort, and results in less diversification and liquidity. Taxes are also a consideration with each of these structures.
What are my risks? A significant risk with private real estate is the lack of diversification. Essentially you are putting your faith into a single region, city, area, type, and economy. It takes a decent portfolio of properties to gain any level of diversification, especially when compared to a basket of stocks. This holds true for those investing in the private stock of a company compared to publicly traded shares. Diversification and liquidity are essential items people may not consider. If things go wrong, these can make or break a portfolio.
How does this investment fit into your overall financial plan? Real estate is an investment, so it needs to be considered along with your other investments as part of your financial plan. You might believe that real estate helps to diversify a portfolio of publicly traded companies since their values may not move in the same direction as the broader stock market. While this may be true, the headwinds of liquidity and determining the value can be problematic. Stocks, on the other hand, are priced every day, from 7:30 am – 2:00 pm MT. You can see, buy, and sell them – all from your phone –at a moment’s notice. Liquidity can be an advantage as well as a disadvantage.
What is your edge or expertise? This might be the most critical question. What do you know about this area and type of investment? Any investor should be able to answer this about all of their investments. Do you have expertise in this area? Do you understand precisely in what you are investing? If not, are you outsourcing this expertise to someone with the right insight, experience, or knowledge? Are their interests aligned with yours?
Questions like those posed by the doctor often lead to more questions, and not simple answers. The key is to understand your “Why.” Know why you want to invest in something before asking if you should. This simple principle can help keep investors out of trouble and on a better path to the goals in their financial plan.
https://prosperion.us/wp-content/uploads/2017/02/whitelogosized.png00Steve Boorenhttps://prosperion.us/wp-content/uploads/2017/02/whitelogosized.pngSteve Booren2019-02-17 13:21:132019-04-08 13:23:54Improving Investor Behavior - Know the "Why" for your Investments
The financial markets have given investors quite a ride in the past few months. Not only have we seen a drop in the prices, but the volatility and multiple-percentage point days seems to have investors feeling a little seasick. The first thing queasy people want to do is to get off the boat.
This is precisely the wrong thing to do, and here’s why. Thinking fluctuation is bad for investors is an incorrect perspective. Volatility is the stock market’s way of redistributing shares of great companies to their rightful long-term owners. When markets fluctuate as they have in recent months, it is nearly impossible to divorce yourself from the emotional powers of fear and greed. The price per share does not matter unless you are buying that day, or selling that day. Other than some “entertainment value.” daily fluctuation should be ignored.
“What makes stocks valuable in the long run is not the market. It is the profitability of the companies you own,” said Peter Lynch in Worth Magazine in 1995. I agree with him. Over time, as corporations become more valuable, sooner or later, their shares will sell for a higher price. Our contention is you need to remember you own a piece of successful, profitable companies.
When we experience moments in time like this past December, when prices decline temporarily, investors tend to get anxious and fearful. If you are a long-term investor who likes owning great-dividend paying companies, the short-term volatility should be irrelevant. If you do not intend to sell any investments for many years to come, why worry about what the prices are today? Short-term price declines cause many investors angst. That emotional heartburn is just one reason it makes sense to work with a professional who can help keep you on track.
Managing assets for the past 40 years, I often feel I live in what might be described as “investment manager hell.” When clients are excited, almost giddy with enthusiasm about the markets and economy, I tend to feel frustrated. Moments like these usually mean my favorite companies are overvalued.
On the other hand, when clients express frustration, anger, fear, or anxiety about the markets, I tend to get excited. This usually means my favorite companies are on sale. Remember that falling prices mean better deals. Sometimes the price drops so far, and so hard, it’s possible to pick up shares at fire sale prices. Panic can be an expensive emotion for sellers.
Rather than get caught up in the moment, we look toward the future and what opportunities may develop for investments. This is investment manager hell – loving “bad” markets and hating “good” markets. When you work diligently to understand each of the companies you may own as an investor, you realize the value of the company is the sum of the future cash flow that a company may generate. The higher the current stock price, the more over-valued that investment may be. Likewise the lower the price today, the more under-valued that company is. It may be a great time to increase ownership shares.
When prices are temporarily falling, rather than be fearful, recognize that you can purchase company stocks at lower prices. Try to make it a practice to never react to prices alone. A more in-depth, thoughtful approach is necessary to evaluate how a company is doing. Price should not be the sole indicator.
How you think about market fluctuation and, more importantly, what you do about it takes discipline. Often investors let fear and greed override common sense or wisdom. Don’t be a victim of the market. Remember, the best time to buy is when things go on sale. Investments are no different. Great investments, like great products or services, sometimes offer discounts. When they come along, buy them, keep them for a long time, and watch how that investment can pay off.
https://prosperion.us/wp-content/uploads/2017/02/whitelogosized.png00Steve Boorenhttps://prosperion.us/wp-content/uploads/2017/02/whitelogosized.pngSteve Booren2019-01-20 13:18:292019-04-08 13:20:19Improving Investor Behavior - Learn to Love a Falling Market
With the year coming to an end, 2018 has been a tumultuous one for investors. For the first time in 46 years, there has not been a clear winner in any asset class: from stocks to bonds, emerging markets to precious metals. As of this writing, none are on track to generate a better than five percent return according to a recent article from Bloomberg.
With all the attention focused on performance and prices, little appreciation goes to what we believe is a most desirable outcome for investors: income. Why do most people invest? Income. Whether you need that income today or tomorrow, most people invest with the belief that doing so will provide, maintain or improve their income.
The problem is that some people tie their income directly to the performance of the market. After all, this is a common approach to investing. Step one, buy a bunch of your desired asset class (stocks, bonds, gold, real estate). Step two, hope their value improves over time. Step three, sell the asset when the price has improved usingthe proceeds for income.
But this is akin to a farmer selling off acres of his land. As the area shrinks, so does his ability to grow crops. It becomes a downward spiral, eventually leading to asset depletion. This is what we refer to as a Growth for Income strategy, whereby growth is necessary for continued income. Years like 2018 make this strategy hazardous. No growth means it’s time for the farmer to sell some land, which makes generating income next year even more difficult.
The other risk is that of inflation. At a mere three percent inflation rate, the prices of food, fuel, and just plain living doubles every 24 years. That might seem like a long time, but that’s the age range of 60 to age 84. With better access to healthcare, science, innovation, and taking better care of yourself during the retirement chapter of your life, reaching age 84 is more likely. If your income has not doubled from 60 to 84, your standard of living is lower, and for many retirees, this is a problem. Often people do not realize this until it is too late.
So what can be done to protect income, and grow it at a rate that outpaces inflation?
There are many ways to approach this challenge, and you should ask your financial advisor if there’s one that may be a good fit for you. From my perspective, dividends are a solid way to grow income since companies distribute a portion of their profits from the business to investors, usually in the form of cold hard cash. Though not always, these companies are typically successful and established. Their dividend is a point of pride and offers them a vehicle to reward investors for owning their shares.
As a result, some companies maintain a long track record of paying a consistent dividend and even grow that dividend over time. Companies like Colgate, 3M, Coca-Cola, and Cloroxall have a long track record of paying and adding to their dividends. Better yet, as a result of the tax law changes enacted late last year, some companies chose to increase their dividend more than five percent, beating most asset classes this year. As in our farmer example, dividends paid are like income from the sale of the crops. The land is only a vehicle for generating revenue. We call this a Growth of Income strategy.
We believe Growth of income is a better strategy rather than Growth for income.
In times of extreme volatility and uncertainty, it’s easy to get thrown off your plan. But as we’ve seen time and again, abandoning a well-constructed plan in favor of an emotional reaction almost always leads to a poor outcome. This is why we encourage investors to keep an eye on their income, not their portfolio value. My guess is your real estate agent doesn’t call you every 15 minutes with an update on the value of your home. This would make even the best investors a little cranky, although this is precisely what investors do with the stock market. Using a cell phone and app, the value of your portfolio is only a glance away.
So as you wrap up 2018, I’d encourage you to look past the value of your portfolio. Try flipping to page two or three in your statement and find the income line. Did your income improve in 2018? Did it stay the same? Did it go down? Hopefully, your income is rising, and at a rate higher than inflation. Over a long period, this will lead to more choices, more opportunities, and greater freedom.
https://prosperion.us/wp-content/uploads/2017/02/whitelogosized.png00Steve Boorenhttps://prosperion.us/wp-content/uploads/2017/02/whitelogosized.pngSteve Booren2018-12-16 13:09:182019-04-08 13:14:34Improving Investor Behavior - Focus on the Right Number
Regret may be the most enduring and damaging emotion investors grapple with during their financial lives. As financial advisors we see it from both sides: clients either regret having done something, or regret NOT having done something, or more often, both. Like a cancer, regret can crawl into all facets of your financial life and encourage you to make bad decisions. All too often, it’s successful.
What is regret? The way I see it, regret is the revisitation of past mistakes. Maybe someone hit the panic button as the market dropped, only to watch investments rebound in a short period. Perhaps they jumped out at a good time, but couldn’t decide on a “right time” to jump back in, missing out on would-be gains. Investors watch themselves do this over and over each time saying they won’t do it again. Then, when they inevitably do, the regret only deepens. This vicious cycle can pour over into other areas of life. How often have we heard the stories of someone betting their life’s savings just to have the outcome bounce the other way?
One such family was chronicled in the Wall Street Journal in May of 2010. The Potyk family liquidated their investment portfolio to avoid the volatility they had been experiencing. The article listed all the problems with the economy and markets, and that investors were abandoning stocks. Investors felt that this was the smart thing to do the article continued, as they thought the markets would be fundamentally different going forward.
I don’t know what happened to the Potyks. The Journal never wrote a follow up to revisit their story. But I wonder how many years they sat on the sidelines, distrustful of what would become one of the longest bull markets in United States history. And if they did, do they now struggle with the regret of that decision? I imagine they must. This is just one of a thousand stories with similar patterns: emotional reactions to uncontrollable circumstances.
So how can we combat regret? What can we do to learn from past experiences without dwelling on the “woulda-coulda-shouldas?”
If regret is a child, its parents are fear and greed. When markets fall, the fear of loss rears its head. When prices rise, greed and envy of those who are “getting rich” lead to the fear of missing out. Ultimately greed is just another form of fear. Giving into either of these emotions often creates regret. In short, regret is most commonly caused by emotional reactions to uncontrollable events.
Though we cannot control the uncontrollable (like what the market does on any given day), we can manage our reaction. We do this by creating a plan based on a foundation of logic, not emotion. Personal finance is more personal than it is finance, so we try to account for feelings. For example, plans should be designed to encourage people to feel safe and strive to help them achieve the growth they seek. They’re regular reminders in periods of uncertainty and fear. They prevent regret by tackling it at its source. Think about it, when was the last time you heard someone regret sticking to a plan?
I think gratitude is also a potent antidote to regret. It’s easy to question past mistakes and wonder what could have been done differently. All the questions make it easy to lose sight of the answer you chose, and the outcomes of the decisions you’ve made. Ultimately they’ve all led you to where you are now. Isn’t that something for which to be thankful? Something from which to learn? Searching for the gratitude hidden under layers of regret has had a profound effect on me, and has led me to learn lessons from each mistake I’ve made.
For those of you who play golf, you’re probably familiar with the idea that you should not let your past shots influence your next one. And if you play golf, you probably know how hard this is to do, especially if your previous shot sent you looking for your ball deep in the weeds of an adjacent hole. But hey, a bad day playing golf beats a good day working. Make a plan, envision the outcome, and take the shot. Make the next shot a good one, and watch the pain of regret fade away.
https://prosperion.us/wp-content/uploads/2018/10/4gennowlogo.jpg3001200Administratorhttps://prosperion.us/wp-content/uploads/2017/02/whitelogosized.pngAdministrator2018-10-17 15:56:052018-10-17 16:05:574Gen Now Conference
This article is set to appear in the Denver Post in about one week. We felt it was worthwhile to share with our clients now, given the events of the past few days.
Shark Week is among the longest running and most popular cable programs in history. First appearing 30 years ago in 1988, the show has since been watched and celebrated by millions. Why would a program about sharks and their danger be so popular? I think it plays on the emotion of fear, and more interestingly, people’s desire to be a little bit scared.
This is quite the paradox: some people enjoy engaging in an activity designed to make them uncomfortable. The same can be said for horror movies, especially at this time of year. In both circumstances, however, the fear is often wholly unfounded. Sharks are responsible for about six deaths per year, and I highly doubt zombies will be taking over the world anytime soon. Instead, people should be much more afraid of mosquitos with their death toll last year of more than 830,000 people.
My point is this: sometimes our greatest fears are the most unfounded. Whether it’s an oversized fish or monsters under the bed, our worst fears take up an oversized portion of our conscious and drive actions that can be damaging and counterproductive. Fear is a powerful emotion and one you must learn to rein in if you want to be a successful investor.
The chances that either you, a loved one, or a friend have had an incident with, or an ongoing relationship with heightened anxiety are likely. Almost 20 percent of the population expresses some sort of anxiety disorder in a lifetime. It comes from a combination of genes and impactful experiences throughout life. Whether relatively mild, or the cause of full on panic attacks for the victim, it is a disruptive force.
Fear and worry can be associated with any number of events or circumstances, but I’ve found that finance can be a leading cause. This post is written for anyone who has anxiety around their money, or for those with a loved one who might. In either situation, it’s important to understand how to take the “fear out of finances.” In this three part series we’ll talk about how to Process, Plan, and Pursue more comfort and confidence in personal finances and investing, hopefully leading to decreased anxiety for those affected by this part of life.
As you get to know our “characters” by their “style of attachment” (the basis for how we think about and interact with our financial lives), I’ve written the characters to represent the extremes. You, or your peer / loved one, may not feel as strongly one way or the other as the examples, but you may find more similarities to one character than another. Wherever one finds themselves in the spectrum, they are not alone, and these processes can be put into practice for a confident future with your finances.
https://prosperion.us/wp-content/uploads/2018/10/anxiety.jpg5001000Pat Alfanohttps://prosperion.us/wp-content/uploads/2017/02/whitelogosized.pngPat Alfano2018-10-11 14:01:292018-10-11 14:06:23Anxiety and Investing: Taking the Fear Out of Finances
When you are stuck in traffic on the interstate, creeping along, do you find yourself wanting to switch from one lane to another? Do you glance to the left and see the “fast lane,” and are envious of how quickly they are moving? You look for an opening, signal and move over to gain some speed… only to come to a stop. You then notice the car you were following in the lane to the right moves along past you. A few minutes later, it has moved way ahead, out of sight.
This is an illustration to which investors can relate. Making a move from one strategy to another – one that looks more attractive because it is moving along faster than you are –often has the same frustrating result. As with driving, you may take the risk and make a financial strategy change to feel like you are getting ahead, only to find yourself coming to a stop since you made that investment at the wrong time, or for the wrong reason. This is FOMO or the Fear of Missing Out.
Buying an investment in today’s world is rather easy. From apps on your phone to Mutual Fund stores in strip malls, purchasing investments has never been simpler. What previously involved a call to your broker to make an investment purchase is now even easier with these multiple alternatives.Investment companies, however, thrive on investors making changes whether it comes from transaction commissions or asset management fees.
Some financial companies encourage lane-changing behavior, where investors hop from one product or strategy to another, in an attempt to “beat the market.” Frankly, beating the market is a lot of work (and luck). You must buy something before the value rises, sell it high, and reinvest those dollars in the next low-value stock that goes up in price. One’s ability to do this consistently is practically non-existent. Yet people believe they can, spurred on by a variety of messaging we receive. The bottom line is that investing takes discipline.
We also know that FOMO has a close cousin: Comparison. Comparing is said to be human nature. We tend to examine what we have, make, how we look, and where we live to others. The funny thing about this habit is that there is never a winner. That is because there will always be someone, somewhere with more than what you have, look better than you do, have a bigger house, etc. The habit of comparison envelops people and can significantly harm their investment behavior. It plants the seed for FOMO and leads to comparing how fast you are going versus the person in the other lane.
I encourage my clients to measure progress. Are you on plan or target? If so, great! If not, what adjustments do you need to make to get back in your lane and make progress toward your destination? Measuring how far you’ve come is a much healthier measure than judging against perfection. Comparing yourself to someone else, or to an ideal, only generates negative feelings and emotions. Measure progress, not perfection.
At the end of the day, the only reason people invest and save is for income – either income today or income tomorrow. Attempting to grow your money pile bigger and bigger may sound appealing, but capital gains are an unreliable source of income. Trying to trade your way up the pile is a lot of work and a goal for which few have the skill and discipline to achieve. Most financial advisors coach people to build up a financial “retirement pile” then spend down or make distributions based on a “safe” distribution rate. Growth is an unreliable source of income, and that strategy can lead to unfortunate timing decisions.
On the contrary, stay focused on a strategy with a history of success. Ignore the whispering emotions of fear or greed, and you can reach your destination with a lot less “lane-changing risk.” We believe in investing in great companies with a broad business moat. They sell their goods or services to everyone, everywhere, every day, and share a portion of the profits with their owner-shareholders in the form of a dividend. Dividends may not be the only path for investor success, but if there is a better one, I have yet to find it.
Decide your destination and map out a course. Be very careful making those lane changes.
https://prosperion.us/wp-content/uploads/2017/02/whitelogosized.png00Steve Boorenhttps://prosperion.us/wp-content/uploads/2017/02/whitelogosized.pngSteve Booren2018-09-16 13:03:242019-04-08 13:05:35Improving Investor Behavior - Fear of Missing Out
PRESS RELEASE: Are You Prepared for Volatile Stock Market Swings During Retirement? Steve Booren’s new book, Intelligent Investing, Shows You HowMarch 19, 2019 - 1:44 pm
PRESS RELEASE: Are You Prepared for Volatile Stock Market Swings During Retirement? Steve Booren’s new book, Intelligent Investing, Shows You How
DENVER, Colo (March 5, 2019) – With today’s stock market swings, Steve Booren’s new book, Intelligent Investing: Your Guide to a Growing Retirement Income, will help readers understand how to retire intelligently. It will equip them with the knowledge needed to get started, as well as an easy to follow investment strategy.
Read more →
Improving Investor Behavior – Doubt, Sold with a Smile
Financial advice is usually broken into three steps. First, define your goals. Where do you want to go? Next comes a plan. This is the recipe for working toward your goals with actionable and measurable steps. Then comes implementation when you start your plan.
The first two steps lay out the “What” of your financial future; the last deals with the “How.” All too often investors make it through the first steps with optimism and progress, only to be led astray with the last. This is when experts, products, advertisements, advisors, and everyone else in the financial world tell you their way is best – and all the others? Well, they just don’t measure up.
Of course, this leaves investors with a problem. Who can you trust? The stakes aren’t small. This is a life’s savings for many. It’s the money investors will rely on for the next 30-40 years or more. But with so much doubt and confusion, how are they to choose in whom to trust?
It’s a hard question. Trust is built over time. Like exercise, it takes repetition. Do what you say you’re going to do when you say you’re going to do it, and always, always, act in the best interest of the client. But relationships take time to foster. If you’re looking for help, you may not already have a trustworthy relationship with someone in finance. So in blank-slate instances like this, I think it helps to examine the agendas of everyone involved. With a clear understanding of their “Whys,” it’s easier to make an informed decision.
Who are the players on the financial scene? I think there are four big ones: financial manufacturers, media, salesmen, and advisors.
Financial manufacturers are companies that offer mutual funds, bonds or other investments. They monitor demand and develop products that people think they want. Their sales are generated by uncertainty in the marketplace. Want to switch stocks? They will sell them to you and profit from the transaction. Want to add some bonds? Again, they will sell those to you too. When your doubt leads to an action, they generate revenue. As a business, their agenda is profit – not your financial future.
So, if manufacturers profit from doubt, doesn’t it benefit them to create more of it? In the media, a 24-hour news cycle has led to a focus on the here and now. In this fast-paced environment, “talking heads” share their opinions and financial forecasts with almost zero accountability. These differing viewpoints generate doubt, questioning, and in the end, change. Consider the number of sponsored talk radio shows, many of which are really 30-minute financial commercials. These shows help fund station’s operations. Again, as a business, their agenda is profit – not your financial future.
Next, we have financial salesmen and advisors. After 40 years in this industry, I’ve seen great salespeople and great advisors, but rarely are they the same person. How do you determine which is which? Ask yourself this: is this person helping me to transact or are they helping me to get where I want to go? Do they ask questions and listen? Do they really understand my goals, my fears and risks, my most significant opportunities, and my strengths? If so, do they help me along the way?
Investments in and of themselves don’t create peace of mind, income growth, generational wealth, or a lasting legacy. Products alone won’t do this. Does your advisor solve a problem or sell you a product? Are they a fiduciary who puts your interests first – before the company they work for and their own personal interests? Who writes their paycheck? If they work for a company, you might consider where their loyalty lies: to you or the company? This was one of the driving forces behind my choice to be independent. Without a company pushing products on me, I have the opportunity to provide clients with advice that works for them.
The goal is to find someone who’s agenda aligns with your own. Retirement planning isn’t a one-time project. It’s an ongoing partnership that works to ensure you have enough money, long enough, to find the freedoms you desire. It’s a large endeavor and one that usually requires a team of people to help tackle the complexities, paperwork, and strategies needed to make it happen. In choosing members of your team, examine their agendas to decide if the foundations of trust are there. Over time, let trust develop. If something doesn’t seem right, get a second opinion. This work may seem monotonous, but it can make all the difference in your financial future.
Improving Investor Behavior – Know the “Why” for your Investments
As financial advisors, we receive questions about all types of investments. Here’s one we recently heard:
It could be a sign of the times or where we are in the economic cycle, but questions about real estate keep popping up, especially from investors in Colorado. This is a stark change from 2008 – 2012 when no one wanted to go near real estate. That’s when prices were inexpensive and investing in real estate made sense. Today, with prices up significantly, that’s not the case.
Before I can address whether real estate investing would be a smart thing for the doctor, I ask a few simple questions:
If the answer is “no” to any of these questions, then putting money into real estate or any other alternative investment may not be wise. Checking off these items first is smart for most savers, especially before investing in something for which they may not have expertise, experience, or what I like to call a “Natural Advantage.”
This stems from a simple idea: understand your “Why.” What is the Why for each of your investments? What do you want to gain from each?
As with any investment, some people are interested in cash flow or income, while others may be looking for price appreciation. This is true regardless of how you invest (real estate, stocks, ownership in businesses, etc.). However, certain investments may offer strengths in one area and weaknesses in other. Investing in the S&P 500, for instance, provides price appreciation and a small dividend income. Investing in real estate keeps up with inflation on average, making it a poor choice if you’re hoping for price appreciation. Unless you’re good at timing market cycles or taking on risk with leverage such as borrowing money to make that investment, you may want to stay away from this. Interesting how people forget how leverage works against investors when prices fall.
With an understanding of your “Why,” ask yourself these questions:
How will you invest? There are many different ways to invest today. You can buy direct ownership of companies via their common stock, or through others using methods like Electronically Traded Funds (ETFs). With real estate, you can buy, own, and manage properties on your own, invest in syndicated pools, or invest in publicly traded Real Estate Investment Trusts (REITs). Anything more complicated than a REIT typically requires additional time and effort, and results in less diversification and liquidity. Taxes are also a consideration with each of these structures.
What are my risks? A significant risk with private real estate is the lack of diversification. Essentially you are putting your faith into a single region, city, area, type, and economy. It takes a decent portfolio of properties to gain any level of diversification, especially when compared to a basket of stocks. This holds true for those investing in the private stock of a company compared to publicly traded shares. Diversification and liquidity are essential items people may not consider. If things go wrong, these can make or break a portfolio.
How does this investment fit into your overall financial plan? Real estate is an investment, so it needs to be considered along with your other investments as part of your financial plan. You might believe that real estate helps to diversify a portfolio of publicly traded companies since their values may not move in the same direction as the broader stock market. While this may be true, the headwinds of liquidity and determining the value can be problematic. Stocks, on the other hand, are priced every day, from 7:30 am – 2:00 pm MT. You can see, buy, and sell them – all from your phone – at a moment’s notice. Liquidity can be an advantage as well as a disadvantage.
What is your edge or expertise? This might be the most critical question. What do you know about this area and type of investment? Any investor should be able to answer this about all of their investments. Do you have expertise in this area? Do you understand precisely in what you are investing? If not, are you outsourcing this expertise to someone with the right insight, experience, or knowledge? Are their interests aligned with yours?
Questions like those posed by the doctor often lead to more questions, and not simple answers. The key is to understand your “Why.” Know why you want to invest in something before asking if you should. This simple principle can help keep investors out of trouble and on a better path to the goals in their financial plan.
Improving Investor Behavior – Learn to Love a Falling Market
The financial markets have given investors quite a ride in the past few months. Not only have we seen a drop in the prices, but the volatility and multiple-percentage point days seems to have investors feeling a little seasick. The first thing queasy people want to do is to get off the boat.
This is precisely the wrong thing to do, and here’s why. Thinking fluctuation is bad for investors is an incorrect perspective. Volatility is the stock market’s way of redistributing shares of great companies to their rightful long-term owners. When markets fluctuate as they have in recent months, it is nearly impossible to divorce yourself from the emotional powers of fear and greed. The price per share does not matter unless you are buying that day, or selling that day. Other than some “entertainment value.” daily fluctuation should be ignored.
“What makes stocks valuable in the long run is not the market. It is the profitability of the companies you own,” said Peter Lynch in Worth Magazine in 1995. I agree with him. Over time, as corporations become more valuable, sooner or later, their shares will sell for a higher price. Our contention is you need to remember you own a piece of successful, profitable companies.
When we experience moments in time like this past December, when prices decline temporarily, investors tend to get anxious and fearful. If you are a long-term investor who likes owning great-dividend paying companies, the short-term volatility should be irrelevant. If you do not intend to sell any investments for many years to come, why worry about what the prices are today? Short-term price declines cause many investors angst. That emotional heartburn is just one reason it makes sense to work with a professional who can help keep you on track.
Managing assets for the past 40 years, I often feel I live in what might be described as “investment manager hell.” When clients are excited, almost giddy with enthusiasm about the markets and economy, I tend to feel frustrated. Moments like these usually mean my favorite companies are overvalued.
On the other hand, when clients express frustration, anger, fear, or anxiety about the markets, I tend to get excited. This usually means my favorite companies are on sale. Remember that falling prices mean better deals. Sometimes the price drops so far, and so hard, it’s possible to pick up shares at fire sale prices. Panic can be an expensive emotion for sellers.
Rather than get caught up in the moment, we look toward the future and what opportunities may develop for investments. This is investment manager hell – loving “bad” markets and hating “good” markets. When you work diligently to understand each of the companies you may own as an investor, you realize the value of the company is the sum of the future cash flow that a company may generate. The higher the current stock price, the more over-valued that investment may be. Likewise the lower the price today, the more under-valued that company is. It may be a great time to increase ownership shares.
When prices are temporarily falling, rather than be fearful, recognize that you can purchase company stocks at lower prices. Try to make it a practice to never react to prices alone. A more in-depth, thoughtful approach is necessary to evaluate how a company is doing. Price should not be the sole indicator.
How you think about market fluctuation and, more importantly, what you do about it takes discipline. Often investors let fear and greed override common sense or wisdom. Don’t be a victim of the market. Remember, the best time to buy is when things go on sale. Investments are no different. Great investments, like great products or services, sometimes offer discounts. When they come along, buy them, keep them for a long time, and watch how that investment can pay off.
Improving Investor Behavior – Focus on the Right Number
With the year coming to an end, 2018 has been a tumultuous one for investors. For the first time in 46 years, there has not been a clear winner in any asset class: from stocks to bonds, emerging markets to precious metals. As of this writing, none are on track to generate a better than five percent return according to a recent article from Bloomberg.
With all the attention focused on performance and prices, little appreciation goes to what we believe is a most desirable outcome for investors: income. Why do most people invest? Income. Whether you need that income today or tomorrow, most people invest with the belief that doing so will provide, maintain or improve their income.
The problem is that some people tie their income directly to the performance of the market. After all, this is a common approach to investing. Step one, buy a bunch of your desired asset class (stocks, bonds, gold, real estate). Step two, hope their value improves over time. Step three, sell the asset when the price has improved using the proceeds for income.
But this is akin to a farmer selling off acres of his land. As the area shrinks, so does his ability to grow crops. It becomes a downward spiral, eventually leading to asset depletion. This is what we refer to as a Growth for Income strategy, whereby growth is necessary for continued income. Years like 2018 make this strategy hazardous. No growth means it’s time for the farmer to sell some land, which makes generating income next year even more difficult.
The other risk is that of inflation. At a mere three percent inflation rate, the prices of food, fuel, and just plain living doubles every 24 years. That might seem like a long time, but that’s the age range of 60 to age 84. With better access to healthcare, science, innovation, and taking better care of yourself during the retirement chapter of your life, reaching age 84 is more likely. If your income has not doubled from 60 to 84, your standard of living is lower, and for many retirees, this is a problem. Often people do not realize this until it is too late.
So what can be done to protect income, and grow it at a rate that outpaces inflation?
There are many ways to approach this challenge, and you should ask your financial advisor if there’s one that may be a good fit for you. From my perspective, dividends are a solid way to grow income since companies distribute a portion of their profits from the business to investors, usually in the form of cold hard cash. Though not always, these companies are typically successful and established. Their dividend is a point of pride and offers them a vehicle to reward investors for owning their shares.
As a result, some companies maintain a long track record of paying a consistent dividend and even grow that dividend over time. Companies like Colgate, 3M, Coca-Cola, and Clorox all have a long track record of paying and adding to their dividends. Better yet, as a result of the tax law changes enacted late last year, some companies chose to increase their dividend more than five percent, beating most asset classes this year. As in our farmer example, dividends paid are like income from the sale of the crops. The land is only a vehicle for generating revenue. We call this a Growth of Income strategy.
We believe Growth of income is a better strategy rather than Growth for income.
In times of extreme volatility and uncertainty, it’s easy to get thrown off your plan. But as we’ve seen time and again, abandoning a well-constructed plan in favor of an emotional reaction almost always leads to a poor outcome. This is why we encourage investors to keep an eye on their income, not their portfolio value. My guess is your real estate agent doesn’t call you every 15 minutes with an update on the value of your home. This would make even the best investors a little cranky, although this is precisely what investors do with the stock market. Using a cell phone and app, the value of your portfolio is only a glance away.
So as you wrap up 2018, I’d encourage you to look past the value of your portfolio. Try flipping to page two or three in your statement and find the income line. Did your income improve in 2018? Did it stay the same? Did it go down? Hopefully, your income is rising, and at a rate higher than inflation. Over a long period, this will lead to more choices, more opportunities, and greater freedom.
Improving Investor Behavior – Managing the Pain of Regret
Regret may be the most enduring and damaging emotion investors grapple with during their financial lives. As financial advisors we see it from both sides: clients either regret having done something, or regret NOT having done something, or more often, both. Like a cancer, regret can crawl into all facets of your financial life and encourage you to make bad decisions. All too often, it’s successful.
What is regret? The way I see it, regret is the revisitation of past mistakes. Maybe someone hit the panic button as the market dropped, only to watch investments rebound in a short period. Perhaps they jumped out at a good time, but couldn’t decide on a “right time” to jump back in, missing out on would-be gains. Investors watch themselves do this over and over each time saying they won’t do it again. Then, when they inevitably do, the regret only deepens. This vicious cycle can pour over into other areas of life. How often have we heard the stories of someone betting their life’s savings just to have the outcome bounce the other way?
One such family was chronicled in the Wall Street Journal in May of 2010. The Potyk family liquidated their investment portfolio to avoid the volatility they had been experiencing. The article listed all the problems with the economy and markets, and that investors were abandoning stocks. Investors felt that this was the smart thing to do the article continued, as they thought the markets would be fundamentally different going forward.
I don’t know what happened to the Potyks. The Journal never wrote a follow up to revisit their story. But I wonder how many years they sat on the sidelines, distrustful of what would become one of the longest bull markets in United States history. And if they did, do they now struggle with the regret of that decision? I imagine they must. This is just one of a thousand stories with similar patterns: emotional reactions to uncontrollable circumstances.
So how can we combat regret? What can we do to learn from past experiences without dwelling on the “woulda-coulda-shouldas?”
If regret is a child, its parents are fear and greed. When markets fall, the fear of loss rears its head. When prices rise, greed and envy of those who are “getting rich” lead to the fear of missing out. Ultimately greed is just another form of fear. Giving into either of these emotions often creates regret. In short, regret is most commonly caused by emotional reactions to uncontrollable events.
Though we cannot control the uncontrollable (like what the market does on any given day), we can manage our reaction. We do this by creating a plan based on a foundation of logic, not emotion. Personal finance is more personal than it is finance, so we try to account for feelings. For example, plans should be designed to encourage people to feel safe and strive to help them achieve the growth they seek. They’re regular reminders in periods of uncertainty and fear. They prevent regret by tackling it at its source. Think about it, when was the last time you heard someone regret sticking to a plan?
I think gratitude is also a potent antidote to regret. It’s easy to question past mistakes and wonder what could have been done differently. All the questions make it easy to lose sight of the answer you chose, and the outcomes of the decisions you’ve made. Ultimately they’ve all led you to where you are now. Isn’t that something for which to be thankful? Something from which to learn? Searching for the gratitude hidden under layers of regret has had a profound effect on me, and has led me to learn lessons from each mistake I’ve made.
For those of you who play golf, you’re probably familiar with the idea that you should not let your past shots influence your next one. And if you play golf, you probably know how hard this is to do, especially if your previous shot sent you looking for your ball deep in the weeds of an adjacent hole. But hey, a bad day playing golf beats a good day working. Make a plan, envision the outcome, and take the shot. Make the next shot a good one, and watch the pain of regret fade away.
4Gen Now Conference
David Morrison and Prosperion Financial Advisors were the title sponsor for the 2018 4GenNow Conference held at the CU Denver South Campus.
Improving Investor Behavior: Managing Your Fears
Shark Week is among the longest running and most popular cable programs in history. First appearing 30 years ago in 1988, the show has since been watched and celebrated by millions. Why would a program about sharks and their danger be so popular? I think it plays on the emotion of fear, and more interestingly, people’s desire to be a little bit scared.
This is quite the paradox: some people enjoy engaging in an activity designed to make them uncomfortable. The same can be said for horror movies, especially at this time of year. In both circumstances, however, the fear is often wholly unfounded. Sharks are responsible for about six deaths per year, and I highly doubt zombies will be taking over the world anytime soon. Instead, people should be much more afraid of mosquitos with their death toll last year of more than 830,000 people.
My point is this: sometimes our greatest fears are the most unfounded. Whether it’s an oversized fish or monsters under the bed, our worst fears take up an oversized portion of our conscious and drive actions that can be damaging and counterproductive. Fear is a powerful emotion and one you must learn to rein in if you want to be a successful investor.
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Anxiety and Investing: Taking the Fear Out of Finances
The chances that either you, a loved one, or a friend have had an incident with, or an ongoing relationship with heightened anxiety are likely. Almost 20 percent of the population expresses some sort of anxiety disorder in a lifetime. It comes from a combination of genes and impactful experiences throughout life. Whether relatively mild, or the cause of full on panic attacks for the victim, it is a disruptive force.
Fear and worry can be associated with any number of events or circumstances, but I’ve found that finance can be a leading cause. This post is written for anyone who has anxiety around their money, or for those with a loved one who might. In either situation, it’s important to understand how to take the “fear out of finances.” In this three part series we’ll talk about how to Process, Plan, and Pursue more comfort and confidence in personal finances and investing, hopefully leading to decreased anxiety for those affected by this part of life.
As you get to know our “characters” by their “style of attachment” (the basis for how we think about and interact with our financial lives), I’ve written the characters to represent the extremes. You, or your peer / loved one, may not feel as strongly one way or the other as the examples, but you may find more similarities to one character than another. Wherever one finds themselves in the spectrum, they are not alone, and these processes can be put into practice for a confident future with your finances.
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Improving Investor Behavior – Fear of Missing Out
When you are stuck in traffic on the interstate, creeping along, do you find yourself wanting to switch from one lane to another? Do you glance to the left and see the “fast lane,” and are envious of how quickly they are moving? You look for an opening, signal and move over to gain some speed… only to come to a stop. You then notice the car you were following in the lane to the right moves along past you. A few minutes later, it has moved way ahead, out of sight.
This is an illustration to which investors can relate. Making a move from one strategy to another – one that looks more attractive because it is moving along faster than you are – often has the same frustrating result. As with driving, you may take the risk and make a financial strategy change to feel like you are getting ahead, only to find yourself coming to a stop since you made that investment at the wrong time, or for the wrong reason. This is FOMO or the Fear of Missing Out.
Buying an investment in today’s world is rather easy. From apps on your phone to Mutual Fund stores in strip malls, purchasing investments has never been simpler. What previously involved a call to your broker to make an investment purchase is now even easier with these multiple alternatives. Investment companies, however, thrive on investors making changes whether it comes from transaction commissions or asset management fees.
Some financial companies encourage lane-changing behavior, where investors hop from one product or strategy to another, in an attempt to “beat the market.” Frankly, beating the market is a lot of work (and luck). You must buy something before the value rises, sell it high, and reinvest those dollars in the next low-value stock that goes up in price. One’s ability to do this consistently is practically non-existent. Yet people believe they can, spurred on by a variety of messaging we receive. The bottom line is that investing takes discipline.
We also know that FOMO has a close cousin: Comparison. Comparing is said to be human nature. We tend to examine what we have, make, how we look, and where we live to others. The funny thing about this habit is that there is never a winner. That is because there will always be someone, somewhere with more than what you have, look better than you do, have a bigger house, etc. The habit of comparison envelops people and can significantly harm their investment behavior. It plants the seed for FOMO and leads to comparing how fast you are going versus the person in the other lane.
I encourage my clients to measure progress. Are you on plan or target? If so, great! If not, what adjustments do you need to make to get back in your lane and make progress toward your destination? Measuring how far you’ve come is a much healthier measure than judging against perfection. Comparing yourself to someone else, or to an ideal, only generates negative feelings and emotions. Measure progress, not perfection.
At the end of the day, the only reason people invest and save is for income – either income today or income tomorrow. Attempting to grow your money pile bigger and bigger may sound appealing, but capital gains are an unreliable source of income. Trying to trade your way up the pile is a lot of work and a goal for which few have the skill and discipline to achieve. Most financial advisors coach people to build up a financial “retirement pile” then spend down or make distributions based on a “safe” distribution rate. Growth is an unreliable source of income, and that strategy can lead to unfortunate timing decisions.
On the contrary, stay focused on a strategy with a history of success. Ignore the whispering emotions of fear or greed, and you can reach your destination with a lot less “lane-changing risk.” We believe in investing in great companies with a broad business moat. They sell their goods or services to everyone, everywhere, every day, and share a portion of the profits with their owner-shareholders in the form of a dividend. Dividends may not be the only path for investor success, but if there is a better one, I have yet to find it.
Decide your destination and map out a course. Be very careful making those lane changes.