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The Importance of Return on Equity

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ROE measures how much profit a company generates per dollar of shareholders’ equity.

Return on equity (ROE) is a must-know financial ratio. It is one of many numbers investors can use to measure return and support investing decision. It measures how many dollars of profit are generated by a company’s management for each dollar of shareholder’s equity.

The metric reveals just how well the company utilizes its equity to generate profits.  It reveals the company’s efficiency at turning shareholder investments into profits and explains, mathematically, the ratio of a company’s net income relative to its shareholder equity.

ROE is very useful for comparing the performance of similar companies in the same industry and can show you which are making most efficient use of their (and by extension investors’) money.

Billionaire investor Warren Buffett uses ROE as part of his investment decision making process. Buffet cares deeply about a company that uses its money wisely and efficiently. He believes that a successful stock investment is a result first and foremost of the underlying business; its value to the owner comes primarily from its ability to generate earnings at an increasing rate each year.

Buffett examines management’s use of owner’s equity, looking for management that has proven it is able to employ equity in new moneymaking ventures, or for stock buybacks when they offer a greater return.

What is ROE

Return on equity is a ratio of a public company’s net income to its shareholders’ equity, or the value of the company’s assets minus its liabilities. This is known as shareholders’ equity because it is the amount that would be divided up among those who held its stock if a company closed.

The basic formula for calculating ROE simply is to divide net income from a given period by shareholder equity. The net earnings can be found on the earnings statement from the company’s most recent annual report, and the shareholder equity will be listed on the company’s balance sheet. The specific ROE formula looks like this:

ROE = (Net Earnings / Shareholders’ Equity) x 100 or EPS / Book Value

“ROE tells you how good or bad management is doing with your investment,” says Mike Bailey, director of research at FBB Capital Partners in Bethesda, Maryland. “Higher ROEs generally stem from profitable businesses that enjoy competitive advantages within a given industry.”

A high ROE doesn’t always mean management is efficiently generating profits. ROE can be affected by the amount that a company borrows.

Increasing debt can cause ROE to grow even when management is not necessarily getting better at generating profit. Share buybacks and asset write-downs may also cause ROE to rise when the company’s profit is declining.

On the other hand, idle cash in excess of what the business needs to continue operations reduces the apparent profitability of the company when measured by return on equity. Distributing idle cash to shareholders is an effective way to boost its return on equity.

Key Takeaway

Return on Equity measures how efficiently a company generates net income based on each dollar invested by company’s shareholders.

A steady or increasing ROE is a company that knows how to successfully reinvest their earnings. This is important because most companies retain their earnings in the equity of the business.

A declining ROE is symbolic of executive management that is unable to successfully reinvest their capital in income producing assets. Companies like this should elect to pay most of their earnings to shareholders as dividends.

References:

  1. https://smartasset.com/investing/return-on-equity
  2. https://www.forbes.com/advisor/investing/roe-return-on-equity/
  3. https://www.nasdaq.com/articles/5-ways-improve-return-equity-2015-01-21
  4. https://money.usnews.com/investing/articles/what-is-return-on-equity-the-ultimate-guide-to-roe

Three Pillars of a Fulfilling Retirement

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“Preparation for old age should begin not later than one’s teens. A life which is empty of purpose until 65 will not suddenly become filled on retirement.” Arthur E. Morgan

Key Insights include:

  • Financial Health, Physical Health and Emotional Health…the Three Pillars are all vitally important to the lifestyle one expects to experience during retirement.
  • Just getting by and/or covering basic living expenses is retirees’ most frequently cited financial priority.
  • Social Security remains the cornerstone of retirement income for many Americans.
  • Retirees’ confidence about maintaining their lifestyle exceeds the size of their retirement nest eggs.
  • Most retirees are happy and enjoying life.

In The Three Pillars for a Prosperousand Fulfilling Retirements, the importance of Financial Health, Physical Health and Emotional Health are important aspects of retirement. All three pillars are vitally critical to the lifestyle and contentment Americans expect to experience during retirement.

Many people look forward to retirement because it represents freedom and a new phase of life. You don’t have to get up and go to work every day or do what a boss tells you. But just because your time is your own after you leave work doesn’t mean you have no rules to live by in your later years. In fact, it may be even more important to adhere to some guidelines.

Americans are living longer than ever in retirement, thanks to advances in health care, improved nutrition and diets, and better exercise. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95, according to data from the Social Security Administration.

This great news also presents Americans with a significant financial challenge in retirement of how to make sure their money lasts as long as they do. The possibility of running out of money is one of the biggest concerns and biggest risks many retirees will face in the years ahead.

Challenges in Retirement

  • There are a plethora of challenges and potential threats to retirement in the United States. Those nearing retirement realize they may have missed out on key saving or investing opportunities during their career, according to results from a new TIAA-CREF survey.
  • Despite all having access to an employer-sponsored plan, more than half of the people (52 percent) approaching retirement (age 55-64) wished they had started saving for the future sooner. In particular, 47 percent wished they saved more of their paycheck, and 34 percent now realize they should have invested their savings more aggressively.  According to findings that come from TIAA-CREF’s 2014 Ready to Retire Survey.
  • The critical importance – during retirement — of “core pursuits” which are hobbies and activities that one pursues with passion and regularity, according to Wess Moss.It’s normal to crave the freedom that retirement brings.  Most people look forward to retirement. But like many other pleasures, it may be bad for your health.  It may even kill you, according to a WSJ article.  Wess Moss has devoted his professional career to helping people retire early and enjoy a happy retirement.
  • Financial Health
    • Americans have put away $18.5 trillion for retirement in 401(k) contribution plans and defined benefit pension programs, according to the report published by the Investment Company Institute. Yet, retirement savings are non-existent or barely exist for many Americans. More than one in five Americans have zero retirement savings and another 10% have less than $5,000 in savings. Pensions have all but disappeared and many of those remaining are underfunded.
    • It is said that money doesn’t grow on trees, however, it can grow when you start early to save and invest, you pay yourself first and develop a system. Knowing how to secure your financial well-being is one of the most important things you’ll ever need in life.You don’t have to be a genius to do it.You just need to know a few financial literacy basics, form a financial system and plan, and be disciplined to stick to it.
    • No matter how much or little money you have, the important thing is to educate yourself about your opportunities and the system of success. No one can guarantee that you’ll make money from investments. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the long-term and enjoy the benefits of managing your money.
  • Physical Health
    • 96% of retirees—and 99% of those age 75 and over—say that health is more important than wealth to live well in retirement. Yet health and wealth are very intertwined. People with financial resources can invest more in their health, and those in poor health have a harder time enjoying what their money can buy.
    • Adults who remain physically active are healthier, feel better, and are less likely to develop many chronic diseases, such as cardiovascular disease, type 2 diabetes, and several types of cancer than are adults who are inactive. Regular moderate-to-vigorous physical activity also reduces feelings of anxiety and depression and improves sleep and quality of life. Even a single episode of physical activity provides temporary improvements in cognitive function and state of anxiety. Adults who are more physically active are better able to perform everyday tasks without undue fatigue.
    • Increased amounts of moderate-to-vigorous physical activity are associated with improved cardiorespiratory and muscular fitness, including a healthier body weight and body composition. Adults who are more physically active can more easily carry out daily tasks like climbing stairs, carrying heavy packages, and performing household chores. These benefits are true for men and women of all ages, races, and ethnicities.
    • Adults gain most of these health benefits when they do the equivalent of 150 to 300 minutes (2 1/2 hours to 5 hours) of moderate-intensity aerobic physical activity each week. Adults gain additional and more extensive health benefits with even more physical activity.  Muscle-strengthening activities and exercises also provide health benefits and are an important part of an adult’s overall physical activity plan.
  • Emotional Health
    • Eighty percent of success in any endeavor, including retirement success, is based on mindset, behavior and habits. The other 20 percent is based on goals and following a plan. Once you cultivate a mindset that gives you the ability to appreciate life despite obstacles and challenges, then you will have the freedom to do the things that matter to you most.
    • Emotional health and well-being are the ability of an individual to successfully handle life’s stresses and adapt to change and difficult times. Emotional Health is more than the absence of mental illness and anxiety; it is a condition that allows people to realize their aspirations, satisfy their needs and to cope with the environment in order to live a long, productive, and fruitful life.
    • Well-being, on the other hand, is dependent upon good health, positive social relationships, and availability and access to basic resources (e.g., shelter, income).  Numerous studies have shown in general, life satisfaction is dependent more closely on the availability of basic needs being met (food, shelter, income) as well as access to modern conveniences (e.g., electricity). Pleasant emotions are more closely associated with having supportive relationships.

    The pyramid is a better way to think about retirement resources because households do not need to rely on each part of the retirement pyramid equally to maintain their standard of living in retirement. The composition of the retirement resource pyramid varies to reflect the resources available to an individual household.

    1. Older Americans report they are struggling with increased financial risks, namely inadequate income and unmanageable costs of healthcare, as they try to deal with reductions to their social safety net.
    2. For an increasing number of older Americans, their golden years are fraught with financial, health and emotional risks.
    • An Investment Company Institute (ICI) study recommends that people use a five-tiered system “pyramid” to build their retirement financial security.
    • Home-ownership,
    • Pensions,
    • IRAs, and
    • Other financial assets supplement their
    • Social Security benefits.
    • This model should carry them through retirement.  Social Security is still the foundation of the pyramid plan, but it has become an increasingly smaller portion for many retirees.

    Social Security provides resources to nearly all retirees, but provides a higher replacement rate to retirees with low lifetime earnings. Because Social Security benefits typically replace a smaller share of earnings for higher-income households, these households rely more on other retirement resources, such as employer-provided retirement benefits, such as pensions and IRAs, and non qualified brokerage accounts.

    Retirement planning, exploring the seriousness of an unhappy retirement through data on critical topics like depression, cognitive decline and even mortality.  The common factor in all of these studies was inactivity, the opposite of adventure, the opposite of social supports, the opposite of caring for you physical health.  In short, if you can stave off inertia, which leads to withdrawal from life, you can reduce the likelihood of an unhappy retirement.

    Reap what you sow

    “Your life mirrors what you put into it or withhold from it. When you are lazy, it is lazy. When you hold back, it holds back. When you hesitate, it stands there staring, hands in its pockets. But when you commit, it comes on like blazes.” Ted Orland

    What a person sows in their early ages as teens, twenties and early thirties, they tend to reap in their later stages of life in their forties, fifties, sixties and beyond.  We are all an accumulation of past decisions and behaviors, of the system or habits that have directed our lives.

    Americans must embrace the notion that it is never too late to change and improve the trajectory and destination of one’s overall retirement health outcome.  Which reminds me of a favorite proverb:

    “Best time to plant a tree was twenty years ago.  The second best time is today”. Chinese Proverb

    What this Proverb confirms is that starting early is important to living a life of contentment and fulfillment in retirement. However, if we have missed the best opportunity or season in our life to plan for financial security, take care of our health and nurture our emotional wellbeing for retirement, it’s never too late to start saving, since…the second best opportunity is today.

    Retirees are living longer than ever before. Nowadays, the age of sixty is the new thirty-five for many people. Besides living longer, studies also reveal that:

    1. Americans values have changed and they seem to desire freedom over money in retirement.
    2. There are many challenges and threats that must be understood and successfully navigated to achieve the dream retirement.
    3. It is imperative to make sure you don’t run out of money when you’re living on a fixed income as a retiree.

    Success are Financial Health, Physical Health and Emotional Health. All three areas are vitally important. This future guide will provide insights to achieving a better life in retirement, in each of three areas — financially,  physically and emotionally.

    References:

    1. https://www.tiaa.org/public/pdf/3_November_Transitioners_Survey-Executive_Summary_11-12-14_KRCedits.pdf
    2. http://icief.org/blog/19_blog_investing1.html
    3. https://transamericacenter.org/retirement-research/retiree-survey

    Housing Boom is Over as New Home Sales Fall to Pandemic Low

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    “Housing has been one of the brightest lights of the economic recovery from COVID-19, but a shortage of homes for sale and rising prices have crimped sales.” U. S. News & World Report

    CNBC reported that:

    • Sales of new single family homes fell to an annualized rate of 676,000, 6.6% below May’s rate of 724,000 and 19.4% below the June 2020 level of 839,000.
    • The inventory of new homes for sale jumped from a 5.5-month supply in May to a 6.3-month supply in June. Last fall, it sat at a low of just 3.5 months.

    Sales of newly built homes dropped in June to the lowest level since the early days of the coronavirus pandemic in April 2020, according to data released by the U.S. Census Bureau.

    After a year of frenzied buying and price gains in the double digits, newly built homes are now out of reach for much of the demand that remains in the market, according to CNBC. 

    The median price of a newly built home in June rose just 6% from June 2020, and while that is a large gain historically, it is nothing compared with the 15%-20% annual gains seen in previous months.

    Most of the homebuying is on the higher end of the market, and builders cannot afford to put up affordable homes due to skyrocketing construction costs.

    Softwood lumber, in particular, spiked more than 300% during the pandemic, and while it has fallen back dramatically in the last month, it is still about 75% above its 2019 average. Other lumber products are still significantly more expensive.

    “We also know there are shortages of appliances, labor and affordable lots,” noted Peter Boockvar, chief investment officer at the Bleakley Advisory Group. “The moderation in home sales is likely a combination of sticker shock and the slowdown in the ability of builders to finish homes because of a variety of delays.”

    While there is unquestionably still strong demand from buyers, much of it is being squelched by affordability and supply issues.

    Those signs clearly showed up at builder home sites in June and have been a factor in weakening homebuilder sentiment for the past two months. Noted builder analyst Ivy Zelman wrote as much in a note last month.

    The U.S. housing market is a major indicator of the strength of the economy.

    When the economy is strong and people are confident about the future, they are more inclined to buy houses, upgrade their current homes or buy larger houses. When they are more concerned about the economy, new home construction, remodeling, median prices and housing sales are all depressed.

    For years, real estate was considered a reliable way to increase personal wealth because the cost of property and housing consistently increased over time.

    References:

    1. https://www.cnbc.com/2021/07/26/housing-boom-is-over-as-new-home-sales-fall-to-pandemic-low.html
    2. https://www.census.gov/construction/nrs/pdf/newressales.pdf
    3. https://www.usnews.com/topics/subjects/housing-market
    4. https://www.usnews.com/news/economy/articles/2021-07-26/new-home-sales-slip-66-in-june

    The Science of Happiness and Well-Being

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    “We humans are unhappy in large part because we are insatiable; after working hard to get what we want, we routinely lose interest in the object of our desire. Rather than feeling satisfied, we feel a bit bored, and in response to this boredom, we go on to form new, even grander desires.” William B. Irvine, author of the book “A Guide to the Good Life”

    You will find that the real joy and happiness often comes from the pursuit of destinations, rather than the destinations themselves.

    Freedom to choose is the friend of natural happiness. Financial independence gives you the ability to design your day in such a way that you can spend mornings doing work you love and evenings being around people you love.

    Practices like:

    • Meditation,
    • Gratitude and
    • Making time for social connections

    …have the biggest effect on our happiness and well-being,

    One of the things that is important to understand is the freedom that money affords. It provides you the means to make some of your own choices and not feel like you’re locked into a job. It was once said that if money is not making you happy, then you’re not spending it right.

    “Money doesn’t buy happiness.”

    “Money doesn’t increase happiness in the way that we think”, said William B. Irvine, author of the book “A Guide to the Good Life”. “Our minds are lying to us about how much of an impact extra cash will have on our happiness.”

    Money gives you more control over your life; the freedom to retire early, the security to support yourself and your family, the comfort of buying things and experiences that excite you, the option of saying “yes” when your friends invite you to dinner…I could go on and on.

    Harvard study from 2018 suggested that “great wealth does predict greater happiness” — for millionaires. Researchers found “consistent evidence that somewhat higher levels of wealth are not associated with higher well-being, but substantially higher levels (net worth of $8 million or more) are linked to modestly greater well-being.” (While the majority of us aren’t millionaires, there’s still a good amount of data to imply that happiness, to some degree, is tied to money.)

    The class called “The Science of Well-Being,” is taught by Laurie Santos, a professor of psychology and cognitive science.

    Money ≠ happiness.

    Money is the tool that we can all use to buy more time to spend on these things. A phenomenon called “miswantings,” refers to the idea that people sometimes “mispredict” how much they’ll enjoy something in the future, according to Dr. Santos.

    Dr. S antos references several “annoying features of the mind” that influence us to chase after things that don’t really make us happy. Many of the materialistic goals we strive for make little to no lasting impact on our overall life satisfaction, Santos argues. One of the the main misconceptions she addresses is money.

    References:

    1. https://www.cnbc.com/2019/05/13/i-took-yales-most-popular-class-ever-and-it-completely-changed-how-i-spend-my-money.html
    2. https://fourpillarfreedom.com/chop-wood-carry-water/

    Dr. Mike Evans is a staff physician at St. Michael’s Hospital and an Associate Professor of Family Medicine. He is a Scientist at the Li Ka Shing Knowledge Institute and has an endowed Chair in Patient Engagement in Child Nutrition at the University of Toronto.

    Trouble is Opportunity: In Every Crisis, There are Opportunities

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    “Success comes down to rare moments of opportunity. Be open, alert, and ready to seize them. Gather the right people and resources; then commit. If you’re not prepared to apply that kind of effort, either the opportunity isn’t as compelling as you think or you are not the right person to pursue it.” Stephen Schwarzman, Chairman and CEO, Blackstone

    In life, you will inevitably encounter many problems, challenges and hardships. Many of these troubles are the consequences of your actions and behaviors. While other problems and hardships are outside of your control and purview. Yet, in every challenge, there is inevitably opportunity.

    During the 2008 global economic crisis and subsequent Great Recession, Warren Buffett maintained his faith in the U.S. economy. In an October 2008 “Buy America, I Am”, NYT opinion article, Buffett explained that the global economic turmoil was not a signal of doom and gloom, but rather a prime investing opportunity. And walking the talk, Buffett made a big bet on Goldman Sachs.

    Like other financial institutions, Goldman was on the verge of collapse as Buffett stepped in and stabilized the situation. Thanks to Buffett funneling $5 billion into Goldman Sachs in the midst of the economic crisis and federal government intervention, Goldman was able to survive and recover.

    “Successful investing relies heavily on buying socks that have good prospects, but for which investors currently have low expectations.” James O’Shaughnessy

    Buying Quality

    The key to successful investing for many Warren Buffett stocks comes down to quality. Buffett only focuses on those firms with low debt, strong cash flows, rising sales, and top-notch management teams. This allows them to perform well even during market crashes and recessions. His strategy is based on long-term investing, choosing stocks that deliver steadily rising revenues/profits, holding them for decades, and collecting a stream of dividends.

    The Laws of Wealth Rule #3 – Trouble Is Opportunity.

    “The market feels most scary when it is actually most safe… Corrections and bear markets are a common part of any investment lifetime, they represent long-term buying opportunity and a systematic process is required to take advantage of them.” The author quotes Ben Carlson: “Markets don’t usually perform the best when they go from good to great. They actually show the best performance when things go from terrible to not-quite-so-terrible as before.”

    “The fact that we’re risk averse and loss averse from an evolutionary perspective, from a psychological perspective has done the human race a great deal of good and has kept us around, but if you apply that same risk aversion and loss aversion to financial markets at a time when we’re living longer and longer, and inflation is what it is, we’re not able to compound our wealth at a sufficient enough clip to have the kind of retirement that we’ve dreamed of. ” Daniel Crosby

    Risk is the likelihood that you will not achieve your long term financial goals and be able to live the lifestyle you desire.

    Successful investing over the long term cannot be predicated on hope and luck. It must be grounded in a discipline approach that is applied in good times and especially in bad and is never abandoned just because what is popular in the moment may not conform to longer-term best practices.

    So, in the words of former White House Chief of Staff Rahm Emanuel at a 2008 Wall Street Journal Forum, “You never want a serious crisis to go to waste.”

    References:

    1. https://thekeypoint.org/2017/05/21/the-laws-of-wealth/
    2. https://www.picpa.org/articles/cpa-conversations/cpa-conversations/2019/01/10/exploring-the-laws-of-wealth-with-author-daniel-crosby
    3. https://www.cnbc.com/id/40276100
    4. https://investorplace.com/2020/10/5-great-warren-buffett-stocks-to-hold-through-the-next-recession

    The brain-changing benefits of exercise

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    Wendy Suzuki • TEDWomen 2017 • October 2017

    “Just a walk around the block or a 10-minute online workout will not only improve your day but also benefit your brain in a lasting way.” Wendy Suzuki

    What’s the most transformative thing that you can do for your brain today? Exercise! says neuroscientist Wendy Suzuki. There is extensive scientific research behind the extraordinary, life-changing effects that physical activity can have on the most important organ in your body: your brain.

    Get inspired to go to the gym or to go for a jog

    Suzuki discusses the science of how working out boosts your mood and memory. “Every time you work out, you are giving your brain a neurochemical bubble bath, and these regular bubble baths can also help protect your brain in the long term from conditions like Alzheimer’s and dementia”, she explains.

    A single workout increases neurotransmitters like dopamine, serotonin and noradrenaline, and these mood boosters can also improve your memory and focus for up to three hours afterwards.

    Dr. Wendy A. Suzuki is a Professor of Neural Science and Psychology in the Center for Neural Science at New York University, an author, storyteller and fitness instructor. Her work has focused on understanding how aerobic exercise can be used to improve learning, memory and higher cognitive abilities in humans.

    Other Long-term Benefits

    Regular exercise and physical activity provides many other important health benefits for chronic disease prevention, according to the Centers for Disease Control and Prevention.

    • Heart Health – Lowers risk of heart disease, stroke, and type 2 diabetes
    • Cancer Prevention – Lowers risk of eight cancers: bladder, breast, colon, endometrium, esophagus, kidney, lung, and stomach
    • Healthy Weight – Reduces risk of weight gain
    • Bone Strength – Improves bone health
    • Balance and Coordination – Reduces risks of falls

    Exercise and Physical Activity Guidelines

    Medical doctors and other health professionals recommend exercise and physical activity, based on the 2018 Physical Activity Guidelines. Adults of all shapes, sizes, and abilities can benefit from being physically active.

    • All adults should avoid inactivity. Some exercise and physical activity is better than none, and adults who participate in any amount of physical activity gain some health benefits.
    • Aerobic activity of any duration may be included in the daily accumulated total volume of physical activity.

    For important health benefits, all adults should do both aerobic and muscle-strengthening physical activities.

    – For Aerobic:

    • At least 2 hours and 30 minutes (150 minutes) a week of moderate-intensity aerobic physical activity (i.e., brisk walking; wheeling oneself in a wheelchair); or
    • 1 hour and 15 minutes (75 minutes) a week of vigorous-intensity aerobic physical activity (i.e., jogging, wheelchair basketball); or
    • A mix of both moderate- and vigorous-intensity aerobic physical activities each week. A rule of thumb is that 1 minute of vigorous-intensity activity is about the same as 2 minutes of moderate-intensity activity.

    – For Muscle-Strengthening:

    • Activities that are moderate or high intensity and involve all major muscle groups on 2 or more days a week (i.e., working with resistance bands; adapted yoga) as these activities provide additional health benefits. (Source: CDC)

    Regular exercise and physical activity is one of the most important things you can do for your brain and overall health!

    References:

    1. https://www.ted.com/speakers/wendy_suzuki
    2. https://www.cdc.gov/physicalactivity/basics/adults/health-benefits-of-physical-activity-for-adults.html
    3. https://ideas.ted.com/why-your-brain-needs-you-to-exercise-plus-3-easy-ways-to-work-out-at-home/
    4. https://www.cdc.gov/ncbddd/disabilityandhealth/pa.html#2

    The Laws of Wealth by Daniel Crosby

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    “Get rid of the excuses and get invested.” Fidelity Investment

    Daniel Crosby, author of The Laws of Wealth, presents 10 rules of behavioral self-management.

    Rule #1 – You Control What Matters Most. “The behavior gap measures the loss that the average investor incurs as a result of emotional responses to market conditions.” As an example, the author notes that the best performing mutual fund during the period 2000-2010 was CGM Focus, with an 18.2% annualized return; however the average investor in the fund had a negative return! The reason is that they tended to buy when the fund was soaring and sell in a panic when the price dipped. More on volatility later…

    Rule #2 — You Cannot Do This Alone. “Vanguard estimated that the value added by working with a competent financial advisor is roughly 3% per year… The benefits of working with an advisor will be ‘lumpy’ and most concentrated during times of profound fear and greed… The best use of a financial advisor is as a behavioral coach rather than an asset manager.” Make sure your advisor is a fiduciary. “A fiduciary has a legal requirement to place his clients’ interest ahead of his own.”

    Rule #3 – Trouble Is Opportunity. “The market feels most scary when it is actually most safe… Corrections and bear markets are a common part of any investment lifetime, they represent long-term buying opportunity and a systematic process is required to take advantage of them.” The author quotes Ben Carlson: “Markets don’t usually perform the best when they go from good to great. They actually show the best performance when things go from terrible to not-quite-so-terrible as before.”

    To do this is by keeping some assets in cash a buy list of stocks that are great qualitly, have a strong balance sheet and a strong brand, but are expensive.

    Rule #4 – If You’re Excited, It’s a Bad Idea. “Emotions are the enemy of good investment decisions.”

    Rule #5 – You Are Not Special. “A belief in personal exceptionality causes us to ignore potential danger, take excessively concentrated stock positions and stray from areas of personal competence… An admission of our own mediocrity is what is required for investment excellence… This tendency to own success and outsource failure [known as fundamental attribution error] leads us to view all investment successes as personal skill, thereby robbing us of opportunities for learning as well as any sense of history. When your stocks go up, you credit your personal genius. When your stocks go down, you fault externalities. Meanwhile, you learn nothing.”

    Rule #6 – Your Life Is the Best Benchmark. “As a human race, we are generally more interested in being better than other people than we are in doing well ourselves.” However, “measuring performance against personal needs rather than an index has been shown to keep us invested during periods of market volatility, enhance savings behavior and help us maintain a long-term focus.”

    Rule #7 – Forecasting Is For Weathermen. “The research is unequivocal—forecasts don’t work. As a corollary, neither does investing based on these forecasts…. Scrupulously avoid conjecture about the future, rely on systems rather than biased human judgment and be diversified enough to show appropriate humility.”

    Rule #8 – Excess Is Never Permanent. “We expect that if a business is well-run and profitable today this excellence will persist.” The author quotes James O’Shaughnessy: “‘The most ironclad rule I have been able to find studying masses of data on the stock market, both in the United States and developed foreign markets, is the idea of reversion to the mean.’ Contrary to the popular idea of bear markets being risky and bull markets being risk-free, the behavioral investor must concede that risk is actually created in periods of market euphoria and actualized in down markets.”

    Rule #9 – Diversification Means Always Having to Say You’re Sorry. “You can take it to the bank that some of your assets will underperform every single year… The simple fact is that no one knows which asset classes will do well at any given time and diversification is the only logical response to such uncertainty… Broad diversification and rebalancing have been shown to add half a percentage point of performance per year, a number that can seem small until you realize how it is compounded over an investment lifetime.”

    Rule #10 – Risk Is Not a Squiggly Line. “Wall Street is stuck in a faulty, short-sighted paradigm that views risk as a mathematical reduction [of volatility]… a flaw that can be profitably exploited by the long-term, behavioral investor who understands the real definition of risk… Volatility is the norm, not the exception, and it should be planned for and diversified against, but never run from… Let me say emphatically, there is no greater risk than overpaying for a stock, regardless of its larger desirability as a brand.”

    One of the most interesting concepts in the book is that investing in an index is not as passive as we might assume. Crosby quotes Rob Arnott: “‘The process is subjective—not entirely rules based and certainly not formulaic. There are many who argue that the S&P 500 isn’t an index at all: It’s an actively managed portfolio selected by a committee—whose very membership is a closely guarded secret!—and has shown a stark growth bias throughout its recent history of additions and deletions… The capitalization-weighted portfolio overweights the overvalued stocks and underweights the undervalued stocks…’ In a very real sense, index investing locks in the exact opposite of what we ought to be doing and causes us to buy high and sell low… Buying a capitalization weighted index like the S&P 500 means that you would have held nearly 50% tech stocks in 2000 and nearly 40% financials in 2008.”

    “Once we realize that passive indexes are not mined from the Earth, but rather assembled arbitrarily by committee, the most pertinent question is not if you are actively investing (you are) but how best to actively invest.”

    “Behavioral risk is the potential for your actions to increase the probability of permanent loss of capital… Behavioral risk is a failure of self… Our own behavior poses at least as great a threat as business or market risks… We must design a process that is resistant to emotion, ego, bad information, misplaced attention and our natural tendency to be loss averse.”

    Crosby presents rule-based behavioral investment, or RBI for short. “The myriad behavior traps to which we can fall prey can largely be mitigated through the simple but elegant process that is RBI. The process is easily remembered by the following four Cs:

    1. Consistency – frees us from the pull of ego, emotion and loss aversion, while focusing our efforts on uniform execution.
    2. Clarity – we prioritize evidence-based factors and are not pulled down the seductive path of worrying about the frightening but unlikely or the exciting but useless.
    3. Courageousness – we automate the process of contrarianism: doing what the brain knows best but the heart and stomach have trouble accomplishing.
    4. Conviction – helps us walk the line between hubris and fear by creating portfolios that are diverse enough to be humble and focused enough to offer a shot at long-term outperformance.”

    “Rule-based investing is about making simple, systematic tweaks to your investment portfolio to try and get an extra percentage point or two that has a dramatic positive impact on managing risk and compounding your wealth over time… We know that what works are strategies that are diversified, low fee, low turnover and account for behavioral biases.”

    “Just like a casino, you will stick to your discipline in all weather, realizing that if you tilt probability in your favor ever so slightly, you will be greatly rewarded in the end… Becoming a successful behavioral investor looks a great deal like being The House instead of The Drunken Vacationer.”

    The author quotes Jason Zweig: “You will do a great disservice to yourselves… if you view behavioral finance mainly as a window onto the world. In truth, it is also a mirror that you must hold up to yourselves.”

    Crosby, Daniel. The Laws of Wealth: Psychology and the Secret to Investing Success. Hampshire, Great Britain: Harriman House, 2016.

    A father’s letter to his kid: The 9 money and life lessons most people learn too late in life | CNBC

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    By Morgan Housel

    “Ninety percent of personal finance is just spend less than you make, diversify, and be patient.”  Morgan Housel

    Often your kids will need life, career, financial and relationship advice as they get older and become adults. Morgan Housel, a new father who has spent much of his career studying and writing about money, wealth, and behavioral finance, provided the following nine money, wealth and life lessons in a letter to his child:

    1. Don’t underestimate the role of chance in life.

    It’s easy to assume that wealth and poverty are caused by the choices we make, but it’s even easier to underestimate the role of chance in life.

    The families, values, countries and generations we’re born into, as well as the people we happen to meet along the way, all play a bigger role in our outcomes than most people want to admit.

    While you should believe in the values and rewards of hard work, it’s also important to understand that not all success is a result of hard work, and that not all poverty is due to laziness. Keep this in mind when forming opinions about others, including yourself.

    2. The highest dividend money pays is the ability to control time.

    Being able to do what you want, when you want, where you want, with who you want and for as long as you want provides a lasting level of happiness that no amount of “fancy stuff” can ever offer.

    The thrill of having fancy stuff wears off quickly. But a job with flexible hours and a short commute will never get old. Having enough savings to give you time and options during an emergency will never get old. Being able to retire when you want to will never get old.

    Achieving independence is our ultimate goal in life. But independence isn’t an “all-or-nothing” — every dollar you save is like owning a slice of your future that might otherwise be managed by someone else, based on their priorities.

    3. Don’t count on getting spoiled.

    No one can grasp the value of a dollar without experiencing its scarcity, so while your mother and I will always do our best to support you, we’re not going to spoil you.

    Learning that you can’t have everything you want is the only way to understand needs versus desires. This in turn will teach you about budgeting, saving, and valuing what you already have.

    Knowing how to be frugal — without it hurting you — is an essential life skill that will come in handy during life’s inevitable ups and downs.

    4. Success doesn’t always come from big actions.

    Napoleon’s definition of a genius is the person “who can do the average thing when everyone else around him is losing his mind.”

    Managing money and accumulating wealth are the same.  You don’t have to do amazing things to end up in a good place over time, you just have to consistently not screw up for long periods of time.

    Avoiding catastrophic mistakes (the biggest of which is burying yourself in debt) is more powerful than any fancy financial tip. Housel offers the following advice to readers of his books and blog…

    “Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people.”

    5. Live below your means.

    The ability to live with less is one of the most powerful financial levers, because you’ll have more control over it than things like your income or investment returns.

    The person who makes $50,000 per year, but only needs $40,000 to be happy, is richer than the person who makes $150,000, but needs $151,000 to be happy. The investor who earns a 5% return, but has low expenses, may be better off than the investor who earns 7% a year, but needs every penny of it.

    How much you make doesn’t determine how much you have, and how much you have doesn’t determine how much you need.

    6. It’s okay to change your mind.

    Almost no one has their life figured out by age 18, so it’s not the end of the world if you pick a major that you end up not enjoying. Or get a degree in a field that you’re not 100% passionate about. Or work in a career and later decide you want to do something else.

    It’s okay to admit that your values and goals have evolved. Forgiving yourself for changing your mind is a superpower, especially when you’re young.

    7. Everything has a price.

    The price of a busy career is time away from friends and family. The price of long-term market returns is uncertainty and volatility. The price of spoiling kids is them living a sheltered life.

    Everything worthwhile comes with a price, and most of those prices are hidden. They’re sometimes worth paying for, but you should never ignore their true costs.

    Once you accept this, you’ll start to view things like time, work, relationships, autonomy and creativity as currencies that are just as valuable as cash.

    “For my father [Warren Buffett], and now me, the essence of a good work ethic starts with meeting a challenge of self-discovery, of finding something you love to do, so that work — even, or especially, when it’s very difficult and arduous — becomes joyful. Maybe even sacred,” Peter Buffett, Warren’s son, writes.

    8. Money is not the greatest measure of success.

    Warren Buffett once said: True success in life is “when the number of people you want to have love you actually do love you.”

    And that love comes overwhelmingly from how you treat people, rather than your level of net worth. Money won’t provide the thing that you (and almost everyone else) want most. No amount of money can compensate for a lack of character, honesty and genuine empathy towards others.

    This is the most important financial advice I can give you.

    9. Don’t blindly accept any advice you’re given.

    All the lessons here, including this last one, are things that most people learn too late in life. But feel free to reject them.

    Your world will be different from mine, just as mine is different from my parents. No one is exactly is the same, and no one has all the right answers. Never take anyone’s advice without contextualizing it with your own values, goals and circumstances.

    References:

    1. https://www.cnbc.com/2020/06/19/fathers-day-letter-to-kid-money-life-lessons-people-learn-too-late-in-life.html
    2. http://www.morganhousel.com/

    Morgan Housel is a partner at Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. Author of the book The Psychology of Money.

    Intermittent Fasting to Hearth Health

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    “Intermittent Fasting may bring heart health and other health benefits.”

    Intermittent fasting can offer many health benefits. It can aid in weight loss, control diabetes and prevent many other health conditions, according to several medical experts.

    The benefits are thought to result from a process called metabolic switching, which is when the body goes into a fasting state and begins using body fat instead of glucose to meet its energy needs, according to Consumers Reports.

    Intermittent fasting helps preserve the body’s normal interplay between the hormone insulin and blood glucose, preventing insulin resistance (when the body doesn’t respond properly to it). Metabolic switching also signals the body to activate maintenance and repair systems, which aid in disease prevention.

    Intermittent fasting is an eating plan that focuses more on when to eat than what to eat.  And, more people are trying intermittent fasting due to its abundance of impressive health results from scientific studies, word of month and social media. Intermittent fasting has become the number one fasting technique and a popular weight loss tactic.

    Fasting is voluntary and controlled period without food. Fasting, especially intermittent fasting, is for health, religious and spiritual reasons.

    Eating cycles involve fasting for a period of time and eating for the rest. These periods can be aligned to a person’s lifestyle, dietary requirements or health conditions.

    When You Eat Matter

    It seems that regularly fasting can potentially improve your risk factors related to heart health. Although researchers aren’t sure why, at least one study has indicated that people who follow a fasting diet may have better heart health than people who don’t.

    Regular fasting and better heart health may be linked to the way your body metabolizes cholesterol and sugar. Regular fasting can decrease your low-density lipoprotein (LDL), or “bad,” cholesterol. It’s also thought that fasting may improve the way your body metabolizes sugar. This can reduce your risk of gaining weight and developing diabetes, which are both risk factors for heart disease.

    More studies are needed to determine whether regular fasting can reduce your risk of heart disease. Most scientific evidence on fasting comes from animal, not human, studies. If you’re considering regular fasting, talk to your doctor about the pros and cons. Keep in mind that a heart-healthy diet and exercising regularly also can improve your heart health.

    What you eat matters.

    Many studies have shown that the types of food you eat affect your health. Additionally, scientists are beginning to understand that when you eat may also make a difference.

    Throughout history, people have experienced periods when food was either scarce or completely lacking, says Dr. Valter Longo, an NIH-funded longevity researcher at the University of Southern California. “So, they were forced to fast,” he says.

    But current technology “has shifted our eating patterns,” explains Dr. Vicki Catenacci, a nutrition researcher at the University of Colorado. “People now eat, on average, throughout a 14-hour period each day.”

    Studies suggest that this constant food intake may lead to health problems and researchers have started looking at whether fasting can have potential health benefits for some people.

    Intermittent Fasting

    Many fasting diets mainly focus on the timing of when you can eat. These fasting diets are sometimes called “intermittent fasting.”

    In intermittent fasting, you eat every day but only during a limited number of hours per day. Instead of eating three meals spread out during the day, you may only eat between a six- to eight-hour window each day and fast for the remaining sixteen to eighteen hour. For example, you might eat breakfast and lunch, but skip dinner.

    The most popular intermittent fasting method is 16:8. This is a schedule that involves 16 hours of fasting and 8 hours of eating.

    Other timed intermittent fasting similar to this include 12:12 and 14:10. The first number always indicates the hours you fast for. During fasting a person must not consume any food or calories. Calorie free drinks are allowed such as water, black coffee and tea.

    Other methods include alternate day fasting. This is where a person fasts for 24 hours every other day or two days. For the other days a healthy nutritious diet should be consumed.

    Another intermittent fasting method is 5:2. This involves eating healthy nutritious non-calorie restricting 5 days a week. The other 2 days a person should consume 600 calories or less.

    But scientists don’t know much about what happens to your body when you fast. Most research has been done in cells and animals in the lab. That work has provided early clues as to how periods without food might affect the body.

    Researchers have found that in some animals, certain fasting diets seem to protect against diabetes, heart disease, and cognitive decline. Fasting has even appeared to slowed the aging process and protected against cancer in some experiments.

    “In mice, we’ve seen that one of the effects of fasting is to kill damaged cells, and then turn on stem cells,” explains Longo. Damaged cells can speed up aging and lead to cancer if they’re not destroyed. When stem cells are turned on, new healthy cells can replace the damaged cells.

    Studies are starting to look at what happens in people. Early results have found that some types of fasting may have positive effects on aspects of health like blood sugar control, blood pressure, and inflammation. But fasting can also cause weight loss. So researchers are studying whether the beneficial changes seen in the body are side effects of the weight loss or the fasting process itself.

    Body Changes

    For many people, the main reason to try fasting is to lose weight. Currently, most people try to lose weight by restricting how many calories they eat each day.

    “That doesn’t work for everyone,” Catenacci explains. “It takes a lot of focus. It takes a lot of math, and a lot of willpower.” Her research team is running a study to compare how much weight participants lose with fasting versus calorie restriction, but over a one-year period. “There’s a lot of debate about whether the benefits of intermittent fasting are due to the extended fasting period itself,” says Dr. Courtney Peterson, an NIH-funded nutrition researcher at the University of Alabama.

    To understand this better, Peterson did a study in pre-diabetic men. It was designed so the volunteers would not lose weight. The men ate an early time-restricted feeding diet for five weeks. They could eat only between 8 am to 2 pm. They then fasted for the next 18 hours. Next, they ate the same amount of food but only during a 12-hour period per day for five weeks. None of the men lost weight.

    The longer fasting period alone made a difference. The intermittent fasting diet “improved their blood sugar control,” Peterson says. “And we found a blood pressure lowering effect equivalent to what you see with a blood pressure medication.”

    These findings suggest that an extended fast or the timing of when you eat—even when it doesn’t affect your weight—can bring health benefits for some people.

    Health benefits of fasting

    Fasting may bring health benefits, but Longo and other experts caution against people trying fasting diets that are not based on research. If you’re fasting, talk with your health care provider first. People with certain health conditions or who are taking certain medications should not try fasting.

    Even if you fast sometimes, you still need to make healthy food choices overall, Peterson explains. “It looks like when you eat matters a lot, but what you eat probably matters more.”

    Autophagy and Anti-Aging

    After 16 to 18 hours of fasting, you should be in full ketosis. Your liver begins converting your fat stores into ketone bodies — bundles of fuel that power your muscles, heart, and brain.

    If you can do intermittent fasting for 16-18 hours a day, you’ll burn through body fat and fill up quickly when you break your fast, which makes it easy to stay in a calorie deficit and lose weight.

    When the body fasts and goes without food for an extended period of time, it begins a waste removal process. This is better known as autophagy.

    Autophagy is a cellular process where the body removes old cells and replaces them with new healthier cells. Replacing old cells with new ones help the body fight disease and cancers.

    Studies show that the autophagy process begins with long term fasting. Autophagy can only begin when glucose and insulin levels are low. It is a healthy process for cells and tissue to repair.

    Studies suggests that autophagy begins after 24 hours of calorie restrictions. It can increase with exercise during periods of fasting.

    After a full-day fast, your body goes into repair mode. It begins recycling old or damaged cells and reducing inflammation. If you’re looking for anti-aging or anti-inflammatory benefits, a 24-hour or greater timeframe fast is required. .

    When your body is under mild stress (such as exercise or an extended fast), your cells respond by becoming more efficient.

    Intermittent fasting is a valuable and an effective tool to improve your mental and physical health.

    References:

    1. https://newsinhealth.nih.gov/2019/12/fast-or-not-fast
    2. https://www.consumerreports.org/dieting-weight-loss/intermittent-fasting-best-times-to-eat-for-weight-loss-health/
    3. A monthly newsletter from the National Institutes of Health, part of the U.S. Department of Health and Human Services 
    4. https://order.store.mayoclinic.com/books/GNWEB20
    5. https://fcer.org/intermittent-fasting-benefits/#2_8211_Anti-inflammatory_properties

    Four Ways to Maximize Social Security Payments | TD Ameritrade

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    Social Security has helped financially millions of Americans during retirement. In 2021, an average of 65 million Americans per month receive Social Security benefit, totaling over one trillion dollars in benefits paid during the year.

    Essentially, Social Security is the major source of income for most elderly Americans age 65 and over.

    • Nearly nine out of ten people age 65 and older receive Social Security benefits.
    • The estimated average Social Security retirement benefit in 2021 is $1,543
    • Social Security benefits represent about 33% of the income of the elderly.
    • Among elderly Social Security beneficiaries, 50% of married couples and 70% of unmarried persons receive 50% or more of their income from Social Security.
    • Among elderly Social Security beneficiaries, 21% of married couples and about 45% of unmarried persons rely on Social Security for 90% or more of their income.

    The maximum Social Security benefit an individual who files in 2021 can receive per month is $2,324 for someone who files at age 62; $3,148 for someone who files at full retirement age (currently 66 and 2 months); and $3,895 for someone who files at age 70. 

    Here are four actions that you can take to maximize your payments:

    • Work at least 35 years,
    • Choose your retirement age carefully,
    • Claim spousal payments, and
    • Minimize federal and state income taxes.

    Retirement planning should include Social Security benefits in the equation, so it’s important to understand the purpose of Social Security and how it works.

    You’ll need to decide when to start taking Social Security benefits and coordinate that income with withdrawals from your various tax-advantaged retirement accounts.

    https://twitter.com/TDAmeritrade/status/1417122059210137605

    An estimated 180 million workers were covered under Social Security in 2020.

    • 48% of the workforce in private industry has no private pension coverage.
    • Two-thirds (68%) of workers are saving for retirement.
    • Having an employer-sponsored retirement savings plan is a key factor in whether Americans save for retirement.
    • Only 17% of those without access to an employer-sponsored plan said they have any retirement savings.

    Social Security Facts

    • In 1940, the life expectancy of a 65-year-old was almost 14 years; today it is just over 20 years, according to Social Security Administration.
    • By 2035, the number of Americans 65 and older will increase from approximately 56 million today to over 78 million.
    • There are currently 2.8 workers for each Social Security beneficiary. By 2035, there will be 2.3 covered workers for each beneficiary

    Reference:

    1. https://tickertape.tdameritrade.com/retirement/how-does-social-security-work-17191
    2. https://www.aarp.org/retirement/social-security/questions-answers/benefits/
    3. https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
    4. https://www.ssa.gov/pubs/EN-05-10085.pdf