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Psychology of Money

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“Look at market fluctuations as your friend rather than your enemy, profit from folly rather than participate in it.” Warren Buffett

Excerpts from: The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel.

The book’s premise is that doing well with money has little to do with how smart you are and a lot to do with how you behave.

  • “Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.”
  • “Soft skills are more important than the technical side of money.”
  • “You think about and are taught about money in ways that are like physics (with rules and laws) and not enough like psychology (with emotions and nuance).”
  • “Finance is guided by people’s behaviors.“

“It’s been an ideal period for investors. A climate of fear is their best friend. Those who invest when commentators are upbeat end up paying a high price for meaningless reassurance. In the end, what counts in investing is what you pay for a business–through the purchase of a small piece of it in the stock market–and what that business earns in the next decade or two.” Warren Buffett

References:

  1. https://www.sloww.co/psychology-of-money-book/https://www.sloww.co/psychology-of-money-book/

Roth IRA

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“Roth individual retirement accounts were created to help middle class earners set aside money for retirement that they wouldn’t have to pay taxes on at withdrawal.” Barron’s

The Roth individual retirement account (IRA) was created to provide an alternative to making non-deductible contributions to traditional IRAs. Roth IRAs are funded with after-tax dollars, which means at withdrawal at age 59 ½ the money is tax-free. Comparatively, traditional IRAs are funded with pre-tax dollars, so distributions are taxed at withdrawal.

You’re taxed or penalized when you withdraw your Roth IRA contributions and earnings if your Roth IRA account isn’t at least 5 years old or if you’re not yet 59½. The earnings portion of the withdrawal may be subject to taxes and a 10% penalty.

The contribution limit for Roth IRA accounts is $6,000 a year in 2021 (or $7,000 for people 50 and older).

There are also income restrictions for Roth IRA.

  • Single individuals with modified adjusted gross incomes (MAGI) of less than $125,000 in 2021 can contribute up to the limit, but their contributions are phased out if their MAGI is between $125,000 and $140,000.
  • If individuals earn more than $140,000, single taxpayers cannot contribute to a Roth IRA. For married couples filing jointly, the threshold is between $198,000 and $208,000 in 2021. 

Individuals can also use Roth conversions, where they take money from a traditional IRA and move it into a Roth after paying a one-time income tax on the transferred assets since pre-taxed dollars converted to a Roth are taxable at ordinary income rates. These transfers can also be known as a “backdoor Roth,” because they’re working around income limits to push money into these ultimately tax-free accounts. 

References:

  1. https://www.barrons.com/articles/peter-thiel-roth-ira-propublica-51624558641
  2. https://www.edwardjones.com/us-en/investment-services/account-options/retirement/roth-ira

2 benefits of investing to meet your goal | Vanguard

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What’s your plan to reach your goal?

You could just add up whatever’s left over in your bank account after you pay your bills each month. But putting that money in a separate investment account instead can have major benefits.

It keeps you from buying something else

No matter how much you really want to check this savings goal off your list, it’s all too easy to spend the money on something else when it’s just sitting in your bank account.

Maybe you think that willpower alone will be enough to keep you on course. If so, that’s great! But what if it doesn’t?

The best way to ensure that your money goes toward your goal is to move it out of your bank account before you’re tempted to spend it. Keeping this money in a separate account also makes it easier to see the progress you’re making toward your goal.

It gives you a chance to reach your goal faster

Let’s say you want to save for a down payment on your first home. You expect to need about $10,000, and you budget $200 a month toward your goal.

Keeping the money in a bank account typically means you’ll earn a pretty low rate of return—0.5%, for example.

At that rate, it will take you a little over 4 years to reach your goal, during which you’ll deposit a total of $9,800.

If you instead invest the money in a moderate-risk mutual fund or ETF (exchange-traded fund) and earn an average return of 5%, you could reach your goal 4 months earlier—with total deposits of only $9,000.

By investing, you could reach your goal with less time and money

A bar chart showing that investing your money could help you reach your goal faster

References:

  1. https://investor.vanguard.com/other-savings-goals/

7 Investing Principles

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The fundamentals you need for investing success.  Charles Schwab & Co., Inc

1. Establish a financial plan based on your goals

  • Be realistic about your goals
  • Review your plan at least annually
  • Make changes as your life circumstances change

Successful planning can help propel your net worth. Committing to a plan can put you on the path to building wealth. Investors who make the effort to plan for the future are more likely to take the steps necessary to achieve their financial goals.

A financial plan can help you navigate major life events, like buying a new house.

2. Start saving and investing today

  • Maximize what you can afford to invest
  • Time in the market is key
  • Don’t try to time the markets—it’s nearly impossible.

It pays to invest early.  Maria and Ana each invested $3,000 every year on January 1 for 10 years—regardless of whether the market was up or down. But Maria started 20 years ago, whereas Ana started only 10 years ago. So although they each invested a total of $30,000, by 2020 Maria had about $66,000 more because she was in the market longer.

Don’t try to predict market highs and lows. 2020 was a very volatile year for investing, so many investors were tempted to get out of the market—but investors withdrew at their peril. For example, if you had invested $100,000 on January 1, 2020 but missed the top 10 trading days, you would have had $51,256 less by the end of the year than if you’d stayed invested the whole time.

3. Build a diversified portfolio based on your tolerance for risk

  • Know your comfort level with temporary losses
  • Understand that asset classes behave differently
  • Don’t chase past performance

Colorful quilt chart showing why diversification makes long-term sense. The chart shows that it’s nearly impossible to predict which asset classes will perform best in any given year.

Asset classes perform differently. $100,000 invested at the beginning of 2000 would have had a volatile journey to nearly $425,000 by the end of 2020 if invested in U.S. stocks. If invested in cash investments or bonds, the ending amount would be lower, but the path would have been smoother. Investing in a moderate allocation portfolio would have captured some of the growth of stocks with lower volatility over the long term.

4. Minimize fees and taxes; eliminate debt

  • Markets are uncertain; fees are certain
  • Pay attention to net returns
  • Minimize taxes to maximize returns
  • Manage  and reduce debt

Fees can eat away at your returns. $3,000 is invested in a hypothetical portfolio that tracks the S&P 500 Index every year for 10 years, then nothing is invested for the next 10 years. Over 20 years, lowering fees by three-quarters of a percentage point would save roughly $13,000.

5. Build in protection against significant losses

  • Modest temporary losses are okay, but recovery from significant losses can take years
  • Use cash investments and bonds for diversification
  • Consider options as a hedge against market declines—certain options strategies can be designed to help you offset losses

Diversify to manage risk. Investing too much in any single sector or asset class can result in major losses when markets are volatile.

6. Rebalance your portfolio regularly

  • Be disciplined about your tolerance for risk
  • Stay engaged with your investments
  • Understand that asset classes behave differently

Regular rebalancing helps keep your portfolio aligned with your risk tolerance. A portfolio began with a 50/50 allocation to stocks and bonds and was never rebalanced. Over the next 10 years, the portfolio drifted to an allocation that was 71% stocks and only 29% bonds—leaving it positioned for larger losses when the COVID-19 crash hit in early 2020 than it would have experienced if it had been rebalanced regularly.

7. Ignore the noise

  • Press makes noise to sell advertising
  • Markets fluctuate
  • Stay focused on your plan

Progress toward your goal is more important than short-term performance. Over 20 years, markets went up and down—but a long-term investor who stuck to her plan would have been rewarded.

References:

  1. https://www.schwab.com/investing-principles

Closing the Black Wealth Gap

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Black families have one-eighth the wealth of white families as a result of economic discrimination and institutionalized racism.

This year marks the 100th anniversary of the Tulsa Race Massacres. Over two days, a white mob in the city’s Black district of Greenwood killed an estimated 300 Black Americans and left nearly 10,000 destitute and homeless. The Greenwood area was known as Black Wall Street, an epicenter of Black business and culture.

The Tulsa Race Massacres is just one many thousands of violent and economic incidents throughout American history that created the wealth gap. As such, the Black wealth gap was created through centuries of institutional racism and economic discrimination that limited opportunities for African-Americans.

Wealth was taken from these communities before it had the opportunity to grow. This history matters for contemporary inequality in part because its legacy is passed down generation-to-generation through unequal monetary inheritances which make up a great deal of current wealth.

The racial wealth gap is a chasm with Black families owning one-eighth the wealth of white families. According to the Survey of Consumer Finances, in 2019, the median net worth of Black households was $24,000 as opposed to $189,000 for white households. This shortfall in financial wealth creates a cascade of inequalities in education, homeownership, and simply saving for emergencies.

Historically, Blacks were limited to certain neighborhoods and had more trouble borrowing to buy a home than white home buyers. Additionally, Black workers don’t advance to the top positions in companies at a proportional rate as other groups.

Moreover, African American families have had fewer opportunities to build generational wealth through home ownership, investments and inheritance. In this century, many Black families were stripped of their wealth and financial security by by both public and private institutionalized racism whether called Jim Crow or redline policies.

There are other factors: Many African-Americans, particularly older ones, are too conservative as investors. Only 34% of Black families own stocks, while more than half of white families do, according to a Federal Reserve. It is important to help African American investors get more comfortable with owning risk assets such as equity stocks, ETF and mutual funds that build wealth over the long term.

Do not seek shortcuts to build wealth

You must build wealth over time. If you’re saving 15% or 20% of your income over 30 years, there’s a good chance you will be wealthy. These methods truly work whether you’re making $50,000 or making $500,000 a year.

‘We just had an 11-year bull market. If you didn’t take the appropriate amount of risk, you’re significantly behind,” says Malik Lee, an Atlanta financial advisor whose clientele is more than 90% African-American.

American Dream for Black families

The heart of the American Dream for Black families is financial wellness, independence and freedom. There are many ways to express the American Dream, including owning their home, not living paycheck to paycheck, and being able to travel. Today, 69% of African American families are confident the American Dream is still attainable, according to MassMutual’s ‘State of the American Family’ survey.

Financial wellness for most families is the heart of the American Dream. American families tend to view financial wellness in terms of five common financial priorities:

  • Having an emergency fund
  • Feeling confident in both short-term and long-term financial decision making
  • Not carrying a lot of debt
  • Being financially prepared for the unexpected
  • Not living paycheck to paycheck

Black families are taking steps to secure their financial future and dreams, but more needs to be done to keep the American Dream alive. The top financial regret across all consumer groups surveyed is “not starting early enough.”

References:

  1. https://www.barrons.com/articles/this-advisor-wants-to-close-the-black-wealth-gap-accepting-risk-is-key-51625077456
  2. https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/#series:Net_Worth;demographic:racecl4;population:1,2,3,4;units:median;range:1989,2019
  3. https://www.brookings.edu/blog/up-front/2020/02/27/examining-the-black-white-wealth-gap/
  4. https://www.massmutual.com/static/path/media/files/mc1133aa_09248mr-final.pdf
  5. https://www.forbes.com/sites/brianthompson1/2021/06/17/the-key-to-closing-the-racial-wealth-gap-black-entrepreneurship/

A Wealth of Wisdom

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“By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.” Warren Buffet

Warren E. Buffett, Chairman and CEO of Berkshire Hathaway Inc., and Charlie T. Munger, Vice Chairman of Berkshire Hathaway Inc., provide “A Wealth of Wisdom” in this CNBC video:

https://youtu.be/rQJWHocG-50

Berkshire owns American-based property, plant and equipment – the sort of assets that make up the “business infrastructure” of the U.S. – with a GAAP valuation exceeding the amount owned by any other U.S. company. Berkshire’s depreciated cost of these domestic “fixed assets” is $154 billion.

 

References:

  1. https://berkshirehathaway.com/2020ar/2020ar.pdf

Option Trading Principles: High Implied Volatility

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Implied volatility is a measure of what the options markets think volatility will be over a given period of time (until the option’s expiration), while historical volatility (also known as realized volatility) is a recording of how the underlying actually moved over a specified past period.

Volatility measures the rate at which a security moves up and down. If a security is moving up and down quickly, volatility will be high. Conversely, if a security is moving up or down slowly, volatility will be low.

Implied volatility (IV) shows how much movement the market is expecting in the future.

Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or the other.

High implied volatility could also mean there is an event coming up soon that may cause a big rally or a huge sell-off. However, implied volatility is only one piece of the puzzle when putting together an options trading strategy.

Generally, option traders look to buy options when implied volatility is low since premiums are lower, in hopes of seeing the underlying stock move in a favorable direction along with an increase in volatility which will make premiums increase.

And traders look to write options when implied volatility is high as option premiums tend to be higher, in hopes of seeing the underlying stock move in a favorable direction to his/her position along with a decrease in volatility which would make premiums decrease.

This is a strategy many seasoned traders use because it captures decay. At expiration, the hope for these traders is that the underlying stock does not move as much as originally expected.

The general idea that options with high IVs are expensive and options with low IVs are cheap.

References:

  1. https://www.nasdaq.com/articles/is-the-options-market-predicting-a-spike-in-invesco-mortgage-capital-ivr-stock-2021-06-11
  2. https://www.nasdaq.com/articles/what-does-implied-volatility-really-mean-2020-10-29

Positive Financial Mindset

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A person cannot achieve financial freedom and save by paying themselves first, invest for the long-term and accumulate wealth until they believe they can be financially free and successful.

Carol S. Dweck, Ph.D., a Stanford University Professor of Psychology, who is considered by many the leading expert on mindset and human behaviors, and who wrote the book, ‘Mindset: The New Psychology of Success‘, says people have two core mindsets: a growth mindset and a fixed mindset.

A growth mindset is the belief that our skills and qualities can be cultivated through effort and perseverance: Our abilities are due to our actions. So many people do not obtain financial freedom because they do not have one thing: the right mindset. Everything starts with how you think about money, wealth and success.

Embracing a Positive Mindset

When you begin to embrace a growth mindset, you start to think differently about how you talk to yourself and think about financial success. This leads individuals to focus on saving by paying yourself first, investing for the long-term and accumulating wealth, rather than focusing on expenses, paying bills and paying off debt. Consider this, if you focus solely on paying bills or paying off debt, you’re limiting your ability to save, invest and accumulating wealth; effectively, you’re not focusing on growth.

One common financial myth held by many Americans is that to achieve financial success through saving, investing and accumulating wealth, a person must sacrifice their happiness, their families and often their health for a large paycheck. People must realized that no matter how successful and happy a person masked themselves to look outwardly, it means nothing if he or she wasn’t happy with themselves on the inside. Portraying an outward image of success no matter how one felt on the inside does not equate to wealth. Instead represents a path to misery and unhappiness.

Most people are never able to achieve financial freedom because, for one, either they don’t know it exists or believe it’s possible for them; normally they’re never taught anything about it.

It begins with Mindset

“If you think the amount of money you have (or rather, don’t have) is due to someone else, you need to change your financial mindset.”

The key to saving, investing and accumulating wealth and achieving financial freedom isn’t starting off with a lot of money, it starts with one’s mindset…embracing a positive financial mindset. It all begins with the belief that you can realize and achieve it. Once you believe in your mind that you can, then you need to find a reason to keep this belief as strong as possible; this reason is your “Why?” Without it, at the first sign of adversity or when things begin to get challenging, you will quit.

Deciding to change your attitude regarding personal finance is one of the first steps in shifting your mindset and changing the of your outcome. A growth mindset means that you think with abundance and you believe that resources are not finite and that you can create more. With a growth mindset, you know that resources are infinite and that if you invest wisely, you’ll be able to achieve higher returns.

For example, people who focus on prosperity tend to look at their finances as an opportunity for growth — they focus on the opportunities for growing their income and net worth. But, in order to achieve this growth, you have to be willing to learn new things and step outside your comfort zone. Having a growth mindset with your finances empowers you to want to learn more about investing and ask a lot of questions about money; it helps you think like an investor.

A growth mindset is especially important with personal finances because it lets you accurately assess risk. A growth mindset knows that there’s always more to be made. It’s a prudent approach to savings as well as personal investing.

A person can find evidence of the Law of Attraction in the Bible in several places.  For instance:

“As a man thinks, so is he”-Proverbs 23:7

“A good man, out of the good treasure of his heart, brings forth that which is good; and an evil man out of the evil treasure of his heart brings forth that which is evil: for of the abundance of his heart his mouth speaketh.”- Luke 6:45

“What you decide on shall be done, and light will shine on your ways”- Job 22:28

“Ask, and it will be given to you; seek, and you will find; knock, and it will be opened to you. “For everyone who asks receives, and he who seeks finds, and to him who knocks it will be opened.…”Matthew 7:7-8

“…whoever shall say unto this mountain, be removed, and be cast into the sea; and shall not doubt in his heart, but shall believe that those things that he says shall come to pass, he shall have whatsoever he says”- Mark 11:23

Mindset is the key to changing your financial habits and building wealth. By changing your money mindset, you will be able to achieve your long term financial goals. Essentially, financial success–saving, investing and accumulatin wealth–is a mindset. A perso can’t truly be wealthy until they believe they can be wealthy.

References:

  1. https://theweek.com/articles/728758/how-growth-mindset-revolutionize-finances
  2. https://investmentu.com/how-to-beef-up-your-financial-mindset-for-2021/

June 2021 U.S. Monthly Jobs Report

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Missing 6.8 million jobs.

  • Nonfarm payrolls increased by 850,000 in June versus the estimate for 706,000.
  • The unemployment rate unexpectedly rose to 5.9% versus the 5.6% estimate.
  • Wages were up 0.3% for the month and 3.6% year over year, both in line with expectations.

Job growth leaped higher in June 2021, the U.S. Labor Department reported. Nonfarm payrolls increased 850,000 for the month, compared with the estimate of 706,000 and better than the upwardly revised 583,000 in May. The unemployment rate rose to 5.9% against the 5.6% expectation.

Currently, 6.8 million fewer jobs exist than before the pandemic. Millions of Americans have dropped out of the labor force.

Aside from ever-present concerns about pay and benefits, workers are particularly interested in jobs that allow them to work remotely at least some of the time. According to a Randstad survey of more than 1,200 people, 54 percent say they prefer a flexible work arrangement that doesn’t require them to be on-site full time.

Health and safety concerns are also very much on the minds of workers whose jobs require face-to-face interactions, the survey found.

The portion of the unemployed who have been out of work for six months or more rose.

Governors in 26 states have moved to end distribution of federal pandemic-related jobless benefits even though they are funded until September, arguing that the assistance — including a $300 weekly supplement — was discouraging people from returning to work.

References:

  1. https://www.cnbc.com/2021/07/02/jobs-report-june-2021.html
  2. https://www.nytimes.com/2021/07/02/business/economy/june-2021-jobs-report.html

Health, Financial and Emotional Well-Being

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“We don’t see the world as it is, we see it as we are.” Anaïs Nin

Recent survey shows Americans are the unhappiest they have been in 50 years. Pandemic and health concerns, social unrest and economic distress have left Americans feeling tired, and living with a constant state of “brain fog” which are just a few symptoms of stress, anxiety, lack of sleep, and poor overall mental health.

People will exercise to help their bodies become fit, but when it comes to mental health, most people do nothing. Let’s be frank, the coronavirus has changed many Americans emotional, financial, and physical health circumstances dramatically and quickly. It’s important to take a holistic approach to your health, financial and emotional well-being. We know that planning for your future is about so much more than your finances – you and your family’s physical and emotional wellness are also a priority.

Time and time again, research has shown that “money cannot buy happiness” and that not only do you need a finite amount of money to be happy, but that prioritizing things like expressing gratitude, friendships, hobbies and family may actually lead to long-term well-being.

Keep physical, emotional and financial health a priority and in the center of your thoughts and daily life.

Overall emotional, physical and financial well-being are what your attempting to holistically achieve. It helps you feel more secure and less stressed in all areas. Sometimes the best thing you can do for your health – and your long-term financial security – is to tune it out the constant negative news. Here are some ways to tune out negativity during uncertain times.

  1. Put down the smart phone and turn off the news. Allow yourself just one hour of news time each day, preferably in the middle of the day. This ensures you don’t start or end your day anxious. It’s important to stay informed, but once a day should suffice.
  2. Stay positive and focus on an attitude of gratitude. List the top five (or more) things you’re grateful for each day. Your list may be the same from day to day or it could change based on the past day’s experience. It could be as simple as being thankful for the roof over your head or a smile from a stranger as you walk your neighborhood.
  3. Get physical and eat healthy. You’ve probably heard it before, and that’s because it’s true – physical activity is just as healthy for your mind as it is for your body. This doesn’t mean you have to participate in high intensity interval training. Start small. Simply going for a walk or doing basic stretches can help keep your mind and body at their best. Additionally, eliminate process foods, refined sugars and saturated fats from your diet. Eat more plant based foods and whole grains.
  4. Connect with family and friends. Having a strong support system is important during good times, but even more so during challenging ones. Reach out to someone you haven’t talked to in a while to see how they’re doing. Send a text or card or give them a call. If your family is spread out across the country, use digital apps to connect and play games.
  5. Stick to a schedule. When you’re stressed, it often takes a toll on your sleep schedule. Keeping a consistent routine can help. Get up and go to bed at the same times each day, even on weekends. Know your stress triggers and pay attention when you notice them flaring up.

While it’s important to be aware of what’s going on in the world, focusing on the bad news won’t help your financial strategy, your emotional well-being or your physical health. Remember, you’re in it for the long term.

During the current coronavirus pandemic, instead of ‘social distancing,’ our focus should be on ‘physical distancing’ and ‘social connection.'”

Maintain mental health and emotional well-being

Focus on the now. Worrying about the past or the future isn’t productive. When you start chastising yourself for past mistakes, or seeing disaster around every corner, you’re only creating more stress and anxiety in your life.

It’s important to stop and to take a breath and ask yourself what you can do right now to succeed. Find something to distract you from destructive thoughts and reset your attitude.

Achieving a healthy frame of mind can seem more challenging than in years past.

Having a daily moment of intentional quiet can go a long way toward a better outlook.

Try this five-minute meditation routine that combines both yoga and balance to steady the mind, utilize the breath to become more mindful, and reduce stress.

Mindfulness meditation does, in fact, decreases anxiety and improves self-esteem, studies have shown.

As you move through Mindfulness meditation, focus on deep breathing. Inhale and exhale through the nose, and start by filling up your lungs with air. Then feel the air rise up into the chest. As you exhale, empty the chest first and then feel the stomach deflate like a balloon. This slow, conscious and specific breath pattern aids in focusing the mind to the present moment.

Finally, if your mind wanders easily during this sequence, you can focus on a one-word mantra to recite silently to yourself. Choosing a word like “serenity” or “peace” or “confidence” and syncing your movement with your breath can help transport you to a different world that quiets distractions from the past and future.

References:

  1. https://www.synchronybank.com/blog/millie/money-and-happiness/https://www.synchronybank.com/blog/millie/money-and-happiness/
  2. https://apple.news/Am_LnLhs1Q22oltXhOLcRLg
  1. https://www.edwardjones.com/market-news-guidance/client-perspective/your-health-your-finances.html
  2. https://www.edwardjones.com/market-news-guidance/guidance/tune-out-stressful-times.html