Category Archives: Financial Planning

Successful Long Term Investing

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“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.” Warren Buffett

You need courage, a long term focus, and the discipline to adhere to a long term plan to buy stocks when the markets are turbulent, stock prices are melting down, and the economy is in a deep slump, and the outlook for corporate earnings over the subsequent quarters is unfavorable. In Warren Buffett’s view, “Widespread fear is your friend as an investor because it serves up bargain purchases.” Thus, smart long-term investors love when the prices of their favorite stocks fall, as it produces some of the most favorable buying opportunities. According to Buffett, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.” Warren Buffett

Warren Buffett

Additionally, investors must focus on the long term — a minimum of seven to ten years — and look for high-quality, blue-chip companies that have fortress like balance sheets and can generate extraordinary free cash flow. In the short term, equity markets tend to swing wildly from day to day on the smallest of news, trend and sentiment, and celebrate or vilify the most inane data points. It’s important not to get caught up in the madness but stick to your homework. Warren Buffett quipped that, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

Invest in well-managed, financially strong businesses that sell goods and services for which demand is consistently strong (think food, consumer goods, and medicines), since it’s essential to keep capital preservation and margin of safety at the top of your priority list when deciding how to invest your money. As Buffett says, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

Businesses that are well managed and that have strong balance sheets typically display certain characteristics:

  • They carry little or no debt.
  • They generate enough free cash flow (earnings plus depreciation and other noncash charges, minus the capital outlays needed to maintain the business) that they don’t have to raise equity or sell debt.
  • They have a proven history of management excellence.
  • They have abundant opportunities for reinvesting capital (or clear policies for returning excess capital to shareholders), and their leaders boast an outstanding record of allocating capital.
  • They have a durable competitive advantage which could mean cost advantages, a strong brand name, or something else.
  • In addition, they are global in scope. After all, 95% of the world’s population lives outside the U.S., and economic growth is likely to be greater abroad than at home.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Warren Buffett

To be a successful long term investor, it’s essential to filter out the short-term noise. Most of the chatter from Wall Street and in the financial entertainment media headlines is just that: chatter you can and should ignore. “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. According to Buffett, “Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” Warren Buffet

If You’re Not Investing You’re Doing it Wrong

“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” Warren Buffett

Investing in equities delivers higher returns than bond or cash investments over the long term but is accompanied by a higher exposure to market risk. Investing in fixed income investments offers more modest return potential and risk exposure. Investors can invest in cash as a low- risk, low-return strategy, which is ideal for short-term savings goals or to balance out the risks of stock and bond investments. Ideally, investors’ asset allocations should reflect their goals, risk tolerance, time horizon, income and wealth, and other personal factors.

“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” Warren Buffett

References:

  1. https://www.kiplinger.com/article/investing/t038-c000-s002-7-blue-chips-to-hold-forever.html
  2. https://www.fool.com/investing/best-warren-buffett-quotes.aspx
  3. https://www.ruleoneinvesting.com/blog/how-to-invest/warren-buffett-quotes-on-investing-success/
  4. https://personal.vanguard.com/pdf/how-america-invests-2020.pdf

Mindfulness and Emotional Well-being

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“Cultivate the habit of being grateful for every good thing that comes to you, and to give thanks continuously.” Ralph Waldo Emerson

Mindfulness means maintaining a moment-by-moment awareness of your thoughts, feelings, bodily sensations, and surrounding environment, through a neutral, nonjudgmental filter.

Mindfulness also involves acceptance, meaning that you pay attention to your current thoughts and feelings without judging them—without believing, for instance, that there’s a “right” or “wrong” way to think or feel in a given moment.

When you practice mindfulness, your thoughts tune into what you’re sensing in the present moment rather than rehashing your past or imagining your future.

To be mindful is to be fully conscious or aware of your surroundings. It’s important to not think or worry about the future. Instead, the goal is to physically, emotionally, mentally, and cognitively stay within the present moment.


 
“Mindfulness…is the presence of heart.” Chinese Translation

To discover mindfulness is to discover what happens when you deliberately take time to detect the reality and your perception of the present moment no matter what it’s like—and gradually cultivate ‘an open heart’ to what we notice and sense, asserts teacher Adam Moskowitz. 

Mindfulness Chinese symbol

A Chinese translation for mindfulness is presence of heart. At its core mindfulness is a heart-centered practice. It is a realization of your fundamental wholeness, according to Moskowitz. It is a discovery of your innate care for yourself and one another. It is recognition of the truth of your interdependence—how we rely on one another and how the world relies on us.

Studies have shown that practicing mindfulness, even for just a few weeks, can bring a variety of physical, psychological, and social benefits. Essentially, mindfulness is good for your health, wealth and emotional well-being.

Mindfulness can be cultivated and practiced daily, Jon Kabat-Zinn emphasizes in his Greater Good video. “It’s about living your life as if it really mattered, moment by moment by moment by moment.”

It is essential for our wellbeing to take a few minutes each day to cultivate mindfulness and achieve a positive mind-body balance. Here are a few key components of practicing mindfulness that Kabat-Zinn and others identify:

  • Pay close attention to your breathing, especially when you’re feeling intense emotions.
  • Notice—really notice—what you’re sensing in a given moment, the sights, sounds, and smells that ordinarily slip by without reaching your conscious awareness.
  • Recognize that your thoughts and emotions are fleeting and do not define you, an insight that can free you from negative thought patterns.
  • Tune into your body’s physical sensations, from the water hitting your skin in the shower to the way your body rests in your office chair.

The cultivation of moment-by-moment awareness of our surrounding environment is a practice that helps us better cope with the difficult thoughts and feelings that cause us stress and anxiety in everyday life.

With regular practice of mindfulness exercises, you can harness the ability to root the mind in the present moment and deal with life’s challenges in a clear-minded, calm, assertive way. It’s about the challenges and the rewards of being less self-centered and more self aware.

References:

  1. https://greatergood.berkeley.edu/topic/mindfulness/definition
  2. https://www.withinmeditation.com/blog/2020/10/2/presence-of-heart-what-mindfulness-is-and-isnt
  3. https://greatergood.berkeley.edu/topic/mindfulness/definition#why-practice-mindfulness
  4. https://www.pocketmindfulness.com/6-mindfulness-exercises-you-can-try-today/

Bitcoin’s Bursting Bubble

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“I have to confess that I find it all exhilarating. I’m only concerned somewhat for the relatively new investors who get drawn into these things and then find out the hard way. I sympathize completely with these people out there enjoying this bubble, but they’ve always ended very badly, and I have no doubt this one will too.” Jeremy Grantham

The price of Bitcoin dropped below $40,000 for the first time in months and the cryptocurrency fell more than 40 percent off recent all time highs.

There are reasons for the recent crash in the price of Bitcoin, according to Barron’s Magazine. Recently, China banned the use of cryptocurrencies for financial institutions asserting that “virtual currencies shouldn’t be used in the market as they are not supported by real value”. Instead, China intends to create its own indigenous cryptocurrency that will allow the regime to monitor and track its citizens

Furthermore, other countries might be considering tighter regulation, particularly as cryptos become the currency of choice for ransomware hackers and money laundering. Additionally, Tesla stopped accepting Bitcoin as payment for vehicles and Elon Musk expressed climate-related concerns over Bitcoin’s mining process.

But sometimes things go down because they are going down, according to Barron’s. Investors who bought early are looking to lock in gains, while recent arrivals to the crypto game are panicking. Selling begets selling.

Image Source: Getty Images

Bubble Burst

“We’re a crazy marketplace full of irrational human beings who behave themselves 80% of the time and then 20% of the time totally freak out one way or the other.” Jeremy Grantham

Retail investors piling into Bitcoin have fueled a historic price bubble that has finally burst. When stock bubbles pop, the selling usually stops when shares drop well below intrinsic value and become attractive to a new class of value investors who didn’t partake in the market froth.

Cryptocurrencies are different. They have no intrinsic value, which means there’s no telling when the selling might stop.

Essentially, Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive Bitcoins in exchange. Overall, the mainstream acceptance of Bitcoin is still limited.

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with tech enthusiasts, speculators — and cybercriminals.

“The concerns among investors and traders is that perhaps we are about to see another crypto winter and it may take a long time for Bitcoin price to see any recovery as the bull cycle may be over,” said Naeem Aslam, chief market analyst at AvaTrade.

“The actual answer is that no one really knows about that and the only thing that we do know is that institutions are still buying Bitcoin on every dip,” said Aslam.

Maintain a long-term outlook

Stock market and assets, like cryptocurrencies, bubble bursts can be intimidating, but they’re no cause for panic. Historically, the market has always recovered from every one of its downturns — and it’s extremely likely it will bounce back again.

If you maintain a long-term outlook, it’s easier to avoid panic-selling when asset prices begin to free-fall. Remind yourself that the market will recover eventually, and you’ll be able to ride out the storm.

The key to investing for the long term is to ensure you’re investing in quality assets. And, investing during market downturns can actually be a cost-effective move.

Because asset prices are lower during market downturns, it can be a good opportunity to buy good assets, like stocks (and cryptocurrencies, if you’re so inclined), at bargain prices.

References:

  1. https://www.barrons.com/articles/china-issues-crypto-bitcoin-warning-51621416378
  2. https://www.dallasnews.com/business/technology/2021/05/19/bitcoin-falls-below-38000-whats-going-on/
  3. https://barrons.cmail20.com/t/ViewEmail/j/62CDF96507F967432540EF23F30FEDED/9E2B0856731CA0B32018F019E6F15D33
  4. https://markets.businessinsider.com/currencies/news/jeremy-grantham-gmo-stock-market-bubble-burst-before-may-2021-2-1030118339
  5. https://www.fool.com/investing/2021/04/03/3-ways-im-preparing-for-the-stock-market-bubble-to/

2021 Modern Wealth Survey | Charles Schwab

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“The past year has of course caused Americans to focus on their health, in particular their mental health, along with the health of their relationships. But the pandemic and the significant impact it had on the economy and stock market also taught us a valuable, and in many cases difficult, lesson about the importance of financial health and preparedness, including the importance of having a plan and emergency savings.”  Rob Williams, vice president of financial planning, Charles Schwab

A majority of Americans (60 percent) are feeling more optimistic about the state of the United States overall, including the economy, the stock market and their personal financial prospects, according to Schwab’s 2021 Modern Wealth Survey. And, more than half feel positive about the U.S. job market, economy and role as a global economic power.

Schwab’s 2021 Modern Wealth Survey is an annual examination of how 1,000 Americans think about saving, spending, investing and wealth. The online survey was conducted from February 1 to February 16, 2021, among a national sample of 1,000 Americans aged 21 to 75.

Recalibrating Priorities and Redefining Wealth

“More than half of Americans were financially impacted by COVID-19 in 2020”

According to Schwab’s survey, more than half of survey participants were financially impacted over the past year, whether the economic environment strained their finances (31 percent), they faced a salary cut or reduced hours (26 percent), or they were laid off or furloughed (20 percent).

In lieu of this recent reality, more than two-thirds (68 percent) of Americans have reprioritized what matters most to them, with 69 percent saying mental health is more important than it was before, followed closely by relationships (57 percent), financial health (54 percent) and physical health (39 percent).

Being financially comfortable

“Americans lowered the bar for what it takes to achieve “financial happiness” and to be “financially comfortable” in 2021”

When it comes to achieving financial peace of mind, Americans say you only need a net worth of $624,000 to be considered “financially comfortable.” That’s down significantly from the $934,000 net worth that Americans cited as the minimum needed for financial comfort last year, according to the Survey.

Additionally, the survey finds that Americans have also revised their perspective on what it takes to be wealthy. It takes $1.9M to be viewed as wealthy, more than double the national average, but down from 2020.

U.S. households had an average net worth of $748,800 prior to the pandemic, according to The Federal Reserve’s 2019 Survey of Consumer Finances. However, the median, or midpoint, net worth of all families was much lower, just $121,700 in 2019.

Some lessons learned or relearned from the pandemic include the importance of being financially prepared and being mindful (and more aware) of your financial, physical, mental and emotional health.

References:

  1. https://www.aboutschwab.com/modern-wealth-survey-2021
  2. https://www.cnbc.com/2021/05/17/net-worth-americans-say-you-need-to-be-financially-comfortable.html
  3. https://content.schwab.com/web/retail/public/about-schwab/schwab_modern_wealth_survey_2021_findings.pdf

Long-Term Investing

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“Finding success as a long-term investor requires navigating a psychological minefield.”. Ben Carson, Director of Institutional Asset Management at Ritholtz Wealth Management.

Everyone would agree that the stock market has been highly volatile since the turn of the 21st century, experiencing crashes of 50%, 57% and 34% since 2000. It’s possible this level of heightened volatility is going to remain for the foreseeable future with an assist from the internet, rising sovereign debt and inflation.

Investing for the long-term implies that you set aside money today so you can have more money in the future. But getting to whatever the “long-term” means to you requires seeing the present value of your holdings fall, sometimes in soul-crushing fashion.

In the coming 40-50 years, you should expect to experience at least 10 or more bear markets, including 5 or 6 that constitute a market crash in stocks. There will also probably be at least 7-8 recessions in that time as well, maybe more.

However, you can never be sure of anything when it comes to the equity markets or the U.S. economy, but let’s use history as a rough guide on this. Over the 50 years from 1970-2019, there were 7 recessions, 10 bear markets and 4 legitimate market crashes with losses in excess of 30% for the U.S. stock market. Over the previous 50 years from 1920-1969, there were 11 recessions, 15 bear markets, and 8 legitimate market crashes with losses in excess of 30% for the U.S. stock market.

Bear markets, brutal market crashes and recessions are a fact of life as an investor. They are a common and expected feature of the financial system.

If you’re investing in the stock market that means you should plan on losing at least 10% of your money once every 1-2 years, on average. You should also plan on losing 20% of your capital once every 3 or 4 years, 30% once every 6 or 7 years and 40% or worse every 10-12 years.

These time frames aren’t set in stone since actual stock market returns are anything but average but you get the point. If your money is invested in the stock market for the long-term, expect it to grow over time but also evaporate without warning on occasion.

The same applies to pretty much any risk asset.

References:

  1. https://awealthofcommonsense.com/2021/05/sometimes-you-just-have-to-eat-your-losses-in-the-markets/
  2. https://awealthofcommonsense.com/2021/02/a-short-history-of-u-s-stock-market-corrections-bear-markets/

Greater Fool Theory | Motley Fool

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“Greater fool theory states that investors can achieve positive returns by buying an asset without concern for valuation fundamentals and other important factors because someone else will buy it at a higher price.”

Simply stated, investors expect to make a profit on the stocks they purchase because another investor (the “greater fool”) will be willing to pay even more for the stock, regardless if the stock’s price is overvalued based on fundamentals analysis or long-term performance outlooks.

According to The Motley Fool, this philosophy relies on the expectation that someone else will get caught up in market momentum (frenzy) or have their own reasons for why the asset is worth more than the price you paid. 

In the short term, popular sentiment plays the biggest role in shaping stock market pricing action, but fundamental factors including revenue, earnings, cash flow, and debt determine how a company’s stock performs over longer periods.

In short, it is possible to achieve strong returns by using the greater fool theory, but it’s risky and far from the best path to achieving strong long-term performance. 

Specifically with regard to the stock market, the Greater Fool Theory becomes relevant when the price of a stock goes up so much that it is being driven by the expectation that buyers for the stock can always be found, not by the intrinsic value (cash flows) of the company.

The Greater Fool Theory is a very risky, speculative strategy that is not recommended especially for long-term investors.

References:

  1. https://www.fool.com/investing/how-to-invest/greater-fool-theory/
  2. https://www.hartfordfunds.com/investor-insight/the-greater-fool-theory-what-is-it.html

Investing – How to Get Started

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“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”  Robert Kiyosaki, Rich Dad Poor Dad

Investing, which involves putting your money to work, is a great first step toward building wealth for yourself and your family. If you think investing is gambling, you’re doing it wrong. The world of investing requires discipline, planning and patience. And, the gains you see over decades can be exciting. The three most common categories of investments, referred to as asset classes, include:

  1. Stocks – which are a share in a company. These tend to be riskier investments, but also typically offer more potential for profit over time.
  2. Bonds – which are a share of debt issued by a business or the government. These are safer investments, typically returning a lower profit than stocks over time.
  3. Cash and cash equivalents – which are readily available cash and short-term investments like certificates of deposit (CDs). These are the safest investments, but typically return little profit over time.

 

Before you start investing, it is important for you to understand a few basic concepts and definitions, such as:

Risk Tolerance

Risk tolerance is basically your emotional ability to deal with losing money. If you invested $1,000 today, could you deal with it being worth $500 for a period of time? That’s possible if you invest heavily in stocks, which tend to increase in value over time but can be volatile from one day to the next. If you answered yes to being okay losing a great deal of money for a period of time, then you have a high risk tolerance.

Time Horizon

Time horizon is the amount of time before you want to use your money. If you’re planning to use the money to make a down payment on a home within the next three years, you have a short time horizon and would likely have less risk tolerance. If you’re not planning to use the money until you retire in 30 years, then you have a long time horizon and can afford to take on more risk.

Asset Allocation

Asset allocation is the percentage of stocks, bonds or cash you own. If you have a high risk tolerance and long time horizon, you’re likely to want a larger percentage of stocks because you’ll be able to weather ups and downs and make more money over the long term. On the other hand, if you have a low risk tolerance and short time horizon, you probably want more cash and bonds so that you don’t lose money right before you need it.

Stocks, bonds and cash tend to respond differently to market conditions (one may go up when the others go down). Asset allocation helps you spread your money so that when one asset class unexpectedly zigs, your whole portfolio doesn’t zig along with it. In this way, asset allocation can help ensure your portfolio is correctly positioned to help you reach your financial goals, no matter what is happening in the market.

Diversification

Diversification splits your investments among different groupings or sectors in order to reduce risk. That includes your asset allocation. But it also includes where you invest within asset classes. For instance, you might diversify between stocks in companies located within the United States and stocks in companies located in Asia.

Different sectors of the economy do better at different times. It’s tough to predict which one will do well in any given year. So when you diversify and own stocks across different sectors, you are positioned to make money on whatever sector is performing well at the time. A well-diversified portfolio can help lessen the impact of market ups and downs on your portfolio.

Rebalancing

If you’ve done a good job with asset allocation and diversifying, then the balance of your portfolio is likely going to get out of whack over time as one sector does better than another. For instance, let’s say you wanted 10 percent of your stocks to be companies in Asia. If companies in Asia have a great year, those companies may now make up 15 percent of your stocks. In that case you’ll want to sell some of those stocks and use that money to buy more stocks (or even bonds) in parts of your portfolio that didn’t do as well.

Rebalancing on a regular basis (once or twice a year, for example) can help ensure your portfolio remains aligned with your goals. And because it provides a disciplined approach to investing, portfolio rebalancing also may prevent you from buying or selling investments based on emotion.

Dollar Cost Averaging 

Dollar cost averaging (DCA) involves putting your investment plan on autopilot.  With DCA, you invest a set amount at set intervals (for example, $200 every month) in the market. By investing systematically, you’ll buy more shares of an investment when the market is lower, fewer when the market is higher, and some when the market is in between. Over time, this may help you to pay a lower average price for the total shares you purchase.

DCA takes the emotion out of investing, helping you to start on your investment plan sooner, rather than later. And once you begin, DCA can also help you remain focused on your goals, no matter what’s happening in the market. It helps make investing a habit.

Capital Gains

Capital gains is an increase in the value of an asset or investment over time. Capital gains is measured by the difference between the current value, or market value, of an asset or investment and its purchase price, or the value of the asset or investment at the time it was acquired {cost basis}.

Realized capital gains and losses occur when an asset is sold, which triggers a taxable event. Unrealized gains and losses, sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment’s value but are not considered a capital gain that should be treated as a taxable event.

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Fiscal Fact: The average white household had $402,000 in unrealized capital gains in 2019, compared with $94,000 for Black households and $130,000 for Hispanic or Latino households. These disparities have generally widened over time.  Source:  Tax Policy Center https://www.taxpolicycenter.org/fiscal-fact/unrealized-capital-gains-ff-05102021

Capital gains are classified as either short-term or long-term. Short-term capital gains, defined as gains realized in securities held for one year or less, are taxed as ordinary income based on the individual’s tax filing status and adjusted gross income. Long-term capital gains, defined as gains realized in securities held for more than one year, are usually taxed at a lower rate than regular income.

“If you want to become really wealthy, you must have your money work for you. The amount you get paid for your personal effort is relatively small compared with the amount you can earn by having your money make money.” John D. Rockefeller

Before you start investing or putting your money to work for your, do your homework and research. Once you’ve made a decision, make sure to re-evaluate the assets in your portfolio on a regular basis. A good asset today may not necessarily be a good asset in the future.

And, don’t panic during the inevitable setbacks and don’t be fearful during the inevitable stock market corrections that all long-term investors face. If the reasoning behind the investment decision was sound when purchased, stick with the assets, and they should eventually recover and grow.

References:

  1. https://www.investopedia.com/financial-edge/0511/the-top-17-investing-quotes-of-all-time.aspx
  2. https://www.northwesternmutual.com/life-and-money/how-to-invest-a-beginners-guide/
  3. https://www.northwesternmutual.com/life-and-money/4-investment-terms-you-should-know/
  4. https://www.investopedia.com/terms/c/capitalgain.asp

Volatility and Market of Stocks

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If you pay any attention to the stock market, you probably know that volatility is actually a normal part of investing.

Stock market volatility is a measure of how much the stock market’s overall value fluctuates up and down. A stock with a price that fluctuates wildly—hits new highs and lows or moves erratically—is considered highly volatile. A stock that maintains a relatively stable price has low volatility. according to Investopedia.

Stock market volatility is most commonly measured by standard deviation, which is a measure of the amount of variability around an average. The larger the standard deviation, the higher the volatility will be.

Volatility is often associated with fear, which tends to rise during bear markets, stock market crashes, and other big downward moves. However, volatility doesn’t measure direction. It’s simply a measure of how big the price swings are. You can think of volatility as a measure of short-term uncertainty.

“Keep it simple and avoid complications in the markets.”

  • Sooner or later, most investors realize that the stock market is actually a ‘market of stocks’ that is chaotic, dictated by investors’ emotions of fear and greed, and influenced by interest rates and macro economic conditions. Good stocks don’t always advance. Bad stocks don’t always fall. Reality is rarely ever as bullish, or as bearish, as forecasted by financial analysts and strategists.

What is certain is that a quasi-invisible force known as volatility is always always present, threatening to disrupt the market’s delicate equilibrium and sanity.

“One of the hardest parts about being a long-term investor is the fact that sometimes your money is going to get incinerated and there’s nothing you can do about it.” Barry Ritholtz

Investors have a few primary ways to respond.

  • They can sit tight and act like long-term investors. Time tends to reward such behavior, though research has shown that it is as difficult to practice as it is uncommon.
  • Most investors never hold stocks long enough to benefit from the fact that the market rises over time. Investors typically buy too late and sell too early. They routinely “greed in” and “panic out” of stocks. They hold stocks for just a few years — or worse, a few months — rather than carefully curating a portfolio over decades, which means most investors behave like salmon swimming upstream. They struggle against the stock market’s natural rhythms.
  • Rotations is when smart and retail money runs after gains in certain sectors until a rally there becomes exhausted, and then their money runs to other sectors.
  • Investors can use options to more effectively navigate the stock market. A well-placed put or call can make all the difference in an uncertain market. A well-placed options contract can turn the unpredictably of investing into a defined outcome.
  • There are two types of options. A call option gives investors the right to buy a stock at a certain price and time. A put option gives investors the right to sell a stock at a certain price and time. An easy way to remember the difference between puts and calls is that a call gives you the right to “call in” a winning stock, while a put gives you the right to “put off” a bad stock on someone else.
  • Investors buy puts when they want to protect stock that they own from losing value.
  • Investors buy calls when they want to own a stock they believe will increase in value.
  • Many investors sell puts and calls to generate income.
  • Many people pick options that expire in three months or less. When you buy an options contract that expires in a year or more, you spend more money because time equals risk.
  • Simplicity is everything. It’s important to keep your trading strategy simple and avoid complications in the markets. Since everything could change tomorrow, or not, and thus we fall back on something we learned during the dark days of the 2008-09 financial crisis: Focus on the facts that have held up over time

Consider keeping a list of stocks or exchange-traded funds you would like to buy during market sell offs or crashes.

When in doubt, always remember: “Bad investors think of ways to make money. Good investors think of ways to not lose money.”

To keep from panicking when stock market volatility ticks up, it’s important to realize that volatility comes with the territory when you decide to invest. The stock market will always have its ups and downs, and there’s no use trying to predict what’s going to happen. So if you’re investing for the long term, consider basing your decisions on your goals. timeline and tolerance for risk, rather than on what’s happening in the markets from one day to the next.

Also, remember that being diversified is one way to help manage your exposure to volatility. By spreading your money out over various asset classes you’re also spreading out your market risk, and ensuring your portfolio’s results aren’t based on the performance of one type of investment.

References:

  1. https://www.fool.com/investing/how-to-invest/stocks/stock-market-volatility/
  2. https://www.barrons.com/articles/how-to-buy-and-sell-options-without-making-a-fool-of-yourself-51600336811
  3. http://www.barrons.com/articles/how-to-use-options-to-beat-the-market-1477415121
  4. https://awealthofcommonsense.com/2021/05/sometimes-you-just-have-to-eat-your-losses-in-the-markets/

Financial Mindset

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“It’s difficult to master the psychology and emotions behind earning, spending, debt, saving, investing, and building wealth.”

Personal finance is simple. Fundamentally, you only need to know one thing: To build wealth and achieve financial freedom, you must spend less than you earn. Yet, it seems challenging for most people to get ahead financially.

Financial success is more about mindset and behavior than it is about math, according to J.D. Roth, author of Get Rich Slowly. Financial success isn’t determined by how smart you are with numbers, but how well you’re able to control your emotions and behaviors regarding savings and spending.

Financial Mindset

“Change your mindset and attitude, and you can change your life.”

You sometimes have to make sacrifices in order to improve your financial situation. For instance, if you are in debt, you need to sacrifice some expenses so you can pay more towards managing and eliminating your debt. It is these financial sacrifices that will require you to have the right financial mindsets so you can overcome the obstacles that derail people from managing and eliminating their debt.

According to an article published in USAToday.com, Americans do not have a financial literacy problem. Instead, Americans simply make the wrong financial decisions and have bad final habits which does not necessarily translate that they are unaware of the best practices of financial management. We know how to make the right choices about our personal finances. The problem, according to the article’s author Peter Dunn, is that Americans have a financial behavioral problem. It is bad financial behavior, decisions and habits that usually get them into money trouble. It is what put them in a financially untenable position.

A perfect example is that you should never spend more than what you are earning. It is logical after all. But does that mean you follow it. Some people still end up in debt because they spend more than what they are earning.

Other examples of beliefs about money and personal finance include:

  • Taking personal responsibility regarding your finances is everything.
  • You shouldn’t buy things you can’t afford.
  • You don’t have to make a ton of money to be financially successful.
  • You can give yourself and your family an amazing life, if you’re able to remain disciplined and think long term.
  • Borrowing money from or lending money to your family isn’t recommended.
  • Education can get you a better job, if you get the right education.
  • You should buy life insurance.
  • You have much more to do with being a financial success than you think.

Financial literacy gems such as “spend less than you make,” “you need to budget” and “save for the future” are impotent attempts to help. However, lacking the correct financial mindset can make following the simple financial gems quite challenging.

There are 5 destructive financial mindsets that are the norm in our society today but you should actually get rid of starting today, according to NationalDebtRelief.com.

1. Using debt to reach your dreams.

This can actually be quite confusing. A lot of people say that it is okay to be in debt as long as it will help you reach your dreams. There is some truth to that but you should probably put everything into the right perspective. Buying your own home and getting a higher education are some of the supposedly “good debts.” It is okay to borrow for these if you can reach your dreams because of that debt. Not so fast. It may be logical to use debt to reach these but here’s the key to really make it work – you should not abuse it. If you get a home loan, buy a house that will help pay for itself. That way, the debt will not be a burden for you. When it comes to student loans, make sure that you work while studying to help pay for your loans while in school. Do what you can to keep debt from being a burden so it will not hinder you from reaching your dreams.

2. Thinking you do not need an emergency fund.

The phrase, “you only live once (YOLO)”, should no longer be your mindset – especially when it comes to your finances. You always have to think about the immediate future. If you really want to enjoy this life, you need to be smart about it. Do not splurge everything on present things that you think will make you happy. It is okay to postpone your enjoyment so you can build up your emergency fund. You are not as invincible as you think even if you are still young.

3. Settling for a stressful job to pay off debt.

“The most important thing when paying off your debts is to pay off your debts.”

Among the financial mindsets that you need to erase is forcing yourself to stay in a stressful job just so you can pay off your debt. You are justifying the miserable experience that you are going through in your job because you need it to meet your financial obligations. This is the wrong mindset. You need to put yourself in a financial position where you will never be forced to stay in a job that you do not like. Live a more frugal life that does not require you to spend a lot so you can pursue a low paying job and still afford to pay your debts.

4. Delaying your retirement savings.

Some young adults think that their retirement savings can wait. Some of them think that they need to pay off their debts first before they can start thinking about the future. This is not the right mindset if you want to improve your finances. You have to save for retirement even when you are drowning in debt.

5. Failing to have a backup plan.

The last of the financial mindsets that you need to forget is not having a backup plan. Do not leave things to chance if it involves your finances. You have to make a plan and not just that, you need to have a backup plan. If you have an emergency savings fund, do not rely on that alone. What if one emergency happens after another? Where will you get the funds to pay for everything? Think about that before you act.

Takeaway

Remember, personal finance is simple…it’s your emotion, behavior and habits that are challenging. Bottom-line, it comes down to your financial mindset.  Smart money management is more about your mindset than it is about personal financial math of net worth, cash flow, saving and investing. The math of personal finance is simple and easy. It’s the psychology that’s tough and challenging. Essentially, the concepts to improving your finances and achieving financial freedom are simple but it is not easy to follow through with them.

References:

  1. https://business.time.com/2013/03/11/why-financial-literacy-fails/
  2. https://www.usatoday.com/story/money/personalfinance/2015/09/27/americans-financial-literacy-behavior/72260844/
  3. https://business.time.com/2011/09/22/debt-tsunamis-debt-snowballs-and-why-the-conventional-wisdom-about-defeating-debt-is-wrong/
  4. https://www.nationaldebtrelief.com/5-financial-mindsets-you-need-to-get-rid-of/
  5. https://www.getrichslowly.org
  6. https://obliviousinvestor.com
  7. https://petetheplanner.com/yes-you-are-an-investor-think-like-one/

Financial Planning

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A financial plan includes everything from defining your goals to executing on them with a budget and an investment plan…and, it’s really never too early to get started!

Financial planning is the process of setting and creating a strategy to achieve your financial goals. Whether you’re planning for short-, medium- or long-term desires, having a financial plan in place makes money decisions easier every step of the way.

The keys to financial security and success are simple to achieve by every American.  The keys involve preparing a simple financial game plan, developing the correct financial mindset and implementing positive financial habits and behaviors…period.

“A ship without a rudder can certainly make its way across the water, but it has no control of where the water will take it–so grab your rudder and take initiative of your financial destiny.” Nancy LaPointe

Creating a game plan is a critical initial step in taking control of your financial future.  A simple financial plan allows you to get control of your financial future.

Financial Planning

Creating a financial plan is about developing a realistic guideline on how you can put all of your financial resources to their best use. The process starts by examining and articulating your short, intermediate and long-term goals and then sorting out your priorities.

A successful financial plan looks at all the interrelated parts of your financial life—income, expenses, discretionary spending, investments, debt, retirement planning, the role of insurance in risk management, income-tax liability, estate planning needs and desires—to make sure they’re all working in sync. This is essential, because if you don’t have a handle on how much money is coming in and going out every month, it’s next to impossible to know how much you can save.

If you don’t have a financial plan, you won’t be able to manage your most important goals like buying that bigger home, paying for your children’s education or funding a comfortable retirement. And if you don’t have adequate insurance, you may not be able to protect these savings in the face of an unexpected event, like an illness or a job loss.

A financial plan will include a series of concrete recommendations to help you achieve the goals that you have identified and prioritized. Without a plan, your financial future remains an undisciplined and low probability of success. The goal of a financial plan, after all, is to make your goals a reality. A financial plan is necessary for money management and financial security because:

  • 78 percent of people with a financial plan pay their bills on time and save each month vs. only 38 percent of people who don’t have a plan
  • 68 percent of planners have an emergency fund while only 26 percent of non-planners are financially prepared to cover an unexpected cost.

Benefits of Having a Financial Plan

Understanding where you stand financially and creating a plan for your financial goals is critical to your financial success. While it’s possible to achieve some financial goals without a financial plan, it’s a lot easier when you have a clear path forward. Having a plan in place serves as helpful guidance when questions of how much to spend and how much to save come up.

Some benefits of personal financial planning are:

  • You’ll better understand your current situation. If you don’t budget or keep track of where your money goes, it’s hard to know what kind of financial shape you’re in. With a financial plan, you’ll always have a pulse on your financial health and know what you’re capable of doing.
  • You’ll have a handle on risk management. Having an emergency fund is essential because you never know when you’ll need it. What’s more, knowing which types of insurance you need—such as health, life and disability—and how much can provide some protection when things go seriously wrong. With a good strategy, you’ll be able to plan for these risk management tools and fit them in your budget.
  • You can eliminate debt faster. If paying off debt is important to you, part of your financial plan can include specific actions you can take to accomplish that goal as fast as possible.
  • You can boost other savings goals. Depending on your goals, you may want to set aside cash for a home down payment, house renovations, a vacation and more. A financial plan can help you map out how you’ll meet each of your savings goals, and give you the motivation to do it.
  • You’ll be ahead on long-term goals. Whether you’re saving for retirement, a vacation or a child’s college education, financial planning can help you understand exactly how much you need to accomplish your goal and what you need to be doing now to get there. The sooner you start this process, the easier it will be to get ahead.

If you’d prefer to build your financial plan on your own, follow these tips:

10 Step Financial Plan

  1. Write down your goals—One of the first things to ask yourself is what you want your money to accomplish. What are your short-term needs? What do you want to accomplish in the next 5 to 10 years? What are you saving for long term? It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying and prioritizing your goals will act as a motivator as you dig into your financial details.
    Write down your long-, medium- and short-term goals. Your long-term list might include things like retirement and a child’s education. Medium-term could be the down payment on a house or a new car. A vacation or new computer might fall into the short-term category. Whatever your goals, make them concrete. Then determine a dollar amount for each and the timeframe for reaching it.
  2. Create a net worth statement—Achieving your goals requires understanding where you stand financially today. So start with what you have. First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property. Now make a list of all your debts: mortgage, credit cards, student loans—everything. Subtract your liabilities from your assets and you have your net worth. If you’re in the plus, great. If you’re in the minus, you have some work to do. But whatever it is, you can use this number as a benchmark against which you can measure your progress.
  3. Review your cash flow—Cash flow simply means money in (your income) and money out (your expenses). How much money do you earn each month? Be sure to include all sources of income. Now look at what you spend each month, including any expenses that may only come up once or twice a year. Do you consistently overspend? How much are you saving? Do you often have extra cash you could direct toward your goals?
  4. Create a budget and Build an emergency fund—Budget will let you know how you’re spending. Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes. Then write down nonessentials—restaurants, entertainment, even clothes. Does your income easily cover all of this? Are savings a part of your monthly budget? This will help you determine if what you’re spending money on lines up with what is most important to you. Additionally, build an emergency fund to keep from dipping into long-term investments or borrowing at unattractive rates when you need cash in a hurry, create an emergency savings fund that can cover at least three to six months of essential living expenses such as rent or mortgage, utilities, food, and transportation.
  5. Focus on debt management—Debt can derail you, but not all debt is bad. Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. Look at each specific debt to decide when and how you’ll systematically pay it down.
  6. Get your retirement savings on track—Whatever your age, retirement saving needs to be part of your financial plan. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference. Calculate how much you will need and contribute to a 401(k) or other employer-sponsored plan (at least enough to capture an employer match) or an IRA. Save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.
  7. Check in with your portfolio—If you’re an investor, you should take a close look at your portfolio? (And if you’re not an investor, think carefully about becoming one!) Market ups and downs can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis.
  8. Make sure you have the right insurance—Having adequate insurance is an important part of protecting your finances. We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Review your policies to make sure you have the right type and amount of coverage.
  9. Know your tax situation—The Tax Jobs and Cuts Act of 2017 changed a number of deductions, credits and tax rates beginning in 2018. For instance, standard deductions were increased significantly, eliminating the need to itemize for a lot of people. To make sure you’re prepared for the 2019 tax season, review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information at https://www.irs.gov/tax-reform. Taking advantage of tax sheltered accounts like IRAs and 401(k)s can help you save money on taxes. You may also want to check in with your accountant for specific tax advice.
  10. Create or update your estate plan—At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare. Medical directive forms are sometimes available online or from your doctor or hospital. Working with an estate planning attorney is recommended to help you plan for complex situations and if you need more help.

Financial planning can improve your chances of achieving your financial goals and financial freedom. While financial freedom can mean different things to different people, it generally means having a feeling of security and empowerment with your money and life.

References:

  1. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan
  2. https://www.westernsouthern.com/learn/financial-education/financial-planning-checklist
  3. https://www.schwab.com/resource-center/insights/content/case-financial-planning
  4. https://www.experian.com/blogs/ask-experian/what-is-financial-planning/