Tag Archives: Financial Planning

Asset Allocation Strategy

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Asset allocation is designed to help an investor take short-term fluctuations more in stride.

When you divide your money among a variety of asset classes — stocks, bonds, real estate and cash — you can potentially smooth the ups and downs of financial markets. Diversifying your investments within the major asset classes and investment styles can help balance out a portfolio.

Asset allocation enables you to own a wide selection of investment types to potentially benefit when one asset class does well and limit the downside when another asset class does not. Once you create an asset allocation strategy as part of your comprehensive financial plan, it helps to keep a long-term perspective when the inevitable financial market volatility occurs.

It’s important to note that asset allocation and diversification do not ensure a profit or protect against loss. However, it makes sense to remember your long-term financial plan and asset allocation strategy, and stick with it, no matter how great short-term economic challenges may seem.

A long-term commitment to your asset allocation strategy doesn’t mean you shouldn’t take action during periods of uncertainty. The key is taking the right action. You may discover the original percentages you allocated to different asset classes and types of investments are not in sync with your strategy due to shifts in the market.

Your portfolio may be overly concentrated or under-represented in one area. If so, you can reallocate your assets and ensure your long-term asset allocation strategy is back on track.

Of course during times of market volatility and economic uncertainty, many investors are tempted to move out of stock investments, into the safety of cash positions. Yes, cash is an asset for investors, but understand that you earn nothing with this asset class…no return from cash.

As a result, investors tend to stay on the sidelines until financial turbulence settles, but this may be a costly mistake. One thing previous recessions and bear markets have taught us is that life goes on. In each of the most recent five bear markets since 1987, sell-offs and correction were ultimately followed by economic and market recoveries.

Thus, once stock markets unexpectedly rebound, as they typically have done in the past, you may end up getting left behind during what could have been a good opportunity to benefit from market rapid recovery and gains.

We live in a world fraught with headline risk and conflict, something that will be ever-present. This fact will always be an integral part of the investment landscape. Those who exit or try to “time the market” tend to miss a significant rally. Those who remained invested or rebalanced towards equities tended to boost their returns during a market rally.

The length of time an investor is in the market can make a difference in the amount they will save and invest to potentially grow their investments. If you sell assets while the market is declining, you risk missing upward trends that have historically followed. If you want to retire someday, start saving and investing now. It takes decades of long-term financial planning, saving and investing to get there. 

Always remember…

Learning to manage money. You need to learn and understand core principles of financial planning — long-term investing, risk management, diversification, asset allocation, retirement, estate and tax planning.

Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

All investments involve risk including loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.

References:

  1. https://im.bnymellon.com/us/en/individual/articles/letter-from-the-lion/spring-2020/stick-with-a-plan-in-uncertain-financial-markets.jsp

Hindsight Bias: Don’t abandon your financial plan | Vanguard

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In times like these, it makes sense to start with a plan, stay committed, stay aware and stick with a plan.

Hindsight bias exists prominently in investing.

No matter the market conditions, there are always sensational reports from the financial entertainment media or the investing community that a market event, such as an extreme market correction or increase, was foreseen, perhaps even obvious. If you begin to believe you’ve missed opportunities or you’re at risk for losses, you might attempt to overcorrect by trying to time the markets or weighting your portfolio too heavily in one area.

Hindsight bias is unavoidable behavior, but don’t let it derail you. You’ve followed your financial plan and made good investing decisions in the past. Trust those decisions and trust the financial plan you’ve put in place.

And remember your financial plan the next time hindsight says you’re wrong.

Read more: https://investornews.vanguard/hindsight-bias-says-to-abandon-your-plan-heres-why-you-shouldnt/

6 habits of successful investors| Fidelity Investment

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Planning, consistency, and sound fundamentals can improve results.

FIDELITY VIEWPOINTS – 03/19/2020

For most people, achieving success as an investor means reaching their financial goals, like owning a home, paying for college, or having the retirement you want.

What separates the most successful investors from the rest are habits. It is the reason why some individuals successfully accumulate wealth while others seem unable to save and invest successfully. Essentially , it can be traced back to daily habits.

Here are the 6 habits of successful investors that we’ve witnessed over the years—and how to make them work for you. Read more: https://www.fidelity.com/viewpoints/investing-ideas/six-habits-successful-investors?immid=100864&imm_pid=272043316&imm_aid=a466972197&dfid=&buf=99999999

Investing can be complex, but some of the most important habits of successful investors are pretty simple. If you build a smart plan and stick with it, save enough, make reasonable investment choices, and be aware of taxes, you will have adopted some of the key traits that may lead to success.

References:

  1. https://grow.acorns.com/7-daily-rich-habits-anyone-can-adopt/

Social Security Age: Claim at 62 or Wait until 70

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“The age you claim Social Security affects your lifetime income.”

Social Security Administration (SSA) payments are based on a calculation of a 35-year average of your lifetime earnings. Each year’s wages are adjusted for inflation before being averaged. If you worked longer than 35 years, the highest 35 years will be used. If you worked fewer than 35 years, SSA will average in zeros for the missing years.

When to collect benefits

According to the Center for Retirement Research at Boston College, 48% of women and 42% of men who claimed Social Security retirement benefits in 2013 did so as soon as they were eligible at age 62.

Yet, according to many financial advisers, baby boomers would be better off waiting until their seventieth (70th) birthday to start claiming Social Security, than if they take benefits in their 60s.

The logic behind this advice is driven by the 8% government-guaranteed increase in lifetime payments for each year baby boomers delay benefits past age 62, up to age 70.

But, baby boomers need to ask themselves what is the likelihood they will live long enough to benefit from the increased payments that start later in life at seventy years old versus collecting benefits at sixty-two years old.

When you decide to delay starting Social Security benefits, you’re betting that you will out-live an actuarially based mortality estimate.

Discount Rate Specification and the Social Security Claiming Decision from the Social Security Administration (SSA) study evaluates Social Security benefits not only as a function of the age of death, but also the probability of reaching that age. It provides that analysis over a range of discount rates.

A general conclusion of the study is that you shouldn’t wait to reach the age of 70 to initiate your Social Security benefits.

Social Security Benefit Breakeven

Before you start drawing on Social Security at age 62, it is recommended that you determine if it maximizes your total payments by calculating the breakeven. Additionally, it’s important that you balance the timing of those benefits with the rest of your retirement income plans. This choice of starting benefits isn’t reversible after 12 months.

Social Security breakeven age occurs when the total value of higher benefits (from postponing retirement) starts to exceed the total value of lower benefits (from choosing early retirement).

  • Example: If you are eligible to collect a reduced $900 benefit at age 62 plus 1 month, and your benefit would increase to $1,251 at age 65 and 10 months, your estimated break-even age is 75 years and 5 months.

https://youtu.be/9e3M3kM9LFk

Early Benefits

Collecting early benefits may pay off despite the reduced monthly check. Since it is impossible to predict how long a baby boomer will live. If you’re facing a potentially significant reduction in life expectancy and are short of income, taking Social Security early may be appropriate.

Just be aware that you will receive a reduced benefit. If your full retirement age is 67 and you begin collecting Social Security at age 62, for example, your benefits are reduced by about 30 percent.

The rational advisors often hear from baby boomers who want to apply for Social Security early benefits at age 62 is that you’ve paid into the system for decades, and want to get something out of it before it goes bankrupt. It might feel like the best decision at the time, but down the road, it may prove the worst decision you ever made in your life.

The legitimate fear for planning purposes is not that you might die early and miss out on some money you could have had from social security, but rather that you will outlive your money.   Think about waiting to collect Social Security as a form of longevity insurance—for you for sure, but also for your surviving spouse if you are the higher earner.  In fact, a higher Social Security benefit is the best deal on longevity insurance you can get.

Benefits reduced if you’re work while receiving benefits

Working after you start receiving retirement benefits may affect your monthly benefit amount, depending on your age and how much you earn. If you are younger than your full retirement age, and your earnings exceed certain dollar amounts, some of your monthly benefit may be withheld.

Social Security will increase your monthly benefit after you reach full retirement age to account for the months of withheld benefits. When you reach your full retirement age, you can work and earn as much as you want and your benefit will not be affected.

Full Retirement Age

Optimum strategy for most baby boomers may or may not be to postpone Social Security benefits at least until you reach full retirement age, which is determined by the Social Security Administration.

Your full retirement age (FRA) is determined by the year you were born. The retirement age used to be 65 for everyone, but is gradually increasing to 67. As the full retirement age goes up, benefits claimed at earlier ages go down.

FRA is 67 for those born in 1960 or later. If you were born in 1937 or earlier, your full retirement age is 65. The FRA rises two months every year after that until it caps out at age 67.

However, collecting Social Security early will cost you. If your full retirement age is 67, your Social Security benefit is reduced by:

  • About 30 percent if you start collecting at 62.
  • About 25 percent if you start collecting at 63.
  • About 20 percent if you start collecting at 64.
  • About 13.3 percent if you start collecting at 65.
  • About 6.7 percent if you start collecting at 66.

If you expect to live beyond the breakeven age, it would be financially worth your while to delay drawing benefits. Yet, there’s not an age that’s appropriate for everyone. Baby boomers must consider their own financial need, health and post-retirement plans before deciding when to begin social security benefits.

There are many ways to collect Social Security benefits. You can collect benefits starting at age 62 or anytime up until you’re 70. Collecting early benefits at age 62 means smaller monthly payouts than waiting until full retirement age or waiting until seventy (70). It’s generally advisable to wait until full retirement age to start collecting Social Security benefits because the monthly benefit is higher than starting early benefits at age 62.

References:

  1. https://crr.bc.edu
  2. https://www.thestreet.com/retirement/social-security-claim-now-or-wait
  3. https://www.bankrate.com/retirement/when-to-take-social-security/
  4. https://www.forbes.com/sites/jlange/2018/10/01/what-is-the-best-age-to-apply-for-social-security/#97e7e9a56d2b
  5. https://www.ssa.gov/benefits/retirement/

3 tips to avoid locking in losses | Mass Mutual

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By Allen Wastler
Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
Posted on Apr 13, 2020

After a huge market downturn and a major loss of value in your investment portfolio, the temptation to do something — anything — may be hard to resist.

But in many ways, the best action may be to take no action. Why? An investment plan is a long-term project and making changes to it based on short-term considerations is often ill-advised. That’s why financial professionals encourage people to stay calm during market sell-offs and think about long-term objectives.

“It is a tough and scary time, and not locking in losses by panic selling is critical,” said J. Todd Gentry, a financial professional with Synergy Wealth Solutions in Chesterfield, Missouri.

But even if you did resist the initial impulse to flee during a market retreat, you still need to keep some discipline about your portfolio as you wait for a market recovery. Here are some traps to avoid….Read more: Avoid Locking in Losses

Markets, as a whole, have historically bounced back from downturns with time, as the following chart illustrates.

Source: Bloomberg. The S&P 500 is an equity index that consists of the stocks of 500 large U.S. companies measured by market capitalization. The results here include the effect of reinvested dividends. You cannot invest directly in an index.

It’s best to be invested.

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The global financial crisis of 2008 proved no one can consistently predict how the market will perform. Thus, it is best for investors to stay invested in the markets.

“You always have to remember the markets are forward-looking, and you don’t know when they’re going to take off—just like you don’t know when they’re going to tumble. So it’s best to be invested than to try to time it, because it’s close to impossible.” Tim Buckley, CEO, Vanguard Investments

If you’re confident in your financial life plan and investment strategy, leaving your investments alone during short-term market corrections and Bear markets could help you accumulate wealth over the long-term and help ensure your retirement nest egg. 

Chinese Stocks are Risky

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Recently Luckin Coffee (LK) issued a press release admitting that their chief operating officer had fabricated a significant amount of sales from the second quarter through the fourth quarter of 2019.  This caused Luckin Coffee share price to fall 82% in U.S. trading and leaving investor with little recourse.

Luckin, a rival of Starbucks in China, happen to be a fairly new public company that opened its initial public offering (IPO) in May 2019.  In the case of Luckin, investors needed to exercise caution when a company goes from zero to a $3 billion market capitalization valuation in less than two years.  Furthermore, it is important to understand that what occurred with Luckin Coffee can occur with other Chinese companies with stocks listed on U.S. equity market exchanges since they are not required to comply with Security and Exchange Commission’s (SEC) strict disclosure and transparency requirements.

Chinese stocks and emerging-markets stocks

China is the world’s second-largest economy and is still growing as an emerging market. Investing in young Chinese companies can be extremely risky.  Although the growth available in China is clearly appealing, there are a number of inherent risks for investors.  The risks include currency manipulation, ineffectual securities reporting standards, the draconian influence of China’s communist government, and the potential for financial fraud.

Recent economic and equity market history are rife with financial frauds and illegal activity related to Chinese companies listed on U.S. equity exchanges.  Many seasoned U.S. investors advise that Americans should avoid investing in Chinese stocks. They even recommend avoiding the few larger Chinese companies with established histories and strong management track records.

Delisting Chinese Stocks

To avoid future Luckin Coffee frauds perpetrated on unsuspecting American investors, “Chinese companies should be delisted from American exchanges if they don’t follow U.S. securities laws”, according to Senator Marco Rubio.  Senator Rubio believes that increase oversight is vitally required for Chinese and other foreign companies listed on American stock exchanges. In fact, he and colleagues have offered legislation that calls for delisting firms that are out of compliance with U.S. regulators for a period of three years.

Bottomline, it is difficult to trust the financial statements coming out of some high-flying companies based there. Fundamentals don’t matter if you can’t be sure the numbers are real and it is difficult to invest in Chinese companies that might be trying to deceive investors.

References:

  1. https://finance.yahoo.com/news/luckin-coffee-chairman-defaults-loan-152735017.html
  2. https://www.msn.com/en-us/finance/topstocks/investing-lessons-from-the-luckin-coffee-accounting-fraud-debacle/ar-BB12eas4
  3. https://www.cnbc.com/2019/10/08/marco-rubio-chinese-firms-should-be-delisted-in-us-if-they-dont-follow-laws.html

Financial Life Planning

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“People have the potential to live longer than any other time in history. This gift of extra time requires that we fundamentally redefine retirement and our life journeys leading up to it.” What is “Retirement’?  Transamerica Center for Retirement Studies

Financial Life Planning connects the dots between our financial realities, our values and the lives we long to live. It helps both pre-retirees and retirees identify their core values and connect them with their financial decisions and life goals. It is an financial planning and investing approach which helps people manage their portfolio.

Financial life plan focuses on the human side of financial planning, including people’s anxiety, habits, behaviors and other emotions (e.g., fear and greed) tied to investing money and accumulating wealth. People struggling with retirement and other finances really need a plan that helps them manage their attitudes, habits, goals and resources.

George Kinder, known to most as the “father” of the life planning, is the founder of Kinder Institute. He views life planning as “a way of holistically delivering financial planning that focuses on delving into people’s real goals, beyond just their financial concerns, in an effort to help them use their money to deliver freedom into their lives”.

Financial Life Planning combines personal finance and wellness. It spends time to discussing life planning and to building an intentional life. There is more to living a life of freedom and purpose than money and wealth. To live a life of freedom and purpose, people are encouraged to consider George Kinder’s famous Three Questions, which are:

Question 1: Design Your Life

“I want you to imagine that you are financially secure, that you have enough money to take care of your needs, now and in the future. The question is, how would you live your life? What would you do with the money? Would you change anything? Let yourself go. Don’t hold back your dreams. Describe a life that is complete, that is richly yours.”

Question 2: You have less time

“This time, you visit your doctor who tells you that you have five to ten years left to live. The good part is that you won’t ever feel sick. The bad news is that you will have no notice of the moment of your death. What will you do in the time you have remaining to live? Will you change your life, and how will you do it?”

Question 3: Today’s the day

“This time, your doctor shocks you with the news that you have only one day left to live. Notice what feelings arise as you confront your very real mortality. Ask yourself: What dreams will be left unfulfilled? What do I wish I had finished or had been? What do I wish I had done? ”

Society tends to attribute personal and professional success to the acquisition of material things and the accumulation of wealth. Most of us find ourselves inextricably caught in a cycle of earning, spending, and investing often induced by societal and peer pressures to fit into a perceived definition of success.

And in spite of this, how many times have we heard from even well-to-do friends, acquaintances and relatives that they are not exactly happy with how their lives have shaped up, how they don’t enjoy what they are doing, how they are drowning in debt or living paycheck to paycheck, or how they don’t have any time to pursue their dreams and interests?

If you look closely, there is a common undercurrent running across all these statements that we find ourselves ‘enslaved’ to a script or lifestyle broadcast by social media which was not exactly aligned to our values and innermost dreams.

No one ever wanted to spend more time in the office

“No one ever said on their deathbed ‘I wish I’d spent more time at the office.’ ” Harold Kushner

Having read many anecdotal reports regarding end of life issues, it is important what truly matters to most people in the end. Typically, people do not say that they wish they had earned more money, spent more time at work, or had one more side hustle.

Most often instead, they wish they had spent more time with family and friends. They had more experiences with those that they love. They had taken better care of their health and bodies over the decades. They had saved more and planned better for their retirement. And finally, they wanted to make sure that those they left behind would be taken care of once they were gone.

References:

  1. https://www.kiplinger.com/article/retirement/T023-C000-S004-retirees-build-a-financial-plan-based-on-you.html
  2. https://www.kinderinstitute.com
  3. https://www.kitces.com/blog/george-kinder-institute-life-planning-podcast-seven-stages-maturity/
  4. Podcast: #FASuccess Ep 015: Why Life Planning Is Simply Financial Planning Done Right With George Kinder

Economy and Markets will Recover

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“There are ‘tremendous opportunities’ in markets.”  Larry Fink

To build wealth, it is advised that investors should take a long-term view of markets; and that they should take a long-term view in the way they manage their personal finances and investment portfolios.  It is certain that the world will get through; and, the economy and markets will recover once the COVID-19 crisis has abated.

For investors who keep their focus on the long-term horizon, “there are tremendous opportunities to be had in today’s stock markets”, according to Blackrock’s Chairman and CEO Larry Fink. For many of Blackrock’s clients, “the recent sell-off created an attractive opportunity to rebalance into equities,” Fink said.

Take banks as an example, “the damage has already been done” to the industry according to most financial professionals and traders.  Yet, the banks are in better condition financially than they were during the 2007-2009 financial crisis.  Once the virus spread stalls and the economy returns to normal operation, the Fed will still be supporting the banking system.

Positive sign for comeback

“Don’t watch their lips, instead watch their feet.”

Extraordinary monetary stimulus measures by the Federal Reserve and fiscal stimulus measures by Congress and the White House have put a proverbial floor under the market in late March.  As a result, many C-suite executives are buying up their own company’s stocks at a record pace, according to InsiderSource.

“Insiders have a 35+ year track record of buying on the type of extreme weakness experienced in Q1′20,” InsiderScore director of research Ben Silverman said in a note. “A dramatic increase in insider buying volume combined with dampened levels of insider selling has resulted in the generation of industry buy inflections – our strongest, quantitative macro signal – for the entire market.”

In his 2010 newsletter to Berkshire-Hathaway shareholders, Warren Buffett wrote: “When it’s raining gold, reach for a bucket, not a thimble.”  Based on his vast and highly successful investing experience, he states that in period like the present, “Big opportunities come infrequently”.

  1. https://www.cnbc.com/2020/03/30/larry-fink-says-economy-will-recover-from-coronavirus.html?recirc=taboolainternal
  2. https://www.cnbc.com/2020/03/30/coronavirus-stock-market-jpmorgan-top-bank-stock-pick-for-trader.html?__twitter_impression=true&recirc=taboolainternal
  3. https://www.cnbc.com/2020/03/26/executives-are-buying-stock-in-droves-giving-a-strong-signal-that-the-comeback-is-for-real.html?recirc=taboolainternal
  4. https://www.cnbc.com/id/35616702

The Wealthy Next Door

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To accumulate wealth, you should start by reading and studying the behaviors of people who have successfully accumulated wealth and achieved financial independence.

In the groundbreaking financial book, “The Millionaire Next Door: Surprising Secrets of America’s Wealthy”, written in 1996 by William Danko and Thomas Stanley, found that people who appear wealthy may not actually be wealthy.

Their findings reveal that people who appear wealthy tend to overspend or live paycheck to paycheck. They often overspend on symbols of wealth like luxury vehicles and large homes — but actually have modest or negative personal net worths. On the other hand, wealthy individuals tend to live modestly in middle-income communities, drive modest vehicles, and shop at Costco Warehouse.

Lessons Learned from “The Millionaire Next Door” are enlightening on how the wealthy actually spend and save. Instead of appearing to be wealthy, they tend to:

Understand that Income Does Not Equal Wealth

It is a fact that higher-income households tend to have more wealth than lower- and middle-income households. But the size of a paycheck explains only approximately 30% of the variation of wealth among households. What really matters is how much of the income is not spent on discretionary things, but is saved and invested. On average, wealthy individuals invest nearly 20% of their income. And, it finds that those in the top quartile of wealth accumulation are prodigious accumulators of wealth (PAWs), according to Danko and Stanley

Work with a Budget

The majority of wealthy individuals have a budget. Of those who don’t, they have what the authors called “an artificial economic environment of scarcity,” more commonly known as “pay yourself first.” In other words, they invest a good chunk of their income before they can spend any of it. As the authors wrote, “It’s much easier to budget if you visualize the long-term benefits of this task.”

Manage their Spend

Nearly two-thirds of the wealthy can answer know how much their family spends each year for food, clothing, and shelter. In contrast, only 35% of high-income non-wealthy answered yes to this question. The wealthy manage and track their spending.

Have Defined Financial Goals

About two-thirds of wealthy have clearly defined short-, intermediate- and long-Term goals. Many of the wealthy are retired and have already reached their goal of financial independence.

Dedicate Time To Financial Planning and Education

Creating a budget, goal setting and financial planning all take time, but the wealthy were willing to spend it. Danko and Stanley found that people they labeled “prodigious accumulators of wealth” (PAW) spend many hours per month planning their investments. In fact, they found “a strong positive correlation” between investment planning and wealth accumulation. Each week, each month, each year, the wealthy plan their investments.

Buy and Hold Smaller Homes

Your purchase of a home — and how often you choose a new one — will determine your ability to accumulate wealth. According to The Millionaire Next Door, that wealthy family has been next door for quite a while. Half of the wealthy have lived in the same house for more than 20 years.

Stay Married

The majority of wealthy people are married and stay married to the same person. Several studies have shown that people who are married accumulate more wealth than those who are single or divorced. Conversely, it’s important to partner with someone who possesses similar healthy financial behavior and habits.

Buy and Hold Pre-Owned Vehicle

The majority of wealthy individuals own their cars, rather than lease. Approximately a quarter have a current-year model, but another quarter drive a car that is four years old or older. More than a third tend to buy used vehicles.

Live Happier Lives

Bottomline, living below your means is the one sure way to accumulate wealth and to live happier. Since, there exist a peace of mind living below your means and saving money. Danko and Stanley’s research indicates that, “financially independent people are happier than those in their same income/age cohort who are not financially secure.”

Essentially, when it comes to financial security and retirement planning, adopting the lifestyle of the wealthy means you can save more toward your financial goals and destination. That’s a formula that can help anyone to accumulate wealth and achieve financial independence.

  • References:
    1. Thomas J. Stanley, and William D. Danko, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy Paperback, November 16, 2010
    2. https://www.getrichslowly.org/nine-lessons-in-wealth-building-from-the-millionaire-next-door/