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What Kind Of Investor Are You?

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One of the most important questions we all should have to answer.  What kind of investor am I?  This question is so important because without knowing what kind of investor you are it is impossible to evaluate your investment results or properly answer the question, How am I doing?

While it is important to understand your personal risk preference (conservative, moderate or aggressive) this is not what I mean when I ask the question, What kind of investor are you?

Here are some examples of the types of investors that you could be: income investor, accumulation investor, alpha investor, smart beta investor, contrarian, long term growth, day trader, indexed arbitrage investor, and much more.

With so many different categories of investors how do you choose which approach is best for you.

To figure out what kind of investor you should be here are four questions you need to ask yourself. 

  1. What are my goals?  The investment style you choose should match your personal goals first.  These goals may be in terms of total dollars you want to have by a certain date, it could be based on income need or lifestyle choice.
  2. What is my risk tolerance?  While it is not the main reason for choosing an investment style, it certainly is a factor in how you will approach implementing your investment style.
  3. What resources do I have and need to be financially secure?  While you may want to be a day trader.  While you may think of yourself as an aggressive investor.  If you can’t afford to live through the volatility this type of approach generates then maybe you should choose an investment style better suited for your financial situation.
  4. What can I emotionally handle?  Can you live through a 30% loss in order to realize an 8% average return?  Maybe you can intellectually but when you actually see your accounts go down by 30% will you stick to your approach or sell out only to lock in your losses and never recover.

 

Regardless of which approach is right for you at some point your investments and your investment style will be in favor and at other times it will not.  This is just how the world works.  And here is where the problems begin.

For some reason that is out of your control, your investment style is out of favor for the moment and another investment approach is hitting new highs or is being touted as where you need to be right now.  So you quickly change your investments and sit back believing you have solved all your financial problems.

If you have ever studied behavioral economics or seen the DALBAR report about 401(k) investors you will realize this is the main reason most investors never achieve their financial goals.  It is possibly the worst thing you can do. The reason is very simple.  Wait another six months to a year and your new investment style will be out of favor and your old investment style will be what everyone is talking about.

Examples of this are everywhere.  In 2007, if you weren’t an aggressive investor you were missing out on the bull market.  In 2008, if you weren’t a conservative investor seeking smart beta or income then you were down 50%.  In the late 1990s, if you weren’t buying the next great tech. company that never made a profit then you were missing out on making millions.  But from 2001-2003, if you were in tech, you experienced the worst multi-year decline we have seen in many decades.

This is why keeping perspective, understanding your goals and managing your expectations are key to financial security.

File and Suspend

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As part of the last deal to keep the government running, a change was made in the social security system.  A very popular strategy called “File and Suspend” was changed so that many of us will no longer be eligible for the benefit.  The rules for filing a restricted application were also changed.

There are three benefits available to each of us under the social security system.  These are: the workers benefit, the spousal benefit and the survivor benefit.

The workers benefit is based on your work history.  You know it as your social security benefit found on your social security statement.

The definition of the spousal benefit is collecting a social security benefit based on your spouse’s earnings history, not yours.  When you collect under the spousal benefit, your workers benefit continues to grow until age 70.

Under the old rules, you could start collecting the spousal benefit at age 62.  You could switch between the spousal benefit and your workers benefit once between age 62 to age 70

The survivor benefit is the larger of your workers benefit and your spouse’s workers benefit.  At the death of one spouse, the surviving spouse will receive the larger of the two benefits.

 

File and Suspend

In order for you to collect your spousal benefit, your spouse must be at least 66 years old and file to collect social security. That’s the file part.  The suspend part of the strategy meant that your spouse didn’t start collecting their benefit but just activated their account.

Then you would file a restricted application which would allow you to collect your spousal benefit.  You could start collecting your spousal benefit at age 62 but your spouse had to be at least 66 for you to collect.

The change is as follows:  You can only file and collect the spousal benefit if your spouse has filed and is collecting their social security benefit. This means your spouse cannot suspend their benefit.  Also, you must achieve full retirement age to file a restricted application, which means you cannot start collecting the spousal benefit until at least age 66 or higher. 

We are actively reviewing our clients’ situations to determine if there is any action that needs to be taken before this change is fully implemented.  If you need to do something, we will contact you.

Don’t be surprised if there are more changes to the social security system in the future.

 

If you would like to discuss how changes to the social security system may affect you, give our office a call at 215-968-1755.

How Emotions Impact Investment Decisions

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We like to think of ourselves as rational creatures. We imagine that most of our actions are motivated by sensible logic.

But the truth is that we humans routinely make major decisions largely based on emotion.

The more uncertainty in the world around us, the more we rely on emotion over logic or the facts at hand. The study of how emotion affects our financial decisions is called economic psychology.

The general assumption is that when we make decisions on financial matters, our actions follow what is best for our own narrow self-interest, rationally deciding what to do.

But this is never actually the case. Investors tend to follow their emotions even when it’s not in their best interest. And the un-indicted co-conspirators in the financial media are consistently ready with anecdotal facts, data and statistics to support virtually any emotional conclusion one might reach.

Two of the emotions found most detrimental in financial decisions are overconfidence and regret.

Overconfidence

None of us likes uncertainty. So to compensate for the suspicion that we have very little control over what happens to us, we tend to cultivate overconfidence. This causes us to believe that we understand how the world works and therefore can reasonably predict what will happen next. To bolster this view, we routinely assign causes to an event after the fact, believing that we saw it coming all along.

This overconfidence in our own predictive gifts in turn causes us to expect the same in so-called investing experts: We want infallible market gurus who can tell us what will happen tomorrow, next week and next quarter. And, regardless of the fact that this is statistically impossible, there’s no shortage of financial pundits willing to present themselves as capable of filling this role.

Regret

Regret is one of the most painful emotions we can experience. It’s a combination of sadness and knowing we’re helpless to change what’s been done.

In the financial world, it’s what causes investors to purchase a stock or fund after it’s had a dramatic rise and then hold onto it as it continues to fall.  Or, perhaps worse, abandon a sound asset allocation strategy in the face of short-term downward market volatility.

 

Remember the primary decision that can turn a temporary decline into a permanent loss is to sell.

Overconfidence in how a specific fund or sector will perform followed by regret when it doesn’t can lead to what research has shown to be the most detrimental behavior for any investor: Repeatedly changing your mind.

Take Your Emotions Into Account

When you talk with us about your investment strategy and long-term retirement plans, it’s best to discuss the emotions that will come with participating in the market. You should acknowledge that you’re sometimes going to feel like radically changing your long-term plan is the only “logical” thing to do. Everybody experiences this.

Remember market research has shown that it’s the investor who does not react to his or her emotions who has the best chance for success.

To schedule an appointment to discuss your investment strategy or long-term plans, give our office a call at 215-968-1755.

Know Your Number

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Know your numberWhen saving for retirement, how critical is it to know your number?

Fidelity, ING and many other Wall Street based financial institutions stress knowing your number. But is that the right way to go about planning for retirement?

In a recent Harvard Business Review article, Nobel Prize winner Robert C. Merton argues that this is exactly the wrong approach to retirement planning. Why?

Decision making, especially decisions about our money, are full of behavioral bias. With the shift from an income-focused retirement planning approach, like pensions and defined benefit plan use, to a rate-of-return-focused retirement planning approach asking questions such as “how much can I make in my 401(k) or what is my number?”, savers are pushed to take on more and more risk, which means more exposure to market loss. The result can be catastrophic if your timing is off just a little bit.

I agree with Mr. Merton that our focus should shift back to an income-based retirement planning approach. Instead of striving to take on more and more risk, a retirement plan should determine how to generate sufficient risk-free income to support your lifestyle during retirement, because the ultimate goal of your retirement plan is to provide income regardless of how much capital you have saved for your retirement.

Maximizing income from your investments is a very different investment approach, requiring very different investment strategies than maximizing rate of return.

At TFG Wealth Management, we specialize in developing and implementing retirement income plans. But unlike the Wall Street crowd that is limited to market-based solutions or the typical annuity salesman that wants to put all your money into an annuity, we use investment options from all sources, banks, insurance companies and the market.

So when I say know your number, it’s not about how big your retirement account is.  Rather, it’s about how much income you can generate from your retirement savings.

Interested in discussing ways to maximize your retirement income?  Give our office a call at 215-968-1755.

 

Investment Lessons We Can Learn From The Phillies

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Phillies logoWith the stock market at record highs, I thought we could take a lesson from the state of the Philadelphia Phillies organization.

Given that the Phillies are seemingly full of superstars, why are they struggling? The answer is pretty apparent. Most of their stars are now past their prime. This has created a triple threat to the immediate and future success of the franchise.

First, the team is not as competitive as it once was with the same players against younger and more talented teams. Second, the veteran superstars command higher than average salaries which makes it hard to sign new players. And third, the trade value for these players is significantly less than it was a few years ago.

So what is the lesson to be learned? It is better to trade a star player a year too early than a year too late.

Like investments, it is very hard to judge when a star athlete has hit their peak.

Like investments, players’ declines can start suddenly and they can lose their value rapidly.

Like investments, once the decline has started, it can be very difficult to realize full value for the athlete either through a trade or performance on the field.

Like an investment, once the decline begins, how fast or how far the value of an athlete will fall is hard to predict.

Finally, investors like fans never want to let go because they are so vested in past performance instead of future results.

As investors, the lesson we can learn from the struggling Phillies is this…

“it is better to trade a great player a year too early than a year too late”
or
“it is better to sell a winner a few points too early than a few points too late after it has reached its peak in value”.

If you want to talk more about some of the investment lessons we can learn from the Phillies, please give our office a call at 215-968-1755.

 

What Does a Floating BMW Have To Do With Retirement Planning?

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Car on flooded roadA few weeks ago, on a Wednesday, we had a terrible storm that dumped over 5 inches of rain in the Philadelphia area.  During that storm, I was driving through Pennsauken on route 130 South in my new BMW, on my way to downtown Philadelphia.

At a dip in the road, there was some water accumulating.   Now, it was nothing I hadn’t driven through before.  Cars were passing cautiously through the water without any trouble.  So I decided to go through it.  Ten minutes later, sitting in my car which was now floating in over 3 feet of water, I was certainly regretting that decision.  What happened? And how does it relate to retirement planning?

As I drove through the water that day, I was hoping for the best and planning for the best.  All of my driving experience over the last 35+ years had led me to believe that I would be OK.

What had changed?

Well, three months earlier, I had purchased a new car.  This car had low profile tires, which meant I was much much lower to the ground.  Combine this with the fact that Pennsauken keeps their sewers closed on Route 130, which causes storm water to quickly collect in low areas, and the results were pretty predictable.

Retirement is like getting a new car you have never driven before and then driving over a road you have never been on.  You move forward, relying on all of your experiences over the last 20 or 30 years and often times using the same strategies that may or may not have served you well during your working years.

If I had only taken the time to talk to someone who had owned a car with low profile tires or investigated how the car drove in various conditions, maybe I would have avoided totaling my car.  If I had spoken to someone who had driven down Route 130 in a driving rain, maybe I would have known to be very cautious about a little bit of water on the road in Pennsauken

Retirement is just like driving a new car down a strange road.  As a retirement planning and investment specialist, I have been down the retirement road many times under many different conditions.  I use strategies and techniques that will help you avoid being caught in 3 feet of water, floating down the highway.

It took over two weeks to finally convince my insurance company that the car was totaled.  I am now in the process of replacing my new car with a new car.  The good news though is that no one was hurt, which is the most important thing.

If you want to talk about how to avoid floating down the road on the way to retirement, please give our office a call at 215-968-1755.

The Devil Is In The Details….Alternative Long Term Care Policies

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Lately, the marketplace has become overrun with life insurance and annuity policies that include a long term care benefit.   As traditional long term care policies jump in cost overnight, families are looking for affordable alternatives.

My comment related to these policies is this:  If it is too good to be true, sometimes it really is … too good to be true.

long term careIf you are going to consider these policies as alternatives to traditional long term care insurance, here are some things you will need to know…

There are two types of riders that insurance companies use to provide this benefit.  They are a Long Term Care (LTC) rider and a Critical and Chronic Illness rider (CCIR).

The LTC rider pays when you meet the basic requirements of the policy, which usually means you can’t perform two (2) of the six (6) defined activities of daily living (ADL).

CCIR riders also kick in when you cannot perform two (2) of the six (6) defined ADLs.  However, the illness or impairment must also be a permanent condition.  So, benefits can be declined even if you meet the basic requirements.

Remember to make sure that you know which type of benefit you are buying or getting for free.

Don’t forget to ask how your benefits are calculated.  Are they indemnity benefits, which is a benefit that pays LTC benefits regardless of your LTC expenses?  Are they reimbursement benefits, which is a benefit that requires you to incur an expense before you receive any money from the insurance company?  Ask the company to calculate exactly what the benefit is going to be.  Don’t take the agent’s word for it.  This can be a complicated formula.

Some of the riders are free and some cost a small fee.  Keep in mind that insurance companies never give anything away for free.  If the benefit is advertised as free, you are paying for it through higher internal fees, a lower rate of return or lower than expected benefits.

On the other hand, some policies allow you to purchase additional benefits beyond the basic benefits offered by the policy.  Seriously consider this option.  It is often a good deal.

Always remember that LTC and CCIR riders are an added benefit.  Make sure that you are buying the insurance contract for the right reason and not just for the extra benefit.  You may find that it is not such a good deal in the end.

If you want more information about this topic, please give our office a call at 866-296-8156 or 215-968-1755.

 

 

Over 50? It’s Time to Shift Your Financial Gear

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Lots of things change as we get older, and things that were right for us at 30 seem out of place at 50. Knowing when to switch gears in life is important, whether it’s in the jeans you’re wearing or your financial planning.

shutterstock_120776140For a large portion of your life, your focus of course was on career and financial growth. Now, if you’re between 50 and 75, your goals and focus are changing dramatically toward retirement. Likewise, your financial planning should shift. Many retirees make a huge mistake here by not changing the course from financial growth to wealth preservation. But if you want to relax, enjoy the benefits your hard work has earned you and spend during these decades with confidence, then wealth preservation should now be your focus.

What’s the difference between financial growth and wealth preservation? The biggest difference is risk and loss. This isn’t the time to be aggressive with your investing since losses will be difficult to recover. It’s easy to see how this comes into play by looking at an example. Let’s say you have $200,000 in a mutual fund and it sustains a 30% loss. Now that investment is down to $140,000. Can a 30% gain now counteract that initial $60,000 loss? $140,000 X .30= $42,000 …not by a long shot. You would need over a 40% gain to recover AND break even.

So now you see why it’s so important to make the shift to focus on markets that minimize risk and preserve wealth. Less than 1% of retirement income planners in the U.S. know and utilize the strategies that I am going to suggest. Now’s the time to step away from the instability of the stock market ticker and stop worrying about an impending bond bubble burst. Instead, I recommend clients of retirement age place their money into insurance and annuity contracts, some of the securest vehicles available.

What makes insurance and annuity contracts so secure? Safety nets like state regulations and re-insurers. They pay if a company ever defaults. Try to get that type of security from a mutual fund! Also insurance companies can only invest on a 1 to 1 ratio, unlike banks who can invest at 9 to 1. What these regulations do is make insurance contracts extremely secure. Just the word you are looking for when deciding where to place your assets.

Change is inevitable throughout life, and by repositioning assets during your retirement era, you can better ensure financial stability and confidence in this exciting stage of life.

If you’re ready to discuss financial strategies that will help you shift gears as you near retirement, give me a call at 215-968-1755 or fill out the contact form on our site and I will get back to you shortly.

 

My Love/Hate Relationship with Suze Orman

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When it comes to handling personal finances, the first place a majority of people turn is to the internet, television, magazines and/or the radio.  Why?  Well, because it’s easy and because it’s everywhere!

mediaOne personality that is the poster child for this type of media based advice is Suze Orman.  The media has dubbed her to be the “expert” in her field.  So why is it so dangerous to take the advice that NBC, CBS, and cable news allows her to provide?

Well, in a recent segment on “Talking Numbers – Yahoo,” Orman orders you to not follow the financial advice of using bond mutual funds (which I agree with for right now).  In fact, she lists it as one of her top three worst investment ideas.  Although this may be great advice in theory, Orman not only fails to provide the proof behind her reasoning, but she also contradicts herself.  How?  Well when you take a look back at her bestseller “The Courage to Be Rich” she dedicates an entire chapter; some forty pages worth, to “Seeking Safety in Bonds” and how they are beneficial to you.  She encourages the idea of investing in bonds by saying, “I want you to read about bonds in any case, because one day slow and steady income and stability is what you want to feel safest and most secure.”  Talk about confusing, right?

I don’t mean to single out Suze, but it is important to know which advice is quality verses that which is garbage.  I understand that the media is always looking for the next great personality that can buy air time and help in the selling of advertisements.  For example, Suze’s latest product that she is pushing on consumers is a pre-paid credit card with high fees for folks with bad credit.

Moving on, let’s take a second to reflect on the material that the media is permitting these “media anointed experts” to deliver to you.  The concept of allowing someone to deliver the same specific advice to millions of people without having reviewed their personal and individual needs is only the first step of many in the wrong direction.  Simply put, what may work for John Smith, may not work for Joe Person.

It is important to remember that one of the most essential ingredients needed to successfully plan your financial future is to consider taking advice from someone who has physically sat down with you one-on-one and has taken the time to get to know who you are as a person.  What you want your money to do for you and your family.  I urge you to take the time to do this, because I know it is something you will not regret.

When it comes to investing your hard earned money, take the time to become familiar with the values of your advisor.  This will allow you to establish a relationship and have confidence in the advice being presented to you.

If you would like to schedule a meeting so we can personally discuss your financial situation, concerns and goals, please give me a call at 215-968-1755 or fill out the contact form on the site and I will get back to you shortly.

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Investment advice offered through Merit Financial Group, LLC, an SEC-registered investment adviser. Access to Merit is only available to clients pursuant to an Investment Advisory Agreement and acceptance of Merit’s Brochure. All investing is subject to risk, including the possible loss of your entire investment.
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About Road Rules for Retirement

In Road Rules for Retirement, Mark Fried shares the many challenges you will face getting to and through retirement. He reveals the many risks you must know about and account for to make sure you never outlive your money.

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