Common Mistakes

Investing in stocks and bonds and having adequate insurance coverage is essential to any comprehensive wealth accumulation plan. The stock market has historically grown at a faster rate than inflation. So why do so many people have such poor results in their portfolios?

Stock markets are cyclical. When one category of securities falls (such as large US company stocks) investors get nervous and make an emotional decision to move to another category that may be moving up at the time, (such as government bonds, for example). We instinctively want to move away from what seems painful. The mistake is that your investments often don’t respond the way you hope from this type of behavior.

In actuality, if you keep moving your investment from one type of security to another, it will erode the potential return because it will likely be in a market that will experience a down turn when the original US company stocks experience its next big move up! Truth is, no one really knows which sector will bring the best results and jumping around rarely produces positive results. Patience does.

It seems logical to pick mutual funds and other managed investments by how well they have performed in the past. It feels comfortable and looking at the data gives us the sense that we can predict how it will perform in the future.

Truth is, predicting future performance based on past performance has created loads of unhappy investors. Studies show the vast majority of funds DO NOT out-perform the market. Picking 100 or 150 stocks out of a stock market that has thousands of choices results in a very small chance of outperforming the broader market returns.

If you have 10 different mutual funds you may think you have good diversification. After all, you hold so many different funds, right?

Maybe not. These funds could have the same individual stocks in them, which means duplication – plus, there could be gaps in the portfolio – and the next good return is in a category you don’t even own! The next cyclical downturn in stocks could weigh heavily on your portfolio if you aren’t balanced among several markets.

Over-Funded Retirement Accounts

Life happens pretty fast. Most of us are busy working away, adding to our retirement accounts in a company plan or an IRA. Before we know it, we’re nearing retirement. And there is something I’ve noticed about this.

It isn’t hard to build up our retirement if it’s taken out of our paychecks or checking accounts automatically. We don’t ever really miss it. But we may not find it so easy to do this with our after-tax money. Setting aside money for emergencies, other long-term savings, ready cash for vacations and big ticket items is important also. We’ve grown accustom to instant gratification, impulsively buying things we don’t need, and we whittle away the money we could be saving in a savings or investment account apart from long-term retirement ones.

In approaching retirement, many people find they have a nice amount in their IRAs or retirement plans, yet not much elsewhere. Once in retirement, or unluckily, laid off, they find they need to not only depend on an income from the retirement accounts, but it also is the place they need to go for big expenses such as repairing big items, needing a new a/c unit, or other big costs. And if they turn 70 ½, now they have to take a significant amount out for their RMD, (Required Mandatory Distribution), because the IRS wants to tax that account you’ve had great tax advantages on for so long.

One scenario: George has $1,000,000 in his IRA. He turned 70 ½ this year and must withdraw $50,000 and pay taxes on that. He may not need it, but he has to take the distribution anyway. He could have directed some of those savings to non-retirement accounts.

Another scenario: Harry, 55, has saved $300,000 in his IRA but has only about $7,000 in savings. He needs a new roof that will cost him $15,000. He needs to take it out of his IRA, paying income tax and a 10% penalty because he is not yet 59 ½.

The advice here is, in addition to saving for retirement, it is important to set aside other monies that is readily available without penalties or tax consequences. There are several ways to set this up automatically, much like your retirement plan at work.

Ask your employer if they have an after-tax savings plan you can contribute to that is reasonably accessible to you.

Set up a savings, money market, or mutual fund and direct your bank to send to this account a set amount at regular periods. Could be around your paycheck deposits.

When you sit down to pay your bills make a point to pay yourself first. Transfer money from your bank account to your savings online.

For extra windfalls such as a bonus, monetary gifts, inheritance, etc. save a portion.

There are more ideas, see if you can think of some. Just be aware so all your assets aren’t in a retirement account. Retirement accounts are for retirement income down the road.

Get with a financial planner and figure out a plan that will give you the income you’ll need in retirement and savings for needs while you’re working.

Salesmen, Emotions and Mistakes

Lately it’s been more challenging out there, especially for older folks alone. Sometimes they get talked into buying products they can’t afford.

Just recently one of our clients was so pressured by an intimidating salesman, she signed up for a water purification system she couldn’t afford. He even told her he would get fired if she didn’t buy it. It did turn out ok for her though, in the end. They can’t touch her retirement account or her home, so she is lucky.

Another client had a salesman in her home to learn about stairway chair-lifts and he was so overbearing he insisted on her giving him her brokerage statement! He told her how she was invested incorrectly and picked up the phone and called me! When she realized he had called me she got on the phone and told me what was going on. I told her not to sign anything and call me later. Fortunately, she is fine, didn’t buy it, and he is now fired.

These two instances were very close calls. One would have had to pay $8,000 and the other $13,000. I am not saying the products were bad or not worth the price, but these clients weren’t in a position to pay for them.

But both women felt intimidated, stressed, even frightened by these aggressive men. I know our clients can make good, solid decisions. But, if you are alone and think you may feel at all vulnerable if someone is trying to hard-sell you something, have a plan ahead of time. Tell a close friend or family member about the appointment. Better yet, have a trusted person with you.

Sit by your phone ready to call if you feel intimidated, and tell your contact ahead of time a prearranged word or phrase to come over, such as “Can I afford this?”

If you do feel like you got pressured into buying something you shouldn’t have, under Florida law you have 3 days to cancel the purchase. For those of you in other states, check your state’s laws.

Call your financial advisor or planner before the appointment to discuss what a reasonable, affordable purchase for you would be, especially if you’re not sure. Then, if the product is over that amount, be firm with your decision that you will not buy it.

If you have already made a mistake and want to find out if anything can be done now, we can see if any of our resources can help, but if not, don’t berate yourself, just know you’ve learned from the experience.

If you have a friend or relative who may be vulnerable in this way, sit down with him or her and come up with a plan if a desired in-home purchase appointment is coming up. Not all companies have unethical salespeople. I know there are many great people out there. Just please be careful.

Sometimes we don’t realize how much an aggressive salesman or woman can coerce us into making an emotional, disastrous decision. Preparing for an appointment with a salesperson includes checking ourselves for our own steadfastness in protecting ourselves, even if that means reaching out for help.

How can you tell if you have the right financial advisor?

Here is a check list of questions to ask yourself:

1) Does he/she prognosticate and predict?
We’ve been taught to expect our experts to tell us what is coming, yet in reality no one knows. We must be prepared for all possible and unseen events to the extent we can be.

2) When the market makes a big move up or down, does your advisor suggest changes to your portfolio?
If so:
A) Why was it incorrectly positioned in the first place?
B) Were there commission charges on the changes?
Your portfolio should be allocated to weather any storm for your time horizon and your comfort level. After that it is just routine maintenance to keep the allocation aligned with your original plan. The only time this might change is when you have big changes such as marriage or retirement.

3) Do you receive education on how the markets really work from your advisor?
Is there an opportunity for clients to learn methods of investing including philosophies so you can discern what yours is?

4) Does your advisor talk ‘above’ you? When you listen to your advisor is he/she understandable?
If you don’t understand, does he/she re-frame the answer in a way that you do? It is important you know what you are doing and why with your investments.

5) Do you have a high feeling of trust? Do you feel good after talking with him or her?
This will be your experience when your advisor is also a good ‘coach’. Your emotions will invariably work against your success if they go unchecked. You may be tempted to buy and sell at inopportune times. The stock markets will always have drops of 20% or more, and our decisions during those times can easily damage our long term plans. It is important that you can voice your fears and concerns to your advisor so that not only are you heard, but hopefully you will learn the truth about the markets and not the latest media buzz.

6) Have you been encouraged by your advisor to have reasonable expectations?
Such as:
A) The markets will cycle through bull and bear markets. During the last 31
years we had 24 positive returns. Even during the positive years the average intra-year decline was 14%
B) The stock markets will invariably decline over 20% at some time.
Are you prepared to stick with your plan no matter what is going on in the world and the markets? This is a sign of a seasoned, well-educated investor.

7) Lastly does your advisor understand, when it comes right down to it, your success has more to do with your internal commitment, internal guidance and financial maturity than any other variable?
If you have no resolve to leave your money invested through the tough times, can’t resist spending more than you earn, or you haven’t devised a good way to save, no advisor can be of much help.

August 2019 Newsletter

We’ve definitively been here before; when seeing the market reports we’re alarmed by the descriptions of wild market swings. The markets hate uncertainty and they are showing it now with all this talk on trade etc.

We know that these moves are within normal parameters in the short term, and when we invest in the broader markets, such as your portfolios are, returns over time are generous. Some may say, but can’t we do better than the broader markets? Aren’t some stocks or mutual funds better to invest in right now than others? And, how do we know which ones to choose? This type of investing is using active management. Here is a quote out of an article on this topic on the Dimensional Fund Advisors website:

Dimensional recently studied the performance of actively managed mutual funds and found that even professional investors have difficulty beating the market: over the last 20 years, 77% of equity funds and 92% of fixed income funds failed to survive and outperform their benchmarks after costs.

For the entire article please click here.

Wondering why you’re hearing we may be going into a recession? Here is an excellent letter another Matson Advisor wrote explaining this complex topic in a clear, understandable way. And of course any questions or concerns please don’t hesitate to contact us. Now get out there and get some fresh air!

To Your Prosperity and Wellbeing,

Kasey Claytor and Aaron Wade
Investment Advisor Representatives
Osprey Money Management LLC

This entry was posted on Thursday, August 15th, 2019 at 7:16 pm and is filed under Articles.