Market Volatility - My Letter To Our Clients

This is a letter that I sent to our clients on August 22, 2015, to address the current market volatility. 

"Our goal is to help people overcome their worries and concerns about money and investing so that they have more time to focus on what's most important to them."

That's a quote from a marketing brochure that Simone and I put together when we started our business back in 2007. Although we haven't used those brochures for years, that sentence still summarizes what I try to do for each of our clients. My sincere hope is that the financial planning we've done has reduced your financial worries and brought more enjoyment to your life.

I'm writing this to address last week's volatility. I realize that even if our clients don't pay attention to the day-to-day movement of their investments (which is never a good idea!), it's impossible to escape the constant barrage of negative headlines that accompany market downturns. This is my response to all of the do-something-now-before-it's-too-late-this-time-is-different articles that you'll come across now and in the future.

I thought it might be helpful to put together a list of the main points that I'd like to make about why we do what we do. This would probably be easier to follow than writing it in paragraph form, and it would be something that you could refer to easily in the future.

In addition to reviewing the list below, I think it would wise to reread all of the Company Updates, Client's Corner, and other articles that I've uploaded to your web portal during the time that we've worked together. These documents were selected to reinforce what we discuss during meetings. It would also be helpful to review past meeting agendas, your meeting notes, financial plans, etc. 

Problem: It's impossible to predict the future.
Solution: Develop a financial plan and update it as needed.

The good news for clients reading this is that your financial plan has prepared you for things like the volatility we experienced last week. During the planning process we discuss what might happen in the future and then built an investment strategy to prepare for it so you don't have to react every time the market swings.

Problem: It's impossible to time the market.
Solution: Stay invested, focus on the long-term, and don't panic and sell during downturns.

Was the downturn last week the start of a new bear market? Or was it just a short-term overreaction to current events? Only time will tell, but reacting to it is the wrong thing to do. Getting out of the market or reducing your stock exposure in response to downturns might feel like a good strategy, but it's a sure way to turn a decline in value into a realized loss. There's no shortage of studies showing that market timing leads to increased costs, higher taxes, and lower performance.

Problem: It's impossible to pick the best investments.
Solution: Select diversified, passively-managed mutual funds and ETFs.

Just like it's impossible to predict the short-term direction of the market, it's also impossible to predict which individual stocks or bonds will do best at any given time. You can eliminate the risk of losing a large percentage of your portfolio in a single holding by investing across a diversified portfolio consisting of thousands of stocks and bonds. Even professional fund managers fail to beat their respective benchmarks. Only around 1 in 5 mutual funds outperform over 10+ year time periods, and it's impossible to know which fund will outperform in advance. Selecting mutual funds and ETFs that track an index of stocks and bonds - instead of trying to pick the best individual holdings - helps make sure that you get as much of the market's return as possible.

Problem: The stock market is volatile.
Solution: Don't put short-term money in the stock market.

It's a fact that the stock market is volatile. It's also a fact that you can't lose money in stocks if you avoid selling when stocks are down. Although there's never a guarantee, you can limit the chance that you'll have to sell stocks during a downturn through regular planning. For clients that aren't retired, we regularly review their cash reserve to make sure they shouldn't have to touch their investments for an emergency expense. For retirees, we regularly review their spending needs and withdrawal strategy to make sure they have enough in cash and bonds to support their projected spending needs in a downturn.

Problem: Your money is worth less each day.
Solution: Invest for long-term growth.

Some individuals avoid the volatility of the stock market in favor of "safe" investments like cash and bonds. A common misconception about these types of holdings is that at least this money will be "safe," but that's not true. I believe that inflation is a larger danger to investors than volatility, especially since it's a danger that many don't "see" until it's too late to do anything about it. For example, retirees that don't get enough growth to outpace inflation might have to make huge reductions in their spending later in life.

So to summarize these points, your financial plan and investment portfolio were designed with market events like last week in mind. Reacting to these events might make you feel better over the short-term, but could do permanent harm to your financial situation.

Please contact us if you have any questions or concerns about the funds we manage for you. Likewise, let us know if your financial needs or goals change.

Best regards,

Neil

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

5 Steps for Financial Success

Step 1: Spend less than you earn.

Spending less than you earn is the starting point for doing well financially. Anytime you find yourself trying to keep up with the Joneses, remember what Dave Ramsey says, “If you will live like no one else now, later you can live like no one else.”

Step 2: Don’t be cash poor.

A cash reserve can protect you (i.e. keep you from casing in investments or accumulating debt) when you face an unexpected expense like car repairs, home maintenance, etc. Having cash on hand is also a good way to make sure you can take advantage of any unexpected opportunities or investments that come your way.

Step 3: Accumulate the right types of assets.

When building your net worth, focus on accumulating assets that (1) are likely to appreciate and (2) can be converted into income later in life. It might feel great to have an expensive house that’s paid off, but if you don’t accumulate sufficient investment assets, you might have to sell your home later in life to fund your retirement. If you live in it, drive it, or wear it, then it’s not the right type of asset.

Step 4: Don’t forget the little things.

Many Americans have unsecured debt like balances on credit cards. Debt like this is often accumulated gradually – rather than all at once – until one day it seems too large to handle. Think twice before using your card to charge for spontaneous purchases. Make sure you actually have money to pay for it.

Step 5: Keep it simple.

When it comes to finances, “complicated” doesn’t always mean “better”. Be leery of any investment requires you to sign complicated contracts, disclosure documents, or suitability statements. There are plenty of straightforward, easy to understand savings and investment vehicles available to investors.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com

Five Rules for Investment Success

Rule 1: Lower Your Investment Costs

Rather than wasting time worrying about things beyond your control - like the direction of the stock market, interest rates, or inflation - focus on things you can control in order to improve your odds of investment success. A simple thing to control is the cost of your investments.

You can reduce your investment costs by choosing “no load” mutual funds over funds that pay sales commissions. After all, how does paying a 5.75% upfront commission improve the odds that a fund will make you money? Another easy way to control your costs is to select mutual funds with lower than average expense ratios. (You can read more about mutual fund expenses and fees in a previous post here).

Rule 2: Know What You're Paying for Advice

Another thing you can control in the investment world is how much you're paying for financial advice. Make sure your advisor discloses all sources and amounts of income so you know exactly what you're paying. You might be surprised at how much the "free advice" you receive from your broker is costing you! (FYI - The hidden costs (i.e. sales commissions) of annuities and life insurance can be especially high.)

You can avoid hidden costs by working with a "fee-only" advisor. Unlike advisors that use the term "fee-based", "fee-only" advisors are paid directly by their clients, never receive sales commissions, and have an incentive to recommend low cost investments and insurance. (See if your advisor would be willing to sign a Fiduciary Statement like the one I use here.)

Rule 3: Ignore Your Emotions

All of us are familiar with the saying “buy low, sell high”, but following your emotions when you invest usually leads to doing the opposite. Think twice before going along with the crowd during manias like the dot-com boom and avoid panicking during market declines. Make sure you follow a clearly defined investment strategy so you can take emotions off of the table when making investment decisions.

Rule 4: Don’t Forget About Taxes

Whether or not you realize it, you have an investment partner involved in every decision you make: Uncle Sam. In addition to taxable investment accounts, make sure you're using tax-favored accounts like 401(k)s, 403(b)s, Traditional IRAs, and Roth IRAs whenever possible.

For most investors it makes sense to have a combination of "tax-deferred" accounts (e.g. 401(k), 403(b), Traditional IRA) and "tax-free" investment vehicles (e.g. Roth IRA, Roth 401(k)) in order to balance current and future tax savings. Keep in mind that Uncle Sam won't forget about you later in life!

Rule 5: Understand Risk

All investments involve risk. If you invest in stocks, you face the risk that stock prices could tumble. If you hold more stable investments like bonds and CDs, you face the risk that the return you receive won’t keep up with inflation over time.

That’s why most investors diversify into a mix of different types of investments. Make sure you understand and are comfortable with the risk you’re taking with each individual investment as well as with your portfolio as a whole.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com

Stimulus, response.

The current market volatility has me thinking of one of my favorite Far Side cartoons that features an amoeba yelling at her husband for never "thinking", only "responding".

It's human nature to want to "respond" (e.g. sell your stocks) when you encounter a "stimulus" (e.g. your stocks just declined in value). Unfortunately, the stimulus-response method of investing is one of the surest ways to lose money over time!

That's not to say you shouldn't make changes to your investments. It's possible you could have too much of your portfolio in stocks and need to reduce your exposure to the day-to-day risk of losing money known as "market risk".

Or it could be that you're facing a large amount of "inflation risk" because you responded to the 2008 market crash by moving your money to CDs, treasuries, and other "safe" vehicles that might not keep up with inflation over time.

(On a side note, I think the idea of investors having to choose between "returns" and "safety" is somewhat of a false dilemma used by salespeople to push financial products. To avoid this and other conflicts of interest, make sure your advisor is held to a fiduciary standard.)

If you've read previous blog posts or newsletters - or have seen a couple of the weekly "Smart Money Segments" I do for the local NBC station - you've probably heard me mention the importance of following an investment strategy when analyzing your portfolio for possible changes.

As an investor, you owe it to yourself to have a clearly defined investment strategy based on your risk tolerance, time horizon, and goals. That's the only way to make sure that any "stimulus" you encounter in the markets will be followed by a "response" based on logic and not emotion.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com

You Might Be Your Own Worst Enemy, Part III

(This is the third part of a three part series. The first two parts were published in our last two newsletters.)

Your behavior as an investor is the single largest determinant of your long-term investment return.* In our last two newsletters we discussed several common mistakes that investors make - greed, panic, overdiversification, underdiversification, speculating, and letting cost basis control your investment decisions.

This final installment will conclude with two additional mistakes you should avoid if you want to increase your chances of achieving investment success.

Focusing on Yield Instead of Total Return

Investment returns are the result of two things: capital gains and yield. A capital gain occurs when an investment appreciates in price, and yield refers to the dividends and interest paid by an investment.

Investors tend to shift their portfolios toward higher yielding securities and away from stocks as they approach retirement, but focusing on yield can be problematic since investments with high yields - like CDs and bonds - historically have not kept up with inflation over long time periods.

According to TIAA-CREF, a couple aged 65 has a 50% chance that one of them will be alive in 30 years. That’s a long time and a lot of inflation! Instead of focusing solely on “yield” investors living off of portfolio income would be better served focusing on “total return” and making sure they have a plan to keep up with – or outpace – inflation.

Buying on Margin (Using Leverage)

Investing on margin is similar to buying a home. Investors borrow money from their broker to purchase more of a security than they could afford to purchase without using borrowed funds for a portion of the total purchase.

The problem with margin is that it’s a double-edged sword. Buying stocks on margin is great when prices go up because it magnifies your return. But, when stocks go down, your losses are magnified as well!

The use of margin can get out of hand not only during long bull markets - like the one we experienced in the late ‘90s - but also during volatile markets like we’ve experienced over the past several months.

In a bull market, the mistake investors make is believing that stocks only appreciate. Trying to increase your return using margin during long bull markets can lead to large losses when the market eventually turns around. In a volatile market, investors trying to earn huge returns on the next upward swing can be wiped out completely if a downturn comes first.


*A study conducted by Dalbar found that investors captured less than 40% of the actual market return during the 20-year time period that ended 12/31/2007. This is a phenomenon that has been repeated over and over with surprising regularity!


To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.