By Doug Buchan

“Maximizing returns” is a phrase that you’ll hear bandied about ad nauseam on both Wall Street and Main Street.

As in, “My goal is to maximize my returns.”

Is it though? Is that really the goal?

Bronnie Ware would beg to differ. More on her in a moment.

Personally, I can’t remember coming across anybody who I would have surmised to be living a full, peaceful and centered life around the primary goal of maximizing their returns, and it’s pretty easy to see why. There can always be greater returns somewhere, and odds are that if you look hard enough, you can find someone who got them.

An alternative phrase that I have been continually encouraging clients to consider involves the idea of “minimizing regret.”

“How do I minimize regret?” feels like something that you can answer in much greater capacity and with a much more satisfying journey than the question “How do I maximize returns?”

This is true in investing as well as in life.

Back to Bronnie. Ms. Ware is an Australian nurse who spent several years working in palliative care, caring for patients in the last 12 weeks of their lives. On her own path, she decided to record her patients’ dying realizations in a blog, which garnered such praise that she put her observations into a best-selling book called “The Top Five Regrets of the Dying.”

Ware writes of the amazing clarity of vision that people gain at the very end of their lives, and how we might learn from their wisdom. The following is a summary of her patients’ collective top five regrets (quoted material is from her book):

1. I wish I’d had the courage to live a life true to myself, not the life others expected of me.

“This was the most common regret of all. When people realise that their life is almost over and look back clearly on it, it is easy to see how many dreams have gone unfulfilled. Most people had not honoured even a half of their dreams and had to die knowing that it was due to choices they had made, or not made. Health brings a freedom very few realise, until they no longer have it.”

1. I wish I hadn’t worked so hard.

“This came from every male patient that I nursed. They missed their children’s youth and their partner’s companionship. Women also spoke of this regret, but as most were from an older generation, many of the female patients had not been breadwinners. All of the men I nursed deeply regretted spending so much of their lives on the treadmill of a work existence.”

1. I wish I’d had the courage to express my feelings.

“Many people suppressed their feelings in order to keep peace with others. As a result, they settled for a mediocre existence and never became who they were truly capable of becoming. Many developed illnesses relating to the bitterness and resentment they carried as a result.”

1. I wish I had stayed in touch with my friends.

“Often they would not truly realise the full benefits of old friends until their dying weeks and it was not always possible to track them down. Many had become so caught up in their own lives that they had let golden friendships slip by over the years. There were many deep regrets about not giving friendships the time and effort that they deserved. Everyone misses their friends when they are dying.”

1. I wish that I had let myself be happier.

“This is a surprisingly common one. Many did not realise until the end that happiness is a choice. They had stayed stuck in old patterns and habits. The so-called ‘comfort’ of familiarity overflowed into their emotions, as well as their physical lives. Fear of change had them pretending to others, and to their selves, that they were content, when deep within, they longed to laugh properly and have silliness in their life again.”

I’ve observed that one of the fortunate consequences of this rather unfortunate situation we all now find ourselves in is that it has allowed many to reflect a bit more on their lives in two distinct ways: to look back at some of the things they may have taken for granted, but also to look forward and reexamine some of the goals they would like to accomplish.

With any bear market – regardless of the circumstances associated with it – comes a reassessment of people’s tolerance for risk.

As you know, we believe in building a portfolio allocation based on your A) need to take on market risk (ascertained by building out detailed goal-attainment projections), B) willingness to take on market risk (more art than science), and C) ability to take on market risk (the time horizon between your age and the desired timing of your most important goals).

I’d like to quickly address variables A and B.

Let’s say we run a plan and we determine that you have a 90% chance of successfully meeting your goals with a 70% allocation to stocks. Let’s also assume that I can construct an alternate portfolio where you also have a 90% chance of success, but with only a 55% allocation to stocks. You reflect on these two options, and you decide you’d like the 70% allocation to stocks.

This is where I would gently ask you, “Why?”

Now, you may say something like, “You know, I’ve listened to you over the years, and I’ve concluded that I am more afraid of the insidious erosion of purchasing power over time than of the long-term risk of owning equities, and I believe equities give me a much better chance to fight that erosion of purchasing power than fixed income bonds. Also, I have a stomach of steel, and do not worry at all about how I’ll feel when the inevitable bear market returns and, hopefully for only a short period of time, negatively impacts the value of my portfolio.”

If you said that, I would say, “Eloquently stated. You’re allocated with your eyes wide open, and you’ve weighed multiple uncertainties of life in an appropriate way for you.”

But if you said in so many words that you’d rather the higher allocation to stocks because you want to get better expected returns, I would encourage you to look through the lens of “regret minimization” as much as you’re looking through the lens of potential “return maximization.”

While the need and ability to take on market risk will change as your goals evolve and as time marches on, it’s the willingness to take on market risk that has been most affected by our current experience. Tolerance for risk is a funny thing, and as I said, it’s often more art than science. We need to be aware that each and every one of us will perceive risk differently when the sun is shining versus when there’s a pandemic outside our window. You see, it’s oh-so-easy to overestimate your tolerance for a risk that you can’t see or can’t imagine.

But the reverse is also true. It’s often difficult to see the projected reward of a risk when that risk is right in front of you but the reward is miles down the road.

It’s OK to admit that your tolerance for stock market volatility might not be what you thought it was. It’s always OK to reassess; no, it’s more than OK – it’s wise. That said, your wealth advisor will encourage you to think through the multitude of risks that may lie ahead, not just the one in front of our faces.

It’s very difficult to be objective and unemotional about your own situation during extremely stressful times. When outcomes are uncertain and the stakes are high is when all of our behavioral glitches seem to peak. And this is a major reason why an objective advisor can be so valuable. Our goal is to help you deeply understand your own personal need, willingness and ability to take risk. Many of these discussions are rooted in academic science, but not just investment science. We are all human, so behavioral science also plays an important part. What good is a solid academic plan if you are emotionally uneasy for much of the journey?

We work our hardest to help you build a financial plan designed with your fullest life in mind, whatever that particular phrase may mean to you. These conversations are often successful; other times they’re a work in progress. But I, for one, will keep at it, as nothing fulfills my life more than helping others fulfill theirs.

It’s never too late to minimize regret. It can start today. Often, minimizing regret requires no money at all, simply a change in mindset and action.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliation, sponsorship, endorsement or representation whatsoever regarding third-party websites. We are not responsible for the content, availability or privacy policies of these sites and shall not be responsible or liable for any information, opinion, advice, products or services available on or through them.

© 2020 Buckingham Strategic Partners^®

The post Minimize Regret Over Maximizing Returns appeared first on JMF Capstone Wealth Management.

By Connie Brezik, CPA/PFS, CFP^® 

Anyone considering retirement, or who has retired in the recent past, understands that there is a lot to this decision. Sure, having enough money is an important part of this equation, but there is much more to consider. Once your company throws you a retirement party, your life will be forever changed.

Figuring out if you can and should retire takes some work. I recently attended an insightful talk where the speaker had researched this topic in depth before retiring himself. He learned so much that he now coaches other potential retirees.

In his experience, there are four main questions you need to ask, and to which you must be able to answer “yes,” before you take this step.

First, do you have enough? Money, that is. To answer this question, you need clarity on your desired lifestyle and what your future income and expenses will be. Your portfolio needs to be positioned correctly to support you for the remainder of your lifetime. You also need to cover your risks so that some unknown and unpredictable event doesn’t unravel a secure future.

Second, have you had enough? Work, that is. Have you reached the stage where you are not excited to continue the daily routine? Are you looking for a change and dream about being able to do what you want, when you want?

A transition between full-time work and no work is a good idea. The shock of going all-out one day to doing nothing the next can cause depression and frustration. Your company may allow you to phase into working part-time to ease this transition. This is often a win-win, as you still get a paycheck and the company benefits from your acquired expertise and having time to replace you.

Third, do you know what you will do? With your time, that is. Do you have hobbies? Do you have friends outside of work as well? Feeling useful and valued is important. Maybe you have skills that your favorite nonprofit is looking for. Perhaps you can take care of grandkids part-time and make life easier for your adult children.

This side of retirement planning may be the most difficult. Many of us come to define ourselves by what we do and the title we hold at work. Much of our “social” life may actually revolve around our career, perhaps providing exciting opportunities for travel and networking. Figure out how you can fill those needs once you no longer are in the workplace.

Fourth, does your spouse want you around? At home 24/7, that is. Be sure to include your spouse in your retirement discussions. He or she may be used to having the house to themselves and don’t want you there all day long. Does your spouse expect you to do grocery shopping, cooking, cleaning or other long-postponed tasks when your plan is to be on the river fishing?

If you and your spouse have both worked and contributed to the household financially, there may be some resentment that this burden will now fall solely on one of you. Even if money is not the issue, the expectation that you contribute and be productive can be strong. Your spouse may get upset if you are simply playing every day while he or she is not.

Retirement is a skill to be developed, and you should practice before you jump in head-first. Take some time off and do the things you expect to do with your day once you officially retire. Find out if you are content traveling, playing golf, fishing or making furniture.

Retirement should be a happy time of your life. If you do your planning and can answer yes to the preceding four questions, you will set yourself up for success.

This commentary originally appeared November 2 on TheCasperStarTribune.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE^®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2019, The BAM ALLIANCE^®

The post Figuring Out if You Should Retire appeared first on JMF Capstone Wealth Management.

The World Health Organization reports that by 2050, 2 billion people (22% of the population) will be age 60 and older, up from 605 million (11% of the population) in 2000. Older adults must make important, and often irreversible, decisions that impact the rest of their lives.

Examples include when to take Social Security and pension benefits, whether to buy long-term care insurance, how to most efficiently draw down savings and whether to annuitize assets.

Unfortunately, while advances in wealth and medical science have led to rising life expectancies, longer lives create the risks of running out of financial assets sufficient to support a minimally acceptable life style and cognitive impairment, which makes us more susceptible to becoming the victim of elder abuse.

What The Research Says

As described in the book “Financial Decision Making and Retirement Security in an Aging World,” the latest volume in the Pension Research Council series, the 2014 study “Financial Exploitation in the Elderly Consumer Context” found that the annual prevalence of elder financial abuse among those age 60+ was about 14% in Florida and Arizona.

Age-related declines in fluid cognitive skills begin to emerge in our 20s—the longer we live, the greater our susceptibility to cognitive impairment. It’s been estimated that today half of those in their 80s have dementia or some milder form of cognitive impairment. Yet as we age, we are still responsible for managing our wealth, health care costs, taxes, insurance and estate plans.

As explained in the book, Wandi Bruine de Bruin, professor of behavioral decision-making at Leeds University, found that older adults make more mistakes when asked to apply decision rules to choose between products, and that as the number of options increases and decisions become more difficult, they are less likely to make the optimal choice.

Also according to the book, in his review of the research on challenges for financial decision-making at older ages, Middle Tennessee State professor Keith Jacks Gamble found: a decrease in cognition is a significant predictor of a decrease in financial literacy among seniors; older investors’ investment selections are less skillful; the prevalence of suboptimal credit decisions increased after age 53; and bankruptcy filings among those age 65 and older constituted the fastest-growing demographic group.

Importantly, he found that while the research shows that a decrease in cognitive skills predicts a decline in self-confidence, this is not necessarily true when it comes to financial decisions—the elderly either don’t recognize this or are reluctant to admit it (which prevents them from seeking help from a trusted advisor). Gamble found that even among those experiencing cognitive declines, about half get no help with their decisions despite the fact that they are likely to benefit from trustworthy, knowledgeable advice.

Susceptibility To Fraud, Elder Abuse

The loss of cognitive skills puts the elderly at greater risk of being susceptible to fraud. Because of that, they are more likely to be targets. According to the 2015 True Link Financial report on Financial Elder Abuse, the amount stolen from elders each year in the U.S. is more than $36 billion.

This includes not only outright theft by unscrupulous people in their lives, and online predators who are after them, but also other kinds of more subtle abuse. Research demonstrates that no one is immune from financial manipulation, regardless of their education, sophistication or experience in financial matters.

True Link found that a significant number of victims are younger seniors, college educated and not living in isolation—and they lost more to abuse than those who were older, less educated and isolated. And the estimate of $36 billion in losses is almost certainly dramatically understated because the elderly are far less likely to report abuse, either due to embarrassment or because the abuse was by a family member, such as a child.

The FINRA Foundation conducted a fraud survey in 2012 and found that those over 65 were targeted more often and were more likely to lose money when targeted compared to those in their 40s. In addition, the 2012 Senior Financial Exploitation Study found that 56% of certified financial planners had an older client who had been financially exploited, with an average loss of about $50,000.

Compounding the problem is that being a victim of fraud causes an increase in risk-taking (to try to make up for the loss), like the casino gambler who keeps playing until he breaks even. In fact, fraud victims report an increased assessment of their lifetime willingness to take on financial risk relative to nonvictims. That in turn can lead to further problems from which it may be impossible to recover.

Summary

Thoughts of retirement can be dreams of being free of job responsibilities and enjoying travel, leisure activity and having fun. We look forward to having time to do the things we didn’t have time to do. Our thoughts usually do not include fear that someone is going to rip us off. Unfortunately, financial abuse does happen, even to the smartest people.

Most of us do not want to face the fact that, over time, we may lose our mental acuity, creating the potential for financial abuse. However, declining mental sharpness is inevitable for many. That makes us vulnerable to financial abuse. Even if you do not suffer any decline in mental sharpness, there is no guarantee you will be untouched by those seeking to exploit you.

Determined, professional thieves know that many seniors have nest eggs that can be stolen. Educated and powerful people can be taken advantage of and manipulated right along with those who lack these advantages. No one is immune.

Elder expert and author Carolyn Rosenblatt offers the following checklist of warning signs of cognitive impairment (which create the risk of financial abuse):

1. It appears to trusted others that you are no longer able to process simple concepts.

2. You appear to be forgetful, with short-term memory loss.

3. You appear unable to recognize or appreciate the consequences of financial decisions.

4. You make any decisions that are inconsistent with your long-held goals, investment philosophy or commitments.

5. You demonstrate erratic behavior.

6. You refuse to follow appropriate investment advice, which you have generally accepted in the past.

7. You seem to others to be paranoid about someone taking your money or missing funds that are not missing.

8. You lose the ability to understand recently completed financial transactions.

9. You appear in any way to be disoriented, get lost in familiar places, such as finding your way home, or you forget where you are.

10. You forget to groom, bathe or take basic care of your physical needs.

If you (or a loved one) are experiencing these signs, it’s time to seek help. You do not want to wait until after the damage is done.

Rosenblatt also offers the following 10-point smart retirees’ checklist that generally covers many of the bases of how to help your family and yourself be best prepared for things you need to manage in this phase of life and avoid abuse. The bottom line here is transparency and open communication.

1. Decide with whom you want to communicate about your future. Set a date and get together.

2. Have a signed, notarized durable power of attorney.

3. Have a signed advance health care directive.

4. Make a list of all bank accounts, passwords, hard drive backup, investment records and financial planning you have done, and provide contact information. Provide written permission to your loved ones to talk with your lawyer, accountant and financial planner.

5. Make a list of all insurance policies, including life, disability, health, property,  earthquake, and anything else you own that will protect your heirs.

6. Make a copy of your mortgage statement, any other loans, financial statements and bank statements. Keep them in one place. Update when changes are made.

7. List your physicians, care providers and medications. Give written permission  for your loved ones to speak with your doctors.

8. Put in writing your wishes for burial or disposition of your remains.

9. Update your will and/or trust with a local attorney. Laws change and documents need to be up-to-date in your state.

10. Have a family meeting to give items 2 through 9 to your loved ones and explain them.

If you or your loved ones don’t have such a plan already in place, I hope you take this as a call to action.

This commentary originally appeared November 12 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE^®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE^®

The post Financial Decision-Making in an Aging World appeared first on JMF Capstone Wealth Management.

When the stock market drops, it can be tough to see past the immediate pain. To help you adopt the long-term view, Chief Investment Officer Jared Kizer talks through October’s market volatility and puts it into proper historical context. Bottom line? Volatility has been the long-term norm in stocks, your investment plan is well aware of such market risk, and predicting short-term equity market moves is virtually impossible anyway.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE^®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE^®

The post Market Volatility and Equity Performance appeared first on JMF Capstone Wealth Management.

I’ve been a close observer of the way families make, communicate and implement financial decisions for most of the last four decades. In that time, I have learned that many individuals and couples make family wealth and lifestyle planning decisions privately, then avoid discussing them with other family members because it’s an uncomfortable conversation.

The family leader or leaders usually know it would be better, in many cases, to explain details, discuss issues, and secure commitments to and acceptance for the family’s financial direction. Clarity equals confidence, and being financially confident empowers a fuller life for all involved.

Yet many, if not most, family leaders struggle to share the intimate specifics, fail to collaborate on decisions, or neglect to have reasonable and open conversations about a range of family wealth and life planning matters. In my experience, the reason for this is twofold. First, as I previously mentioned, it’s just plain uncomfortable (or, at least initially, easier to do nothing at all). Second, few people are trained to hold money discussions and just don’t know where to start or how to do it.

So, you may ask, what exactly is involved in starting a constructive dialogue about your family finances and the decisions that affect them?

Having worked with hundreds of families to meet their life and long-term financial goals, and based on my unscientific observations, here is where and how you might want to start your family’s next important conversation about money:

1. The late Stephen Covey, a legendary author and speaker, advocated planning by “starting with the end at the beginning.” Before sitting down for the planned conversation, very carefully consider and decide what you hope to accomplish. Be very specific. Then, pen in hand, list the most important aspects of a desired outcome.

2. Next, envision the setting where this conversation could take place. Consider a location where its content can remain confidential, yet also is comfortable and unthreatening.

3. Decide who should be present. Will you ask only those other family members required to execute the decision in question or limit participation to a close group whose input and opinions you value? Do you wish to include every family member with a possible stake in the decision’s outcome or that it may affect? Additionally, given those who will be involved and the matters to address, imagine the ideal timing of your family discussion.

4. With the “who, where and when” in mind, consider the “how” part of the conversation. Are you, the family leader, the best person to lead the discussion? Perhaps a trusted financial advisor might be a better “meeting leader” in some instances.

5. With the big picture in mind, write down a first draft of an agenda or outline. Use it as a guide for the conversation that you (or your meeting leader) will have with your family member(s). Prepare to discuss not only what needs to be accomplished, but also why it is important. I have heard family heads explain why a given decision was theirs to make, but also why it was important to them that family members agree.

6. Set the stage for a successful meeting by introducing the conversation topic in advance (and individually, if several people are involved) and by offering a personal “invitation” to each impacted family member.

7. Review your initial agenda, editing and amending as necessary. Practice the delivery of your most important, core message. Consider a trial run-through with a trusted financial advisor, your attorney or your CPA.

8. On the appointed day, be prepared for emotions that could range from acceptance, acquiescence, approval and gratitude to sadness, disappointment, anger and resentment. There may not be immediate acceptance of the message or your choices. Consider how you will react to the various possibilities. If your plan and thinking have been thoroughly prepared and developed, stick to your final agenda with confidence. Remember that being a caring family leader and financial decision-maker doesn’t mean you cannot be firm in your resolve to achieve the best outcome for your family and its future.

Serious family financial conversations are rarely easy. Strong bonds, good relationships and family members committed to each other’s happiness and well-being don’t always make a difficult discussion easier. Indeed, some conversations can be even more challenging in those circumstances. If you have experience with making serious presentations and you are comfortable with your ability to take the steps I’ve outlined, set forth putting your plan together.

On the other hand, many people would feel uncomfortable, intimidated even, developing and leading such an interaction with their loved ones. A trusted, fiduciary financial advisor can be instrumental in helping to formulate the topic and effectively deliver the desired message. I know that I’m honored to be involved when asked.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of The BAM ALLIANCE^®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE^®

The post A Guide to Starting Family Financial Conversations appeared first on JMF Capstone Wealth Management.

“Wow, those guys must be millionaires!” I can recall uttering those words as a child, driving by the nicest house in our neighborhood—you know, the one with four garages filled with cars from Europe.

The innocent presumption, of course, was that our neighbor’s visible affluence was an expression of apparent financial independence, and that $1 million would certainly be enough to qualify as “enough.”

Now, as an adult—and especially as a financial planner—I’m more aware of a few million-dollar realities:

1.  Visible affluence doesn’t necessarily equate to actual wealth. Thomas Stanley and William Danko, in their fascinating behavioral finance book, The Millionaire Next Door, surprised many of us with their research suggesting that visible affluence may actually be a sign of lesser net worth, with the average American millionaire exhibiting surprisingly few outward displays of wealth. Big hat, no cattle.

2. A million dollars ain’t what it used to be. In 1984, a million bucks would have felt like about $2.4 million in today’s dollars. But while it’s quite possible that our neighbors were genuinely wealthy—financially independent, even—I doubt they had just barely crossed the seven-digit threshold, comfortably maintaining their apparent standard of living. To do so comfortably would likely take more than a million, even in the ’80s.

3.  Wealth is one of the most relative, misused terms in the world.  Relatively speaking, if you’re reading this article, you’re already among the world’s most wealthy, simply because you have a device capable of reading it. Most of the world’s inhabitants don’t have a car, much less two. But even among those blessed to have enough money to require help managing it, I have clients who are comfortably retired on half a million and millionaires who need to quadruple their nest egg in order to retire with their current standard of living.

The teacher couple, trained by reality to live frugally most of their lives, don’t even dip into their $400,000 retirement nest egg or their $250,000 home equity because they have two pensions and Social Security that more than covers their income needs. Their retirement savings is just a bonus.

But the lawyer couple, trained by reality to live a more visibly wealthy existence, isn’t even close to retiring with their million-dollar retirement savings. In order to be comfortable, they’ll need to have at least $4 million.

A million bucks, then, may be more than enough for some and woefully insufficient for others.

A Simple Retirement Stress Test

A simple way to conduct a retirement stress test is to apply some elementary school math:

Expected Annual Pension Income

+ Expected Annual Social Security

+ Retirement Savings x .04 (4% withdrawal rate)

= Total Expected Annual Income

If your total expected annual income is more than your expected income needs, you passed the retirement stress test. If you didn’t, you’ve got more work to do. While your catch-up method will be based on your specific situation, there are really only two basic ways to improve your retirement readiness:

1. Increase your retirement income. As little as some want to hear it, working longer has a really powerful impact because you may be able to strengthen each of the three legs of the retirement stool—or at least two of them, if you don’t have a pension.

2. Decrease your retirement expenses. No one wants to retire and then live like a pauper, so decreasing spending is typically even more unpopular than working longer, but it need not be. If you’re willing to alter your geography and go on an adventure, moving from an area with a higher cost of living to a lower one can transform a seemingly hopeless scenario into one that is more than comfortable. This is especially true when you’re able to buy a comparable house for less and add the proceeds to your retirement nest egg. 

Conclusion

The million-dollar retirement goal gets a lot of attention. Remember, though, that personal finance is more personal than it is finance. Seeing one’s nest egg add another decimal place on the calculator may satisfy an emotional need, but there’s really no magic to it. A million is more than enough for some while lacking for others. The better question: What number works for you?

This commentary originally appeared June 18 on Forbes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE

The post Is a Million Bucks Enough to Retire? appeared first on JMF Capstone Wealth Management.

Prior to Feb. 2, 2018, the stock market had been through a remarkably tranquil period. Since that date, the U.S. stock market has experienced multiple days with drops of 2 percent or more in a short period of time. Here, though, we will focus on the long-term investing concepts investors should keep in mind, as well as historical context for market moves of this magnitude.

Short-Term Forecasting

Markets are notoriously difficult to forecast over any horizon, and this difficulty is only amplified over shorter periods of time. Nevertheless, this won’t stop some market “professionals” from trying. Investors would be wise to ignore these forecasts in their own decision-making. Yes, markets are currently extremely volatile, but that volatility might not continue, and no one can reliably know whether stocks will move up or down from here. In fact, no one can even clearly know what caused the drop over the last week. Some commentary we have seen points to inflationary concerns, while other pundits blame anxiety around the U.S. budgetary process. Still others believe the market is concerned the Federal Reserve may raise interest rates too quickly. Who’s to say which, if any, of those explanations are correct, much less what that implies going forward. What we do know, though, is that over the long term, investors can expect to be rewarded for investing in a low-cost, diversified portfolio of stock funds.

The recent past shows us just how wrong consensus, short-term forecasts can be. Two recent examples are the post-financial-crisis prediction of higher interest rates and the expectation that the stock market would decline following the 2016 presidential election. Both predictions were clearly wrong, and investors who acted on them instead of focusing on the long-run evidence that markets tend to reward risk-taking were harmed.

Your Plan Should Incorporate Risk

One of the advantages investors have today compared to investors in the early part of the 20th century is that we now have decades-worth of data to help us understand long-run returns and risks. For firms in the BAM ALLIANCE, we maintain an extensive database of the risk profiles associated with the portfolios that we recommend to clients. This data allows us to incorporate risk into the way we build clients’ financial plan, meaning that outcomes like the market falling by 2, 3 or 4 percent over a handful of days already are reflected in our recommendation. Our investment committee is well aware that these events — however unpredictable — will eventually happen, and advisors in the BAM ALLIANCE therefore imbed this knowledge in the comprehensive planning process that results in each client’s portfolio allocation.

Putting Market Risk in Historical Context

The following graph plots the historical annual return of the U.S. stock market in each year (in blue) from 1926 through 2017 and the largest intra-year decline (in light blue outline) that occurred in each of those years.

Annual Stock Market Returns and Intra-Year Declines

There are two primary takeaways from this graph. First, as we all know, the stock market goes up far more often than it goes down. Second, but possibly less well known, virtually every year includes a period of time where markets fell precipitously. It’s clear, though, that these intra-year declines don’t necessarily signal whether the market will be up or down over that particular year. But it does show that stock markets have and always will be risky, particularly over shorter periods of time.

Are There Any Actions to Take?

Given what we know, we obviously don’t recommend making drastic changes to a portfolio allocation as a result of short-term market moves already accounted for in the planning process. The portfolios BAM ALLIANCE firms create for clients are well-thought-through and built to be highly diversified. But are there any other actions worth considering? If you haven’t recently, now could be a good time to reassess your investment plan from a long-term point of view.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE

The post A Long-Term Perspective on the Stock Market Downturn appeared first on JMF Capstone Wealth Management.

With markets hitting record highs and a new tax plan in place, there’s a lot in play when it comes to balancing your finances. Tim Maurer visits with the TODAY show’s Sheinelle Jones and Craig Melvin to discuss managing debt, saving for the future and investing long-term.

Find it on Today.com.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE

The post How to Manage Your Money in 2018 appeared first on JMF Capstone Wealth Management.

In-state or out-of-state municipal bonds? Fixed Income Advisor Steve Wiechel explains how the fixed income desk determines which is best for each individual client.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites.

We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

The post Fixed Income Quick Take: In-State vs. Out-of-State Bonds appeared first on JMF Capstone Wealth Management.

Recency bias—the tendency to give too much weight to recent experience and ignore long-term historical evidence—underlies many of the mistakes commonly made by investors. It’s particularly dangerous because it causes investors to buy after periods of strong performance (when valuations are high and expected returns low) and sell after periods of poor performance (when valuations are low and expected returns high).

Recency can lead even investors with well-developed plans to abandon them. And it can also lead to other mistakes, such as overconfidence and the penchant to treat unlikely outcomes as impossible. It’s one of the reasons studies have found that investors tend to underperform the very mutual funds in which they invest.

Recency and Value

A great example of the recency problem involves the performance of value stocks. For the nine years from 2007 through 2015, the value premium (the annual average difference in returns between value stocks and growth stocks) was -3.4%. Cumulative underperformance for the period was 28%.

This type of underperformance often leads to selling. Unfortunately for investors who sold, 2016 turned out to be a year in which the value premium turned strongly positive (20.7%), although it turned negative again in the first 10 months of 2017 (-11.2%).

Investors who know their financial history understand that this type of what we might call “regime change” is to be expected. In fact, even though the value premium has been quite large and persistent over the long term, it’s been highly volatile. The annual standard deviation of the premium, at 12.7%, is 2.7 times the size of the 4.7% annual premium itself (for the period July 1926 through October 2017).

As further evidence, the value premium has been negative in 37% of years since 1926. Even over five- and 10-year periods, it has been negative 22% and 14% of years, respectively. Thus, periods of underperformance like the one we have seen recently should not come as any surprise.

In fact, they should be expected (the only thing we don’t know is when they will pop up), because periods of underperformance occur in every risky asset class and factor.

The following table, taken from my latest book, “Your Complete Guide to Factor-Based Investing,” which I co-authored with Andrew Berkin, provides evidence demonstrating this point.

Underperformance Happens

Each of the factors in the table has been shown to have an economically large, persistent and pervasive premium. In addition, there are intuitive risk- or behavioral-based explanations for why we should believe the premiums are likely to persist in the future, and they are robust to various definitions as well as implementable (meaning they survive trading and other costs).

But each of them, including market beta, also experience long periods of underperformance. That is a good reason to diversify risk across factors rather than concentrating it in any single factor, including market beta.

However, a long period of underperformance should not cause investors to abandon a well-developed plan. Nor should it cause them to question the existence of the value premium any more than it should have caused them to question the market beta premium when it was negative for 3% of the 20-year periods from 1927 through 2016, as the table shows.

As I point out in my book, “Think, Act, and Invest Like Warren Buffett,” one of the great ironies today is that while investors idolize Buffett, many not only ignore his advice but tend to do exactly the opposite of what he recommends (like never trying to time the market).

For example, we know Buffett did not abandon his belief in the value premium following the 10-year period ending in 1999, when it posted an annual average return of just 0.5% and produced a cumulative return of -5.2%. And I suspect he has not abandoned his faith in it given its recent relatively poor performance. While this surely is the case, many investors still question the continued existence of the value premium.

Why Value Still Matters

There are various reasons you should continue to expect an ex-ante value premium. The first is that risk cannot be arbitraged away. And the research provides us with many simple and intuitive risk-based explanations for the persistence of the value premium, as I have written about before.

Second, if, as many people believe, the publication of findings on the value premium has led to cash flows that have caused it to disappear, we should have seen massive outperformance in value stocks as investors purchased value stocks and sold growth stocks. Yet the last 10 years have witnessed the reverse in terms of performance.

In addition, as David Blitz demonstrated in his February 2017 paper, “Are Exchange-Traded Funds Harvesting Factor Premiums?”, while some exchange-traded funds are specifically designed for harvesting factor premiums, such as the size, value, momentum and low-volatility premiums, other ETFs implicitly go against these factors.

Specifically, Blitz found that “from a factor investing perspective, smart-beta ETFs tend to provide the right factor exposures, while conventional ETFs tend to be on the other side of the trade with the wrong factor exposures. In other words, these two groups of investors are essentially betting against each other.”

The bottom line is that, despite what many investors believe, there has not been a massive net inflow into value stocks relative to growth stocks.

Third, academic research has found that valuation metrics, such as the earnings yield (E/P) or the CAPE 10 earnings yield, and valuation spreads have predictive value in terms of future returns. In other words, the higher the earnings yield, the higher the expected return, and the larger the spread in valuations between growth and value stocks, the larger the future value premium is likely to be—and it holds across asset classes, not just for stocks.

For example, the 2007 study “Does Predicting the Value Premium Earn Abnormal Returns?” by Jim Davis of DFA found that, despite book-to-market ratio spreads containing information regarding future returns, style-timing rules did not generate high average returns because the signals are “too noisy” (they don’t provide enough information to offer a profitable timing signal).

The October 2017 study “Value Timing: Risk and Return Across Asset Classes,” authored by Fahiz Baba Yara, Martijn Boons and Andrea Tamoni, offers further support that valuation spreads provide information.

The authors found that “returns to value strategies in individual equities, commodities, currencies, global government bonds and stock indexes are predictable by the value spread …. In all asset classes, a standard deviation increase in the value spread predicts an increase in expected value return in the same order of magnitude (or more) as the unconditional value premium.”

Is Value Still Value?

Given that valuation spreads have been shown to have predictive value, we can examine current valuation spreads to see if they have shrunk in a way that would be expected to eliminate the value premium.

As a simple test, using data from Ken French’s website, I took a look at the spread in book-to-market (BtM) values of the top and bottom three deciles in 2008 and compared them to where they were at the end of October 2017, the latest data available. This should tell us whether cash flows over the last 10 years have altered the very nature of the value premium.

The methodology used to compute BtM ratios is this: Take the book value of the stocks as of December 31 of the prior year and then the market value of the stock as of June 30 of the following year. For 2008, the BtM ratios were 0.21 (deciles 1-3) and 0.92 (deciles 8-10), for a value spread of 0.71. For 2017, the BtM ratios were 0.16 and 0.83, respectively, for a value spread of 0.67—virtually unchanged from 10 years earlier.

Note that the value premium from 1926 through 2007 was 5.6%. Thus, at least in terms of valuation spreads, there doesn’t seem to be any evidence to support the idea that the value premium has disappeared.

To help you avoid mistakes involving recency, keep the following example handy. The stock risk premium has been large, almost 8% a year. However, it’s also highly volatile, with an annual standard deviation of about 19% (about 2.5 times the size of the premium itself).

The premium is large because there’s a large amount of risk involved in equity investing, and investors demand it to take that risk. Because it’s a risk premium, the chance that investors may experience very long periods of underperformance must exist. In fact, the premium may never be realized. If such a risk did not exist, there really wouldn’t be any risk (and thus no premium).

As proof, consider that from 1969 through 2008, U.S. large-cap growth stocks returned 7.8% and underperformed long-term (20-year) Treasury bonds, which returned 9.0%. That’s a 40-year period in which investors took all the risks of stocks and underperformed long-term U.S. Treasuries. Should that have convinced investors the strategy of believing in a stock risk premium was wrong? Of course not.

The logic is still the same. Stocks are riskier and must have higher expected returns. It’s just that the risk involved showed up for this very long period. Those who abandoned their plans and sold stocks because they confused strategy and outcome may have missed out on the bull market that followed—the greatest since the 1930s.

What’s important to understand is that the premiums for the market overall, small stocks and value stocks have been earned only by those investors disciplined enough to stay the course through the periods when the asset classes (and factors) they have invested in underperform.

As we have seen, the periods can be quite long, long enough to test even the most disciplined of investors. That is, perhaps, why Warren Buffett has stated that his favorite holding period is forever. He has also said that successful investing has far more to do with temperament than intellect.

This commentary originally appeared December 11 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

The post Don’t Write Off Value appeared first on JMF Capstone Wealth Management.