Your Big Advantage Over the Average Investor

Posted by John Charles Kernodle on October 27, 2015  /   Posted in Newsletter

Over the last few days, I suspect you were tempted to look at your investments. After all, you’re human, and it’s been a bit of a wild ride with the markets trying to decide where to settle. But here’s the thing. Even if you did peek, you know something that many other people don’t.

You know that your financial goals have very little to do with what’s happening in the market on any given day.

Instead of paying attention to the markets, you’re choosing to pay attention to your goals. Instead of trying to guess what the markets will do tomorrow, you’re focusing on the things within your control today.

That gives you a big advantage over the average investor.

Too many people put off dealing with their financial lives. They avoid looking at their retirement accounts. They ignore their credit card debt. They forget the power of compound interest.

I understand why. Even after spending years helping people with their money decisions, I can still see why it feels overwhelming. When I work with clients to help identify their goals, I’m asking questions that require thinking about their future selves. Who will you be in 10, 20, even 30 years?

These questions don’t always come with easy answers. But experience shows that asking these questions now can help people set financial goals they’ll actually stick with.

For instance, if you didn’t understand the true value of your assets and your debt, how will you ever know what you need to save to reach a future goal? And if you don’t know how much you need to save, then how can you know what investments best match your goals?

I know that thinking about money, let alone talking about it, can be a challenge for some people. But it’s so important to have these conversations and understand your true financial situation.

I love those moments as an advisor during a client meeting when I see people making the connection. After answering several questions and considering different options, they now know what goals matter most to them. They also know markets will go up AND down. But they have confidence that by sticking with their goals, they can feel confident about their ability to adapt as things change both in the world and in their lives.

Over the next few days, weeks, and probably months, there will continue to be headlines about what the markets are (or aren’t) doing. At times, the headlines will be really persuasive. If that happens, and you’re feeling tempted to react, I suggest reviewing your goals. Unless a particular headline happens to be one of your goals, stick with what you know will work in the long term.

I doubt very many people have set a goal to sell everything if the Chinese stock market takes a dip. However, based on what I’ve seen in the news the last few days, that’s how too many people are reacting. You know better, and with your financial goals in place, you can feel confident about the decisions you’re making for your financial future.

It’s Time to Have This Conversation

Posted by John Charles Kernodle on October 27, 2015  /   Posted in Newsletter

No one likes to think of the possibility that some day, easy tasks that we take for granted may prove beyond our ability. Things like the simple math we use to figure out a tip or balance our checkbook may become more difficult. I was surprised to learn that even the healthiest of brains can struggle with basic math and financial decisions as we get older.

The issue isn’t intelligence, but age. Once we hit 80, we all face a greater risk of some cognitive impairment. As a result, we’ll put at risk our financial success and well being if we don’t take steps early on to protect ourselves.

This issue is most definitely a part of the transition process I introduced in the March newsletter.  We have a choice, both as an older parent or as an aging child. We can take steps now to make use of financial tools that will protect us, like revocable living trusts, durable financial power of attorney, and health care directives.  Or, we can pretend this will never happen, and do nothing.

Clearly, I recommend everyone do the former. The reality is that as we age, we may continue to have good physical health. We may even continue to enjoy our daily crossword puzzle. But we need to recognize that age can make us more vulnerable to bad financial decisions.

You haven’t worked this hard and this long to build up your wealth for nothing. But protecting it may require admitting we’re human. Things will change, and one of those things is that we may need more direct help with our finances.

In the New York Times recently, reporter Tara Siegel Bernard shared the story of Francis Taylor:

At 80 years old, he married a woman 17 years his junior, who, over their three-year union, according to the family, cashed $40,000 in blank checks sent by his credit-card issuer and emptied the contents of his $123,000 annuity, leaving him with little more than a giant tax bill.

Luckily, the family learned what was happening before paperwork for a reverse mortgage could be submitted. Mr. Taylor still has the equity in his home.

But this situation represents the last thing I want to happen to any of you. In this instance, it was a second spouse, but it just as easily could have been a friend or another family member. The sooner we recognize our potential risk, the better we can lay the groundwork to have our affairs taken care of the way we want.

It may not happen today, but if you haven’t already done so, I suggest you set a date to finalize a transition plan. Have the conversation with everyone involved from friends and family to the professionals you work with. Make sure that everyone knows about everyone else so there’s a clear system of checks and balances in place.

I’m of the firm belief that when we reach the point where we need help, that help doesn’t have to be smothering or condescending. If we’ve taken the time to create a transition plan that fits us, that respects our desires, we can have confidence that all the hard work we’ve done over the years won’t be lost in our last years.

Do You Have a Transition Plan?

Posted by John Charles Kernodle on March 01, 2015  /   Posted in Newsletter

Over the last few years, we’ve seen a growing trend of people caught between two sets of demands. On the one side, this group is focused on raising a family, building a career, and saving for retirement. But on the other side, this group is being asked to step in and help manage their parents’ affairs.

The situation has become common enough the group has earned a name, the Sandwich Generation. According to a 2013 Pew Research report, “around 42 percent of Gen Xers and 33 percent of baby boomers fit this profile.”

Even more concerning, a large number of “households are not prepared for retirement.” In 2014, the Federal Reserve conducted a survey that found “31 percent of non-retired respondents (including 19 percent of those aged 55 to 64) … don’t have any retirement savings or pension.”
Given those numbers, it’s not surprising that I’m hearing more often from clients about this issue and how they feel caught in the middle. The concerns vary, but they come back to a bigger question. How do we make this transition successfully?

Over the next few months, I’m going to share some best practices in this newsletter that specifically address this issue of transition. You may be the position of a parent needing more help from a child or a child being asked to do more for a parent.

Whatever your role, my goal is to help reduce the frustration and limit the guessing. These transition periods will happen for all us. And while we may be on one side at this point, there’s no reason to think we won’t end up on the other side … eventually.

Refusing to talk about the need for a transition plan remains a huge roadblock. No one likes to think about the day when roles will reverse. That said, these discussions are crucial. The sooner many of these issues can be addressed and planned for the better for everyone involved.
With that in mind, here are some of the specific situations I’ll address in future newsletters:

  • Establishing power of attorneys
  • Setting up estate plans
  • Creating and managing the transition plan

One of the most common scenarios I’m seeing is that people assume having the documentation (e.g., power of attorney) is enough. However, there’s yet to be a conversation about when and how things will transition. Stopping short of this conversation can create otherwise avoidable headaches. My goal is to save you from most, if not all, of those headaches.

We’re at an interesting moment in history. People are living longer. We’re having kids later. Sometimes those kids leave, then boomerang back. Some parents are discovering they may very well outlive their money. Whatever the situation, things have changed. My hope is that by the end of 2015 you’ll feel more confident about how to handle these changes.

Don’t Leave Money on the Table

Posted by John Charles Kernodle on October 07, 2014  /   Posted in Newsletter

It isn’t discussed much, but when markets take a drop, it sets up a choice for investors with long-term consequences. Investors can stick with their plans, which probably include holding on to stock and maybe even buying more. It can feel like a scary choice if the markets are jumping all over the place. However, the other option is to let emotion rule the day.

Maybe investors don’t have a plan, or they ignore it, and they sell all their stock holdings, convinced it’s better to get out now. After all, it’s much wiser to get what you can out of the markets before it all disappears.

I’ve heard people make both arguments. But when they make the latter one, they skip over something incredibly important: the compounding effect. As a result, the choice to sell all stocks at market lows can create a wealth gap that’s incredibly difficult to close.

One of the best examples has to be Dalbar’s rolling 20-year average return. From 1993-2013, the S&P 500 returned 9.22 percent. Remember that this number accounts for the down years after the tech bubble and the most recent recession. It’s a return almost everyone I know would consider acceptable, and all it required was investing in a S&P 500 fund in 1993 and then doing nothing. But that’s not what the average investor did.

Instead, the average investor jumped in at market highs and cashed out during market lows, which resulted in an average return of 5.02 percent. That’s a gap of 4.20 percent. I know of no investor that would be happy leaving that money on the table. Yet it can happen if we aren’t careful. Just remember the headlines from even a week or two ago. People who previously wondered if we’d ever see volatility again were now worried the market wouldn’t ever settle back down.

It a tough tightrope to walk as an investor, but to give you some context let’s walk through what all too many investors did back in 2007. It wasn’t unusual to hear that people were getting out of stocks and swearing to never buy them again. This decision came with a cost that the Wall Street Journal illustrated perfectly.

“Imagine two well-off households, each with $100,000 in the stock market in 2007. A family that sold in 2009 after losing half its portfolio’s value may now have $50,000 in a savings account. A family that held on would now have about $130,000 in stocks. The inequality has yawned merely because of the investing decisions. In the long run, those savings accounts have a vanishingly small chance of outperforming stocks.”

Besides the fact that we know markets go through cycles, we also know they compound wealth much more efficiently than savings accounts. If you’re lucky, you might find a savings account paying one percent. Compare that to the five-year S&P 500 average of 17.94 percent.

Over those five years, $50,000 in a savings account earning one percent would only be worth $52,551. That same $50,000 invested in an S&P 500 fund would have turned into $114,097. It’s incredibly difficult to recover from that kind of investing misstep, particularly since we understand that $114,097 will continue to compound faster than the $52,551 even if it’s immediately invested into stocks.

So the next time the markets start to dance around and the headlines try to convince you that another Black Friday is around the corner, remember these numbers and the potential cost of ignoring your plan. We’ve worked together to build a plan that takes market movement into account while still helping you get closer to your goals. By letting your plan do its job, you can avoid the classic investor mistake of buying high and selling low. It’s a choice that’s tripped up more than one investor, and it’s one mistake that’s entirely avoidable.

The Most Expensive Isn’t Always the Best

Posted by John Charles Kernodle on August 07, 2014  /   Posted in Newsletter

When it comes to investing, some of the best investor behavior seems counterintuitive:

  • Buy when everyone else is selling
  • Don’t buy when everyone else is buying
  • Paying more doesn’t mean doing better

The first two pieces of advice may sound familiar. They’re favorites of Warren Buffett. The last piece of advice is one of my favorites, in large part because the data is so clear.

For instance, the research shows that what an investor pays to invest in a mutual fund (e.g., the expense ratio) is one of the few predictors of its future performance. In what seems like a huge contradiction, the more you pay, the greater the odds that a mutual fund will underperform.

Morningstar took a look at fund performance in broad U.S. equity group funds from 2008-2013 and found that “the higher the fees, the less likely funds were to survive and outperform.” The data also showed similar results “in the sector-equity, international-equity, taxable-bond, and municipal-bond groups.” As you can see from the chart below, the least expensive funds were almost twice as likely as the most expensive funds to survive and outperform. That’s a huge difference for investors!

On top of underperforming, every additional dollar you spend on fees is one less dollar you get to count in your returns. When you throw in compound interest, what may seem like a small fee in the beginning begins to cost you a lot over time.

I’m highlighting this issue because it’s easy for investors to skip this particular investment math. It just doesn’t feel like a big deal. But what if failing to do the math ends up costing you money?

Let’s assume you have $1 million, and you’re presented with two investment options. Both options are promising a gross return of 9% over 20 years. But there’s a catch. After fees, option one will net you 8.5% and option two will net you 7.5%. A 1% difference isn’t a big deal, right? Over 20 years, if you net 7.5% on $1 million you’ll earn $4,247,851. That’s a nice nest egg. But if you net 8.5% on your investment, you’ll earn $5,112,046, almost $1 million more ($864,195.02 more to be exact). That 1% added up to quite a bit.

Sometimes it’s worth it to pay for the most expensive option. But when it comes to investing, opting for the less expensive option is likely to earn you much more and cost you much less.

Behaving in Calm Markets

Posted by John Charles Kernodle on July 01, 2014  /   Posted in Newsletter

Six months ago, I’m not sure anyone could have predicted what we see in the markets today: a whole lot of nothing. The markets go up one day, down a little the next, but they’re basically calm, and some investors aren’t reacting very well. In fact, some investors are chasing incredibly risky investments because calm markets don’t generate the same returns as volatile markets. So they go on the hunt and make big bets on investments they’d avoid at any other time, all in the hope of generating a bigger return.

Of course, there’s no guarantee the markets will stay calm. As we know from past experience, global events can shake up the markets at any time. So it may seem like this risk-chasing isn’t a big deal. However, over time, if enough investors do it, we’ll start to see instability in the overall system. That’s a potential problem for everyone.

Notice that as the S&P 500 keeps going up, market volatility continues to drop. This big gap can make it difficult for investors to behave.

It also doesn’t help that markets with low volatility can make it very hard to stay disciplined as an investor. It’s easy to look around and wonder (1) if you should have EVERYTHING invested in stocks since they don’t feel too risky and (2) if you should explore other investments promising a really big return. In other words, it’s very tempting to put aside your financial plan and start placing bets. After all, it doesn’t feel very risky. Who needs a plan when the markets keep going up?

Moments (and temptations) like these are why you have a diversified, well-designed portfolio. It may not feel like it now, but you adopted this strategy of diversification to deal with the reality that we can’t predict what the markets will do next. They could very well keep going up, but they could just as easily take a drop. By sticking with your plan, you’re decreasing the odds of being really disappointed when things do change—and they will.

One of the hardest things for an investor to do most times is to stand still and do nothing. So I understand completely that it may feel like you should be doing something to take advantage of this situation. But it’s no wiser to chase after returns in a calm market than in a volatile market. You’ve set your goals and made your plan. Now it’s time to follow through. I’d be giving similar advice if the markets were acting crazy because that’s the point of having a financial plan.

We didn’t build your plan to only work at certain times. We built it and your portfolio with checks and balances to see you through the ups and downs and even the flat spots in the markets. Even though the headlines may suggest otherwise, now is not the time to start second guessing and exploring “alternative” investments.

You and your goals are better served by the thoughtful plan you laid out months or even years ago when you weren’t wondering if maybe you could beat the market. So this summer, instead of wasting time wondering what the markets will do next, I suggest you spend more time with family and friends, and let your financial plan take care of itself.

What You Can Really Control As an Investor

Posted by John Charles Kernodle on April 07, 2014  /   Posted in Newsletter

In theory, it seems like investing should be easy. After all, we have access to a lot of information. How could we possibly fail at investing? We should all be experts, right?

But there’s one big problem with this theory. No matter the amount information we have, we’re still human. Sometimes information, even really good information, isn’t enough to keep us from reacting in the moment when we’d be much better off sticking with our plans.

I see it happen most often when investors assume they can control things that are really outside of their control. For instance, we can’t control:

  • What the markets do
  • What others around us do
  • What happens tomorrow

Even though our rational selves tell us we can’t control these things, a lot of investors still try. They assume that if they can control these things, they’ll become successful investors. However, if we go down this path, we’re much more likely to end up frustrated and disappointed, both emotions that can trigger bad financial decisions. But what happens when we focus on the things we can control?

By taking the things we can’t control off the table, we create the opportunity to focus on the things we can control:

  • Our asset allocation
  • Our behavior in good and bad markets

In the big scheme of things, this list may seem like small potatoes, but let’s break down why being able to control each one is so important for investors.

1. Asset Allocation

In 1986, Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, published a now-famous study that established why asset allocation matters. They found an investor’s asset allocation decision was responsible for 88 percent of a diversified portfolio’s return patterns over time. That’s a hard number to ignore, and we have the control when it comes to asset allocation.

2. Behavior in Good and Bad Markets

It can be so hard to behave. When the talking heads on TV are shouting, it feels like we’re being really stupid if we don’t do SOMETHING. However, by reacting to what’s happening right now, we’re rarely acting in a way that’s good for our long-term financial success. As a result, we end up doing something dumb like selling at a market low or buying at a market high. We can prepare for the ups and downs we’ll experience by establishing a disciplined routine to help us weigh if we’re doing what we planned to do or reacting to the latest news.

As investors, we do have control, but we need to focus on the things we can actually control to have an impact. We can’t control the markets, but we can control ourselves, and once we understand that fact we’re that much closer to reaching our investing goals.

Stop Paying Attention to Forecasts & Predictions

Posted by John Charles Kernodle on February 01, 2014  /   Posted in Newsletter

Every year, the airwaves are filled with experts predicting where the financial markets are headed. They tell us where the market’s spots will be, and where to avoid investing your money. They whisper about the top stocks to own, and the investment plays that are the best bets to beat the market.

It’s no secret that many investors take these predictions as gospel, shifting their investments to follow the smart money. Unfortunately, these investors more often than not are disappointed in their performance. After all, the truth is that nobody knows where the markets are heading in a given week, let alone over the course of a year.

Want proof? Just look at last year. Experts generally expected the stock market to gain 5% or 6% in 2013. Even PIMCO’s Bill Gross, one of the most respected investors on Wall Street, forecasted mid-single-digit growth for the stock market last year. These experts said issues such as high unemployment and a soft economy would create headwinds for the stock market. So what happened? The S&P 500 index rocketed up nearly 30% in 2013—its best annual performance in 15 years.

The lesson here is to stop paying attention to the forecasts and predictions from these experts. Yes, some may hit the bullseye—and make a mint for those who took their advice. But year after year, these experts are wrong much more often than they’re right. The data bears that out: The following chart shows the percentage of equity funds that got beat by their benchmarks over the five years through mid-2013. In each case, more than seven out of 10 funds in each category underperformed its benchmark index. And, remember, these are funds that are managed by Wall Street pros with teams of analysts and lots of resources for investment research.

It’s human nature for us to trust the experts. We want to take on faith that what they’re saying is true. And since their overwhelming focus is on beating the market, that’s what we focus on, too. But history says that individuals trying to beat the market are more likely to underperform: The average investor gained just 4.25% a year during the last 20 years while the S&P 500 index returned 8.21% each year.1 One reason: Investors tend to buy at market peaks and sell when prices are low.

The fact is, you don’t need forecasting, predictions or prognostications. You don’t need to overhaul your investment strategy every year or every month to position yourself to chase the hottest market sectors.

What you do need is a plan that is goal- focused and not market driven.

At Strathmore Capital Advisors, we believe in the power of a well-constructed plan. Ideally, that plan is one that’s customized for your situation, and takes into account such things as your own risk tolerance and long-term financial goals. It would center around an efficiently-designed portfolio that includes a diversified mix of low-cost, global investments. And you’d stick with that plan regardless of what’s happening in the financial markets.

Ultimately, your ability to stay the course and remain committed to your plan through all different types of markets is one of the most important factors in helping you to reach your financial goals over time. What the markets do in the short-term won’t have much bearing on your long-term investment results—unless you deviate from your plan and react to the markets’ periodic ups and downs.

So whatever the so-called expert is saying on TV or in your favorite financial magazine, just tune it out or turn the page. Doing so may just mean the difference between meeting your long-term financial goals and falling short.

No One Knows What Will Happen Tomorrow

Posted by John Charles Kernodle on November 01, 2013  /   Posted in Newsletter

With only a few weeks left in 2013, it seems like the perfect time to talk a little more about one of the investing fundamentals: no one knows what will happen tomorrow. Even as you prepare to wrap up this year and begin a new one, your plans are based on what you “think” will happen. For the most part, this approach won’t trip up too many of us. However, we’ll run into problems if we make it the driving force behind our investing decisions.

Thinking Leads to Chasing 

So much of what we think we know about the markets comes from trying to interpret things that may or may not have any relevance. The latest statement from the chairman (or chairwoman) of the Federal Reserve seems to get the markets excited, but what does it really mean to the individual investor? Then there’s the monthly job reports. The talking heads on TV seem to suggest we should look to these numbers for insights about what’s to come.

But here’s the hard reality for the individual investor. The things that play out on screen and in the news are events that rarely intersect directly with our own lives and decisions. But we don’t really hear that message. Instead, we hear that we should be doing “something,” even though there’s a high probability that we shouldn’t be doing anything.

Chasing Leads to Underperforming 

One of the big drawback to “thinking” we know happens next is that we’re just as likely to jump into something when everyone else is jumping out. By trying to chase the market, we’re making some big assumptions, and those big assumptions can often lead to underperforming the market averages. Why? We have a tendency to buy high and sell low when we’re chasing the market because we’re inclined to rely on past performance to guide our decisions.

No One Knows What Will Happen Tomorrow

So if we don’t know, then what are our options? It comes down to managing the decisions we do control. We don’t know what the market will do tomorrow or next week, but we do know how much we can save each month to add to our 401(k)s or portfolios. We also know what goals we want to accomplish, and we can weigh our decisions based on whether they get us closer to those goals over time.

Also, by focusing on what we do control, it becomes easier to block out the noise of people trying to predict the market—something we know isn’t possible. Keep that in mind this holiday season and make it a point to turn off the noise and spend more time doing something you enjoy.

8 Investing Fundamentals That Matter

Posted by John Charles Kernodle on September 01, 2013  /   Posted in Newsletter

Investing isn’t easy.  Between magazine headlines and cable TV, what passes as financial advice can sound contradictory and confusing. On top of that, it can be flat out wrong and misleading. So how can we separate the wheat from the chaff?

It helps if we have a clear understanding about investing fundamentals like risk, active management, and market timing. Once we understand the basics, it becomes much easier to see most of this advice for what it is—a waste of time.  Over the coming months, we plan to discuss these eight fundamentals to help filter out the good information from the bad.

1. There is a direct connection between risk and reward. 

I understand that investing would be easier if we could separate the two, but we can’t have reward without risk. The flip side is that with risk we increase the odds of reward. Risk isn’t necessarily bad as long as we understand that it exists and why we’re taking it. We also need to remember the connection between risk and reward if someone tries to convince us that we can earn double-digit returns with no risk. Remember: the greater the reward, the higher the risk.

2. No one knows what will happen tomorrow. 

If we invest based on what we “think” will  happen, we’ll find ourselves chasing the market and coming up short every time. Most financial professional who speculate with their clients’ money (e.g., guessing about tomorrow) end up under performing the market averages. Run, don’t walk if someone tells you predicting the market is possible. Market predictions often rely on past performance and we know that past performance isn’t a guarantee of future performance.

3. There is no correlation between paying more and doing better.

In fact, the opposite is true. For example, if a mutual fund has high internal costs, the research shows that the outcome is poor performance. It’s hard to wrap our heads around this one because of the old saying, “You get what you pay for.” But in this instance, don’t assume that a bigger price tag means investments will perform better.

4. It’s not easy to find the next Peter Lynch.

Every year there seems to be somebody that the financial press identifies as the next hot fund manager. They’ve had several high-performing quarters, and we think to ourselves, “If I could just get in on the next one, I’d be set.” The problem is that just as most fund managers suddenly become hot, they could just as easily have a bad quarter. Our goal isn’t to find someone who can predict the market (see #2), but to find an advisor who helps us make smart decisions.

5. By a pretty wide margin, active management under performs the passive approach.

You’ve probably heard me discuss this once or twice, but it’s worth repeating. Adopting an active management strategy isn’t a realistic option for the average investor. Sometimes the returns make it look really attractive in the short term, but when we consider a big enough window of time, say 10 years, passive investing generates better results for investors.

6.  You need a good relationship with your advisor.

What type of relationship do you have with your advisor? Do they really know you or are you just a number? One of the reasons we want to work with an advisor is because they know us, our goals, and what we really value. Make the effort to connect with an advisor that wants to connect with you. It’s not acceptable for your wants and needs to be ignored by your financial advisor. We all deserve a meaningful relationship that helps us  reach our financial goals.

7. We need a long-term plan.

The time to create a plan for the next bear market isn’t in the middle of a down period.  If we’re serious about making smart investment decisions, then we need to play the long game. To handle the ups AND downs that come with investing we need a long-term plan that takes both scenarios into account and helps us enjoy the highs and survive the lows.

8. Humans don’t make the best investors.

Investing doesn’t come easily to most people because we’re inclined to make decisions based on emotion. A prime example is buying when the market is high and selling when the market is low. But once we identify these bad investing behaviors, acknowledge that we have a problem, and take steps to avoid them in the future, we’re that much closer to achieving our financial goals.

I doubt any of these fundamentals surprise you, but hopefully they’re valuable reminders about what really matters for investing success. I look forward to discussing them with you during the next few months and hope that the next time you’re distracted by a financial headline, you’ll have the context to weigh its true value.

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