Large Stocks vs Small Stocks: Does the Last 3 Years Change Things?

Looking back at the last few years, small stocks have been under performing by a big margin compared to large stocks.   Is this just a short term fad or is this a bandwagon that you need to jump on?

The S&P 500 is a grouping of the 500 largest companies in America.  It is a very popular thing to invest in for many reasons.  First of all, it is made up of incredible companies that we all know and love like Google, Walmart and Apple.

Here is a chart showing 2017-2019 average annual returns from these different US stock categories.

 US Markets Annualized Return (%)
S&P 500 Index 15.27%
Dimensional US Large Cap Value Index 8.46%
Dimensional US Micro Cap Index 6.85%
Dimensional US Small Cap Index 6.75%
Dimensional US Small Cap Value Index 3.32%

Obviously the S&P 500 has done amazing, while the other categories have done below their long term averages.     This can sometimes lead to a problem called recency bias.   Recency bias is a form of timing the market and investing in what has done well recently.   We believe it can be detrimental to your long term investment strategy.

Different categories of stocks have returns that come at different times and for different reasons.   Our main job as investment coaches is to keep you diversified and disciplined during crazy times like this.   This has happened before, and it looked almost the same as it does in the chart above.

From 1995-March of 2000, the S&P 500 was the best category of stocks by a wide margin.  The next closest category was over 4% lower annually, with most of the other categories being 14% or more lower annually vs the S&P 500 during that time.     Then for the next 10 years starting in march of 2000, the S&P 500 was the only stock category that had a negative return.   Yes, it lost money over a 10 year period.  But International Small Value stocks were up over 14% per year during that same period and US Small Value stocks were up  over 11% per year.

The stock market is random and unpredictable in the short term.  It really does take patience to be a successful long term investor.  I know, just like you, how frustrating it is to see other people having great returns while I am not.

Below is a chart showing a longer term history, and the returns of each category, including international categories from march of 2000-through the end of 2019.

Markets Annualized Return (%)
Fama/French US Small Value Research Index 10.75%
Dimensional International Small Cap Value Index 10.51%
CRSP Deciles 9-10 Index 8.81%
Dimensional International Small Cap Index 8.79%
CRSP Deciles 6-10 Index 8.32%
Fama/French International Value Index 7.53%
MSCI Emerging Markets Index (gross div.) 6.99%
Fama/French US Large Value Research Index 6.76%
Dimensional International Large Value Index 6.14%
S&P 500 Index 6.01%
MSCI EAFE Index (net div.) 3.36%

You can see that the S&P 500 has been the second lowest category over this last 20 year period.

We keep our clients invested in the S&P 500, but we overweight towards small and value, because their long term returns have been higher.

Although the S&P 500 is popular, and has been up lately, that doesn’t mean you can forget the long term projections and academic studies that have proved again and again that an efficient diversified portfolio beats the S&P 500 in the long term.

By Jimmy Hancock

References

  1.  Matson Money. Three warning signs you may be speculating and gambling with your money powerpoint. N.p.: Matson Money Inc., 29 June 2020. PPT.

The Easiest Way to Become a Millionaire

Becoming a Millionaire used to seem like this totally unrealistic goal that would never happen unless I won the lottery or inherited a bunch of money from some distant relative.   As it turns out becoming a millionaire is not all that unrealistic of a goal. Becoming a millionaire just means that your net worth, or the amount of money and assets you own, is greater than $1 Million.   It is achievable on almost any salary if you do it the right way.  There are over 11 million Millionaire households in America.  That’s almost 10% of all households in the United States.   1.

Is it Possible?

This is my 3 step guide to reach the status of millionaire: 1. Saving/investing at least 10% of your income, 2. investing prudently while taking proper risks, and 3. starting young.

1. Saving at least 10% of Your Income

I will show you an example of how a person making $30,000 a year can be a millionaire by the time they retire.   A 25 year old, let’s say his name is Bayden, just graduated from college and got a job making $30k year.  He decides to put 10% of that into a Roth IRA, which is $250 a month.   As it turns out he stayed at that same job for his entire life and never got a raise, but continued to invest the 10%.   When he retires at age 67, with growth rate of 8%, he will have $1,058,593 in his Roth IRA.  And the best part of that is the money is all tax free!  Obviously with a higher salary and/or frequent raises you could end up with much more than a million if you follow the 10% rule.  For most people that are out of debt and have an emergency fund, I suggest contributing 15% of their income towards retirement.

2. Investing Prudently While Taking Proper Risk

Time, and growth rate are the two most important factors in that equation.  An 8% growth rate is not anything too crazy, but you have to be invested long term, and have a vast majority of your money in stocks.  You cannot panic and take your money out if there is a crash.  You must trust in the market, and understand that stocks are the greatest wealth creation tool in the world.

3. Start Young

millionaire

Total contributions     $12,000                $36,000

* assumes an 8% growth rate    2.

This visual further proves how important time and compounding is to your retirement account.  Starting young is a principle that everyone knows, they just don’t follow it.  The power of compounding interest is amazing, and the younger you start the more powerful it is.  Even if you can’t reach the 10% goal, if you have an income source, you should be contributing to a retirement account.  For those of you who don’t have 40 years till retirement, you will need to save more than 10% to reach a million.

Do you  really need $1 Million Dollars?

Going back to the example of Bayden, when he retires at age 67, he will literally need every cent (and more) that he saved and earned while investing.   Just to live on the equivalent of today’s $30,000 a year ($103k assuming 3% inflation) for 20 years in retirement, he would need $1.1 million.   And that is assuming a 6% growth rate on the money for those 20 years.   If you don’t have a pension at work, and you want to live on more than $30k a year in retirement, then you better get to saving! Most people will need at least $2 or $3 Million to live comfortably in retirement.

If you can apply discipline in your finances and in your investments, you can become a millionaire by the time you retire.    That is my plan.

By Jimmy Hancock

References

1. “Market Insights Report 2018.” Record Numbers of U.S. Households Achieve Millionaire Status in 2016, According to New Spectrem Market Insights Report, 22 Mar. 2018, spectrem.com/Content_Press/Spectrem-Press-Release-3-22-17.aspx.

Matson Money. Who Wants to be a Millionaire Powerpoint. Mason, OH: Matson Money, 16 Jul. 2015. PPT.

Now is the Time to Rebalance your Investments

With the big drop in the stock market last month, this is the best time to rebalance your investment portfolio.

Today we are going to discuss the topic of Rebalancing your portfolio and why it is so important.  I will explain to you how a continuously rebalanced portfolio is one that is constantly buying low and selling high.

“Rebalancing -The process of realigning the weightings of one’s portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.”

Rebalancing for Dummies

Rebalancing can be very complex and confusing, but I will give a simple example to explain some of the benefits.

For example, lets say you have a retirement portfolio with $50,000 invested in stocks, and $50,000 invested in bonds. This is the 50/50 portfolio which is pretty safe and best for those close to or in retirement.  So you let it go 1 year and lets say it was like 2019 and stocks had a great year.   After 1 year you now have about $65,000 in stocks and $51,000 in the fixed portion.  You are no longer invested like you wanted to be, and are opening yourself up to way more risk than you originally planned on.   Rebalancing is then needed to sell off what is high, which is stocks, and buy into what is low, bonds.  The beautiful thing about it is, there is never a time when rebalancing forces you to buy high, or sell low.

Why doesn’t everyone rebalance?

Rebalancing never seems like the right thing to do at the time.  For example in 2008, or like we have seen in the last few months, when stocks were plummeting, rebalancing is selling safe fixed income to buy stocks.  If you think about it though, you are buying low and selling high.   Buying stocks low in a market like we have today can give you a huge advantage long term.

So by rebalancing a portfolio, what you are really doing is lowering the risk and keeping to your individual risk preferences.  That is really the main goal of rebalancing, but an added benefit is being able to consistently buy low and sell high.  This can help over the long term to increase your return as well.

The Proof

Take a look at this chart by Forbes which visually explains all of this.

 

Rebalancing chart forbes

 

You can see from the chart that rebalancing really does its work when the downturns in the market come.  The chart shows that the rebalanced portfolio made more than the portfolio that was left alone, and with much lower risk.

Make sure that your money is invested with an investment coach that has a scientific and predetermined way for rebalancing your hard earned money.

The portfolio’s we use with our clients are automatically rebalanced quarterly at the beginning of each quarter.

By Jimmy Hancock

 

References

1.”Rebalancing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 17 Sept. 2014. <http://www.investopedia.com/terms/r/rebalancing.asp>.

2. Brown, Janet. The Impact of Rebalancing. Digital image. Forbes.com. Forbes, 16 Nov. 2011. Web. 17 Sept. 2014. <http://www.forbes.com/sites/investor/2011/11/16/does-portfolio-rebalancing-work/>.

What to do during a Stock Market Crash

So the stock market has hit “bear market” territory over the last few weeks which is a 20% drop from the previous high.  And many people are panicked!  But panicking after a big drop in the market can be very bad for your long term retirement account.  Especially if that panic involved pulling your money (20% less than you had 4 weeks ago) out of the stock market.

This might sound weird but I actually got excited when the stock market took it’s big tumbles over the last few weeks.  I have been waiting for a good opportunity to “buy low” in the stock market.   Yes, now is the best time to put extra money into your retirement investment account.   Buying shares in a time like this is like when your favorite store has a 20% off your entire purchase sale!  Basically, you get the same items for a lower cost.

There are a few reason why I don’t panic when the stock market goes down.

First, I understand that the stock market has always come back from corrections and crashes to reach new highs.   Along with that, I know that the stock market as tracked by the S&P 500 has made about 10% per year on average over the last 30 years.   I often get asked by people, what if it just keeps going down and I lose all my money?   Investing in a diversified mix of over 12,000 stocks makes it very unlikely for you to lose all of your money.  What are the odds that 12,000 companies across the world in different sectors providing different products all go bankrupt at the same time?

Second, I know I am in this for the long haul.  Every investor is at a different place and will use their money for different things.  If you are needing the money you have invested in the next few years, you should definitely not have a vast majority of your money in stocks.   Even throughout retirement,  why wouldn’t you stay invested and give your money a chance to grow and keep up with inflation.  Smart people look at investing as a lifelong thing.

Third, I don’t believe that me or anyone else can accurately predict the future.  This is a big one.  I get asked all the time innocent questions about investing and the stock market from clients and others that are all based around predicting the future.  Questions such as, is this going to end up being a crash?  Do you think stocks are overpriced?  How much do you think a diversified mix of stocks will make this year?  When I answer this question by saying I cannot predict the future, people are usually not satisfied.   The great thing about it is that you do not need a prediction about the future to be a successful investor and make money in the stock market.

Lastly, I believe in the phrase, buy low and sell high.  It is usually the hard thing to do at the time.  When the stock market is crashing down and you see the headlines say, this is the biggest drop in the Dow in its history, it isn’t necessarily an easy thing to buy stocks on that day.  On the opposite end, when the market is up for 2 straight years and the economy looks great and the headlines say, this is just the beginning for stocks, it isn’t easy to rebalance your portfolio and thus sell stocks.

Ultimately, we know there are going to be stock market ups and downs in the short term, but if you have a low cost diversified mix of stocks you will be doing alright in the long term.

By Jimmy Hancock



References

1. Matson Money. Separating Myths From Truths, The Story of Investing. N.p.: n.p., n.d. PPT.

New SECURE Act Signed into Law

On December 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act, 2020.  This includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act provisions previously passed by the House in April 2019.  There are quite a few changes that may effect you now or in the near future.  Most, if not all the changes are positive and allow you more flexibility in general.  Many of the changes have already become effective as of January 1st, 2020.   Below is a few of the provisions and a brief explanation of each.

Required Minimum Distributions (RMDs).  The age at which required minimum distributions must begin will be increased to age 72 from age 70 ½.

Explanation- If you were born before July 1st, 1949, this does not effect your RMD at all.  Even if you just turned age 70 1/2 last year you will still be required to take your RMD in 2020.  But for anyone born after July 1st 1949, you can wait until the year in which you turn age 72 before you are required to start taking distributions from your Traditional IRA or 401k.

Birth/adoption excise tax exception.  Penalty-free retirement plan withdrawals for a birth or adoption.

Explanation- Before age 59 1/2, you can take out money from your Retirement Account to pay for a birth or adoption and you won’t be charged the 10% penalty tax.

No maximum age for Traditional IRA contributions.  You can contribute to a Traditional IRA at any age.

Explanation- Previously, you could not contribute to a Traditional IRA even if you were otherwise eligible after the age of 70 1/2, now you can.

 

Changes for business owners setting up company retirement Accounts

Increased Tax Credits. For new 401k’s being set up, there is an increase in tax credits for the startup costs of setting up and running the plan for the first 3 years.

Deadline to Setup New Plan. An employer has until the due date of the company tax return (with extensions) to establish a new plan for the year.  Previously, the deadline was the last day of their business year. 

 

These are some of the major parts of the new SECURE act.   If you have any questions about these new rules or how to best take advantage of them, feel free to contact me.

-Jimmy Hancock

References

  1.  Neal, Richard E. “The SECURE Act of 2019.” Secure Act Section by Section, House Committee on Ways and Means, waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf.

Health Insurance Options in Idaho in 2020

As the Open Enrollment Period for enrolling in a qualified health insurance plans kicks off for 2020, I thought it would be a good time to review some basics on how health insurance in Idaho works these days.

Open Enrollment Period

If you do not currently have a health insurance plan you have until December 16th to get signed up, or else you will most likely have to wait for 2021.   If you already have a health insurance plan, the deadline to switch to a different plan is the same day, December 16th.

Who Qualifies for a premium tax credit?

APTC, or Advanced Premium Tax Credit is when your health insurance premiums are significantly reduced based on your income.  Anyone who isn’t offered coverage from work and has income between 138% and 400% of the federal poverty line(FPL) based on their family size may qualify for the premium tax credit.  If spouses and children are offered coverage from work they are not eligible for APTC.   The 2018 federal poverty line for a family of 1 is $12,490 and goes up by $4,420 for each additional person in the family. 1.   So a family of 4 can make as much as $103,000 and still qualify for a premium tax credit by being under 400% of the FPL.  In many cases if you qualify for APTC, you can get a high deductible health plan for Free.   If you make below 138% of the FPL, you can qualify for Medicaid.

 

Options for Coverage in Idaho

Options are pretty slim in most states, including Idaho.  There are 4 health insurance carriers (Mountain Health Co-op, Blue Cross, Select Health, and Pacific Source) offering individual and family coverage both on and off the Idaho Exchange(must get coverage on exchange to get APTC) , and 1 more that offers individual coverage outside the exchange only (Regence).   But then when you talk about price increases and deductibles that keep going up, there are really no “affordable” options for most people.   With that being said, whatever your current situation is you might be able to save money by looking into all your options.  The prices vary so much with each company each year that it is usually not in your best interest to stick with the same company year over year.

Saving Money

For example, I helped a family save hundreds of dollars a month by switching them from being a spouse and children on a school district employer health plan, to a family plan off the exchange with Regence, separate from their employer.  Coverage for the actual employee is usually a very good price, but if your employer offers coverage for your spouse and children, it is usually more expensive then what you could get separate from your employer.

Another option to possibly consider, is the new “Enhanced Short Term” plans available through Blue Cross.   These plans can be renewed up to 3 years and in general are quite a bit cheaper than the on exchange plans.   These policies go through underwriting, so your price is based on your health history.   You cannot use APTC to get these plans, but if you do not qualify for a tax credit, this is a more affordable option.

If you need help with your health insurance I am a licensed agent  and work with the Idaho health insurance companies both on and off the exchange.

By Jimmy Hancock

References

1. “Federal Poverty Level (FPL) – HealthCare.gov Glossary.” HealthCare.gov, www.healthcare.gov/glossary/federal-poverty-level-fpl/.

7 Golden Questions to Ask When Investing Your Money

There are seven questions that one must answer before beginning to have peace of mind with your investments. Making investment decisions isn’t easy, especially if you are just entering the game. There are a lot of details that many people don’t think about until it’s too late. So, if you want to avoid the life long pain of poor investment plans, ask yourself these seven questions.

1. “Why?” It’s a simple question, but it’s often the hardest one to answer. Why are you investing, and what do you hope to gain from it? In other words, you must set specific goals. Maybe you want to save for retirement, maybe you want to send your kids to college, or maybe you just want some breathing room from everyday expenses. Whatever the reason, it’s important that you define why you are investing your money and what goals you wish to accomplish in doing so.  This will help you to decide how much money to put away.

2. “What is my time frame?”  This is like asking, how long will it be until I need the money?  This can depend on your age, and of course your answer to question number one.  If you are putting money away for retirement, your time frame should not end at the day you plan to retire, it should end at the day you plan to die.  You will need portions of that money starting at retirement, but you will keep a majority of it invested throughout retirement if you do it right.

3. “What am I going to get out of it?” What can you realistically expect to earn on your investments? Having an unrealistic idea of playing the stock market and striking it rich could leave you simply striking out.  Investing in stocks is not the problem, it is the expectation of beating the market, rather than expecting to get market returns.  Other investments, such as bonds, have fixed returns that are not as susceptible to market changes but have a lower expected return.  You should not expect to see growth every year or even 2 years.   The short term flat or down periods always seem to bore people out of the market, but that would be a huge mistake.

4. “What kind of earnings will you make?” Very few times when investing does a wad of cash appear in your mailbox if you’re successful. Your earnings will be very inconsistent in the short term, so there is no point in fretting over 1, 3, or 5 year returns.  The annual return that you will get is dependent on the type of investment you are in.  You can reasonably expect between 5 and 12% annual growth per year over the long term depending on your portfolio, but of course that is not guaranteed.   Which leads me to my next point.

5. “What’s my risk?” And here comes the basic balance in investing, risk versus reward. The higher the risk, usually the higher the potential reward, but that is not always the case.   Overall there is no guarantee that you will get your money back or receive the earnings promised to you, unless you have your money in a savings account or a U.S. Treasury security, both of which are backed by the federal government and give you extremely small returns. Make sure that the risk you take is worth the reward that you expect to achieve.  If you have a longer time frame, you can invest in riskier investments.

6. “Is my money diversified?” A great way to lower risk without hurting your return is by diversifying your portfolio.   Certain types of investments do better in certain situations, so by diversifying your investments, you are spreading your eggs across many baskets. That way if a certain industry tanks or sector is struggling, you will have plenty of other baskets holding your money safe and sound.  This doesn’t mean having different accounts or different advisors, but having different holdings in thousands of stocks and bonds.

7. “What is the effect of taxes on my investments?”  Every person who receives any earned income can invest in a tax advantaged plan.  Whether that be a 401k or 403B at work, or an IRA/Roth IRA, or all of the above.  Make sure you understand the implications of how your money is taxed with each type of account.  In many cases, a Roth IRA is the best for your tax situation, especially in retirement.  Also, make sure you plan to have enough money saved to pay for taxes in retirement.

By Jimmy Hancock



Did You Learn from the Crash of 2008?

Many investors and young potential investors are still scared out of their minds because of what happened to a lot of innocent investors in 2008.  I have heard a few horror stories of people who supposedly lost all of their retirement money because of the crash.  Many young professionals are scared of the stock market because of the stories they have heard from their parents and grandparents.  But is the stock market really the issue, or is bad decision making also involved?

The Horror Story known as 2008

This is what happened to the average investor in 2008, instincts kicked in.  What I mean by that is that the average investor thinks that when the stock market is headed downward, it is going to keep going downward in a never ending spiral until the world ends.  That is just our instinct as human beings.  So as an investor, the obvious thing to do if you believe that, is to take your money out of stocks and put it in bonds, a bank account, or even under your mattress.  But the term that I use for that is selling low.  By the time most investors could get their money out of the stock market in 2008-2009,  it was already down 20 maybe even 40%.    Let’s take a look at the numbers.

Pain and Pleasure

On your statement at the end of 2008 you see that your small US stocks were down 38.67%.  You lost almost half of your hard earned money!  You also notice on the news that long term bonds were up 25.8% during 2008.  What does instinct tell you to do?  It tells you to leave the pain that stocks are inflicting upon you and go to the pleasure of bonds.   But is that really the best decision?

Regardless of what we know happened after the crash, it is ALWAYS a bad decision to sell low, and buy high.  But in the moment it doesn’t seem like that is what you are doing.  So let’s say you sold out of stocks and bought into bonds at the beginning of 2009.  Then at the end of 2009 you get this horrifying statement.  Long term bonds are down 14.09%.  What?  How could this happen?  You then search online and see that small US stocks were up 47.54%!   You managed to lose half of your money while those stock investors who didn’t do anything during this time did twice as good and made their money back.

I personally know people who did this, and their families are now forever afraid of the stock market.   These people blame the stock market when it was really their own emotions and fear that was the problem.   The stock market is way higher than it was before the crash in 2008 and continues to reach new highs as usual.

The Success Story known as 2008

Those investors who saw the largely negative numbers and heard the panic throughout the world, yet stayed disciplined made out like a bandit.   The best investors did exactly the opposite of what instincts told them to do, that is they bought more into stocks when the crash was happening and the prices were discounted, and sold some bonds while they were high.  Those people especially have been rewarded for their discipline.

The Next Crash

We all know crashes are a part of the stock market and are a regular thing.  The stock market has always come back lightning fast after a crash.  So are you going to go with your instinct and panic, or are you going to stay disciplined.

By Jimmy Hancock

References

1. Matson Money. Mind Over Money Powerpoint. Mason, OH: Matson Money, 2 Aug. 2016. PPT

 



How to Pick the Best Stocks

You think you can pick winning stocks consistently, and I’m here to tell you that you can’t. But even if I cannot convince you that you can’t pick stocks, I hope to at least convince you that it is not in your best interest to try. We look at examples like Warren Buffet and see how much success he had “stock picking”. But the funny thing is that Warren Buffet believes that the best strategy for most investors is to buy low-cost index funds.

Bad Advice

The most dangerous advice in investing is often that which seems most practical, which is why the worst investing advice you will likely ever receive is that you should try to pick “good” stocks and sell “bad” ones. Yes it seems very sensible and almost too obvious that you should try to do this. You will get this advice like this from innumerable sources, including a lot of investment advisers, friends, work associates, and most especially Wall Street/investment media. But…You should ignore it.

If you pursue a stock-picking strategy, you are almost certain to lag the market.

Stock pickers always underestimate the number of variables that are involved in the pricing of stocks. There are literally trillions of variables that could occur on any given day that could change the price of a stock instantly. Stock prices are based on every single investor which all have different feelings about companies, reasons for investing, and regional bias.

The big problem for investors is that even though stock-picking usually hurts returns, it’s extremely interesting and a makes for a great conversation. If you are wanting to wean yourself of this bad habit, the first step is to understand why it’s so rarely successful. The quick answer is that the overall market provides most investment returns, not particular stock picks, so stock pickers get credit for gains that came merely from being invested in stocks generally.

Although it is relatively easy to pick stocks that beat the market before costs (just like a monkey you have a 50% chance), it is much harder to do so after costs are added in. So lets say you happen to pick stocks well enough to boost your return by a couple of points, the expenses you rack up along the way (ie. research, trading, taxes) will usually more than offset your gain.

Most stock pickers believe that they are among the 1% of investors who happen to beat the market after costs, and, for inspiration and encouragement, they point to legends such as Warren Buffett and Benjamin Graham. But as I mentioned before, such investors often don’t know that even Buffett has said that the best strategy for most investors is to buy low-cost index funds and that the great Benjamin Graham eventually changed his mind to advocate a passive approach to investing.

Stock picking is not only a dangerous activity for you to be involved in as an individual investor, but it is also dangerous to invest in mutual funds that employ stock picking strategies. These stock picking strategies are used in a lot of the mutual funds out there, also known as active investing. These mutual fund managers think they have a crystal ball and can predict the best stocks and drop the worst ones.

The Opposite of Stock Picking

Instead of stock picking, invest in a globally diversified portfolio managed by a low fee investment coach that will help to educate you on the investing process. Instead of constantly turning the portfolio over by stock picking and active trading, buy and rebalance when necessary. Long term you will see the fruits of your decision.

By Jimmy Hancock

References

1.Blodget, Henry. “Why the World’s Greatest Stock Picker Stopped Picking Stocks.” Slate Magazine. N.p., 22 Jan. 2007. Web. 28 Jun. 2016. http://www.slate.com/articles/arts/bad_advice/2007/01/stop_picking_stocksimmediately.html.

2.Stock Market People. Digital image. Opinion-forum.com. N.p., Aug. 2012. Web. 28 June 2016. <http://opinion-forum.com/index/wp-content/uploads/2012/08/stock_market.jpg>.



Is your Investment Advisor a Bully?

Wall Street Bullies are not just found in New York City, they are found in investment brokerages throughout the country.  In fact, your investment guy, might just be a wall street bully.

I explain a Wall Street Bully as an individual or institution that uses fear, greed, intimidation, and misleading information to get an investor to act in a certain way.

The core issue behind all of this is that people that work on wall street make money every time there is a trade made on stock or other security.   Acting like any salesman, it is in their best interest to get people to buy and sell every week, every day, every hour.  But the problem is, actively trading by buying and selling on impulse is not in the best interest of the long term investor.

Wall Street Bullies try to take advantage of under educated and uninformed investors by instilling fear in them and getting them to become short term focused even when they are long term investors.  They create the illusion that they are genius’s that can outsmart the market with little to no risk if you just trust them.  There are 3 main types of Wall Street Bullies as stated by Mark Matson in his book “Main Street Money”.

The 3 types of Wall Street Bullies

The Conman

This is the easiest one to identify, at least after they have been convicted.  Think of Bernie Madoff.  These people gain your trust with a great reputation and promise you great returns with no risk or downside.  If it seems to good to be true, it probably is.  Often times these con men send out false statements showing growth when in reality they are stealing your money.

The way to protect yourself from a con man is to never allow someone to manage your money that does not use a third party custodian to hold the money.  Without a third party custodian, the fox is guarding the hen house.   There were a lot of so called “sophisticated” investors who got caught up in the Bernie Madoff scheme and lost millions of dollars.

The Prognosticator

There is no shortage of self proclaimed genius fortune tellers who will convincingly claim that they know exactly what is going to happen in the stock market in the short term future.  They pull out charts, graphs, economic theories and data galore.  Investing in the stock market would be a whole lot easier if these “experts” really could predict the short term future.  Ultimately they are trying to sell newsletters or get media attention for their hedge fund or alternative strategy they are selling.

If your portfolio needs a prediction about the future to be successful, it is already broken.  If anyone tells you they know what the market is going to do in the next few days, or next few months, don’t walk, run away.

The Guru

These are the sharply dressed people you see on the front cover of any investment magazine.  They are the ones have beaten the market in the past and think they can continue to do it forever.  They are reported to have amazing insights into which stocks are undervalued and which stocks to stay away from.  But the issue here is, there is ZERO correlation between a Guru’s market beating performance in the past and his ability to do it in the future.

Guru’s are the most common form of Wall Street Bully.  Many investment advisor’s, Brokers, and money managers claim to be guru’s who study and pick the best stocks that will beat the market as a whole.  Staying away from them can be hard, but instead, you should work with a investment coach who educates you on why stock picking is not necessary to have a successful long term portfolio.

What should you do?

At Preferred Retirement Options, we call it Bully Proofing Your Portfolio.  Not all investment professionals are Wall Street Bullies.  We help our investors follow the simple rules of investing, which are own equities, diversify, rebalance.  No crystal ball is necessary.

By Jimmy Hancock

References

  1. Wall Street Wolf Cast. Digital image. N.p., n.d. Web. 20 Nov. 2016. <http://tse1.mm.bing.net/th?&id=OIP.M1ee62057658b9c97e8d311a77a7a7d78o0&w=300&h=204&c=0&pid=1.9&rs=0&p=0&r=0>.
  2. Matson, Mark E. “1.” Main Street Money: How to Outwit, Outsmart & out Invest the Wall Street Bullies. Cincinnati, OH: McGriff Pub., 2012. 3-5. Print.