Markets: Covering Our Eyes is a Bad Strategy

Reflated markets from 2009-2014 hid and created bad behaviors. It’s not too late to increase our odds for investment longevity. Many investors are paying too much and receiving little OR paying too little and not receiving enough practical guidance. Perhaps change is unnecessary; still, we need to build a statement of net worth, review cash and investment accounts, estimate new tax bills sooner than later, and prepare a written checklist of acceptable rewards and risks. The behavioral goal is to empower our brain to avoid emotional decision-making in case a real economic storm evolves.

China, Europe, Latin America, credit markets, global central banks, oil markets, currencies, geopolitics, and earnings will directly or indirectly IMPACT OUR retirement assets. Unfortunately, the very best and most vocal resources of the U.S. Federal Reserve, Wall Street, Econometric Models, Robots and Main Street Gurus cannot pinpoint an accurate outlook for 2016. So, let us instead improve cognitive functions with our eyes and an old fashioned pencil.

Let us focus on the more controllable aspects of wealth: saving, spending, and planning. Thus, we are REQUIRED to review, scrutinize, and reaffirm unique circumstances and financial plans. Is there alignment with the plans and fee structures executing on our family’s behalf? The goal is to IGNORE (mostly) the less controllable negatives of lower prices and scary headlines when confidence is reached in the answers to what, where, how, why, who, and how much!

As of this writing, the S&P 500 is slightly above last summer’s swoon to 1,860 from its previous high of nearly 2,135; however, this “normal” retreat disguises the extreme deterioration in markets across the globe. Hold on now…that information should not automatically steer us to buy, sell, or hold. However, it should signal relentless focus on our goals with a margin-of-safety!

20 Years Later…& Lots of Bad Markets

  • 7,500: Approximate number of days I have reviewed financial markets and portfolios as a professional advisor to advisors and private asset manager.
  • 250: Approximate number of days I pivoted from strategic plans to implement new well-reasoned plans.

Whether a professional or novice protector of hard earned wealth, we must address the suitability and reasonableness of expenses, leverage, complexity, liquidity, diversification, and risk management. It is our responsibility to proactively shield assets from the value erosion driven by emotional decision-making, unnecessary taxes, onerous inflation or deflation, and overly standardized or biased advice.

Covering our eyes is a bad strategy if change is necessary, and the only way to know is to look. Think strategically. Apply sound principles of investing, saving and spending. Avoid big directional bets. Also, see this recent Post with highlights on Patience, Discipline, Process, and Customization.

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. While directly managing over $5 billion in growth and retirement assets; his proactive advice and software innovations have influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email | Michael@empoweredportfolios.com

Twitter | @MichaelHakerem

Advertisements

Four of the Most Reliable Words in Investing, Coaching, and Parenting.

Patience, Discipline

“It’s tough to make predictions, especially about the future.” Yogi Berra

Armed with brainpower, insider information, and sophisticated tools, even the most powerful global institutions cannot outguess economic data and financial markets. One such institution, the U.S. Federal Reserve officially diverged from other central banks with a much anticipated December monetary policy  announcement, and Fed Head, Yellen, steadfastly exuded confidence in an ability to execute on central plans. While seemingly small now, this historic event does signal added change, uncertainty, and hypersensitivity to future news-flow.

Default risk, volatility and extreme downside in security prices were reintroduced in 2015. Well-intended 2016 forecasts are on the way to our inboxes, and these notes often serve only to confuse yesterday’s confident beliefs. Stocks, bonds, commodities, emerging markets, and currencies will continually jostle investors and prognosticators.

No crystal ball or “black-box” strategy guarantees consistent and successful market timing, so let us briefly examine four words able to more reliably trigger clearer thinking in times of added stress.

Patience, Discipline, Process and Customization have proven a helpful and mightily resilient decision-making framework throughout a career of investing, coaching, and parenting.

#1 Patience helps to promote less emotional decision-making. We have all been in that daunting place, a moment where reactions, words, and instructions are paramount to a more successful outcome. Take a mental moment or even physically remove yourself from a tough situation. Intentional breaths also enhance one’s ability to patiently respond when control is momentarily lost.

Quick Tip: Avoid an immediate investing decision if you have recently been exposed to the flashing of red and green price-change indicators.

#2 Discipline reinforces adherence to well-grounded investment strategies and financial plans. The temptation to impatiently chase the latest fad, change styles, or to abandon the “game plan” out of fear, often leads to instability more detrimental than whatever short-term deficit or problem exists.

Quick Tip: Avoid compromises or exceptions only made to make a decision work this time.

Fearful headlines and twitter feeds sell ads and keep people glued to screens, but fear does not make money in the stock market.

#3 Process translates into effective execution of less emotional disciplines. Successful investors, coaches, and parents rely on consistent process methods to evaluate reward-to-risk relationships. This ability is wired into survival–Is that a stick or a snake? Should we kick an extra point or go for two? What will tomorrow bring if the kids win the battle to stay up too late? Investors should define and document reward and risk targets to compare with current prices. Key stats and ratios can help to set the limited price you are willing to pay and the point at which a sale is appropriate for each holding. This preparation should be done prior to the potential constraints of euphoria or despondency.

Quick Tip: A scheduled routine to review financial plan health, asset, sector and security allocations, tax efficiency, all-in expenses, and risk-adjusted performance is important and helps to avoid random thoughts and decisions.

#4 Customization can produce more optimal bottom-lines over robotic or glide-path plans. Armed with patience, discipline, and a process for execution, the flexibility to adjust for the conditions on the field is critical. Hard-earned wealth is proactively built, so unique circumstances deserve collaboration and measured decisions. Simple strategies to achieve low cost, diversification, and risk management can be achieved while paying attention to the changing complexities of taxes, special requirements, and crazy markets.

Quick Tip: Be wise with model recommendations found in newsletters, popular media, or other widely distributed platforms. While often good advice on the surface, what is right for your neighbor is not always right for your family.

Happy New Year and Best Wishes for 2016!

It is tough to predict any 12 month period. This investing year is especially difficult with so many large players like China, the U.S. Federal Reserve, and the European Union attempting historic shifts alongside a daunting list of uncertainties. Besides turbulent markets, our basketball team is struggling, and we “welcome” our first teenager into the house. The written words of Patience, Discipline, Process and Customization will literally be turned to as reliable triggers to handle tough decisions (see pictured office whiteboard).

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. While directly managing over $5 billion in growth and retirement assets; his proactive advice and software innovations have influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email | Michael@empoweredportfolios.com

Twitter | @MichaelHakerem