Simone and I are what we refer to as “anti-pack rats.” Neither of us can stand clutter and we regularly go through our belongings and get rid of things we don’t need. In fact, our recent spring cleaning frenzy led to us donating a couple of items that we shouldn’t have. One donation was an audio cable that I gave to Goodwill, but I was able to buy it back from them before someone else did! Deciding to get rid of something you can repurchase is easier than deciding whether or not to hold on to … [Read more...]
Tips for Avoiding a Ponzi Scheme
Are you worried that an investment you’re considering might be a Ponzi scheme? Are you afraid that your financial planner might turn out to be the next Bernie Madoff? If you answered yes to either of these questions, then follow these simple tips to avoid potential investment scams and steer clear of con artists posing as trusted advisors. Tip 1: Beware of the promise of high returns and low risk. A lot of investment scams attract investors by promising very high returns will little or … [Read more...]
Who Moved My Small-Cap Fund?
Actively-managed mutual funds have a lot of flexibility over the types of investments they hold. One problem with this flexibility is that it often leads to style drift, which is a term used to describe a gradual change in investment style within a fund. Style drift is important to understand since a change in the investment style of a single fund could change the expected risk and return of your overall portfolio. I wasn’t concerned about style drift when I first started investing. I … [Read more...]
Is Recency Bias Affecting Your Decisions?
Humans tend to use recent experiences as predictors of what will happen in the future. The technical term for this is recency bias, and it’s a reason why many investors aren’t as successful as they could be. Paying too much attention to recent trends - like the excellent performance of the stock market over the past 7+ years - often leads to performance chasing, dangerous asset allocation changes, and other harmful decisions. The S&P 500 peaked at 1,565 in October 2007, and continued to … [Read more...]
Financial Planning Life Stages
Everyone’s financial situation is unique. And any financial advice you receive should be tailored for your specific needs and goals. While no two financial plans should be the same, there are certain financial issues that each of us should focus on at different stages in our lives. Stage 1: Foundation Years During the first few years out of college you should focus on developing good financial habits. Make sure to live within your means and avoid consumer debt that can hurt you for years. … [Read more...]
Do You Know How Your Financial Advisor Is Paid?
Do you know how your financial advisor is paid? Unfortunately most individuals are left in the dark when it comes to the true cost of the financial advice they receive. Independent advisors and planners earn commissions, fees, or a combination of the two. It’s important to understand how each of these pay structures work since they can affect the type of advice you receive. Commissions Many financial advisors are paid by commissions from the products and services they sell. This leads … [Read more...]
Tips for Surviving Market Volatility
Your behavior is the most important factor for investment success. Even if you do manage to pick the best performing investments, (which is something professional mutual fund managers can't even do consistently as shown here) panicking out of those investments during a downturn will likely cause permanent damage to your finances. Here are a few tips to help you avoid behavioral mistakes and survive whatever the market sends your way. Tip 1: Reassess your risk tolerance. Using a … [Read more...]
Year-End Investment Moves
The end of the year is a great time to review your accounts and investments. Consider the following moves during your year-end review. Move 1: Check your asset allocation. The mix of investments you hold is referred to as your asset allocation. Younger investors tend to hold more in stocks for higher return potential, and older investors need more money in bonds for stability. The end of the year is a great time to check your investments and rebalance back to your target … [Read more...]
Are You Underperforming Your Own Investments?
My recent post titled To Index, Or Not To Index: That Is The Question! focused on the fact that most actively-managed mutual funds fail to outperform their benchmarks. It's bad enough that most funds underperform the market, but what's worse is that investors often underperform their own investments! The Quantitative Analysis of Investor Behavior (QAIB) is a report that Dalbar, a financial research company, has published since 1994. This study compares the performance of individual investors … [Read more...]
To Index, or Not to Index: That Is the Question!
Is it best to pick a mutual fund run by a top-notch manager? Or should you keep expenses low and track an index? Determining which side of the active vs. passive debate you're on is an important part of the investment planning process. Passively-managed investments track indexes like the S&P 500. These types of funds replicate the holdings of an index in an attempt to track its performance as closely as possible. Actively-managed investments attempt to outperform their respective index by … [Read more...]