Being Smart With $$ - Recency Bias may have killed your portfolio in 2022

 

Did “Recency Bias” kill your portfolio in 2022?  In investing, many people load up on sectors that have recently done well believing they will continue to do well.  These investors fail to follow the common advice to regularly rebalance your portfolio.  Growth stocks have soared to high levels in recent years making big growth companies the daily topic of conversation on the financial channels.  Many investors weighed their portfolios heavily towards growth stocks hoping that infinitely higher stock prices are possible even as corporate earnings can only grow by so much.  This past year taught a harsh lesson to those who ignore valuations and keep chasing the highest flyers.  In 2022, an index of growth stocks fell by 33% while an index of value stocks only fell by 2%.  Those who fell into the “recency bias” trap may have lost a lot more than if they regularly rebalanced their portfolio.  Many people have avoided international stocks for the same reason but equities from other parts of the world lost 2% less than U.S. stocks this year (and 17% less than U.S. growth stocks.)  It is easy to fall into this trap when analysts on TV tell you to keep buying the most expensive stocks.  When the big growth name goes from $100 to $120, they now tell you they have moved their target to $140.  When it hits $140, now they tell you it will go to $160.  There is rarely sound logic based on fundamental factors for why the price target is raised just because the stock price is higher when the company didn’t change much.  Maybe you loved Tesla stock and didn’t diversify as it rose.  Tesla fell 65% in 2022.  Maybe you loved Amazon after everyone stopped going to stores in the Covid era.  Amazon fell 50% in 2022.  No one knows which stock sector will outperform in the coming year.  Rebalancing your portfolio at least annually will allow you to lock in some gains from the sector that did best in the past year and ensure that you have some exposure to the sector that will do best in the coming year.

(Past performance may not be an indicator of what to expect in the future and your individual circumstances should be considered in any investment decision.)

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com

Hourly, Fee-Only Financial Planning and Advice.

No Commissions.  No automatic, annual fees.

Being Smart with $$ -- Big Mistake Buying Whole Life Insurance 40 Years Ago

 

Forty years ago, my dad opened a whole life insurance policy for me saying that no matter what, I’d always have some insurance.  With a $10,000 death benefit, it may not have saved my family from financial ruin if I died but the gesture was nice.  But the financial impact of this decision may have been very, very costly.  For forty years, we have paid $75 per year in premiums.  The policy has a cash value today of $4,200.  If we keep making the premium payments, which could be for roughly 25 years based on my life expectancy, it will some day pay out $10,000 to my heirs.  But what was the alternative?  If $75 per year had been added to a balanced investment account of stocks and bonds, it may have earned an annualized 7% over the last 40 years.  These annual premiums would have grown to around $15,000 today.  In 25 years when I reach my life expectancy, this money could grow to over $80,000 if it earns a similar 7% moving forward.  But I also still need to pay $75 per year to keep the policy going.  If these annual payments were instead added to the investment account, they might add another $4,700 to my value in 25 years for a total value of almost $85,000.  If I live five extra years beyond age 83, this alternate-universe account could grow to $119,000.  But the whole life policy will always pay me $10,000 at the end. Let me think for a minute which I would rather have: $10,000 or $85,000.  I will have to sleep on it.  (Critics will point out tax advantages of the insurance which is a weak argument in this case given the difference in value and the stability of the whole policy which ignores the fact that while stocks are volatile in the short run, they are not very volatility over a 40-year period.)  Be very careful of turning money over to someone with a slick sales pitch when it may be very costly to do so.  And imagine how costly this would have been for a $100,000 policy instead of a $10,000 contract.  I’ll do the math for you.  It would cost you three quarters of a million dollars.

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com
Blog: clientpriority.blogspot.com

Hourly, Fee-Only Financial Planning and Advice.

No Commissions.  No automatic, annual fees.

Being Smart With $$ -- Thoughts on the Difficult Markets

 

A few thoughts on the difficult financial markets:

We can pick an historical period that makes our returns look good or we can pick one that makes our returns look bad. We can painfully consider that the US stock market is down 24% year to date. Or we can happily recall that even with the terrible year we are having, the US market has given us over 50% in total returns since the beginning of 2019.

Here are a few things we know about the financial markets:

1. The stock market goes up over the long run due to profits generated by global companies most years (but with no guarantees that the future will be like the past).

2. No one expects the stock market to rise in a straight line.

3. Investors overall are very bad at timing the market so it is not easy to just get in and out at the right times and avoid the big declines. Most large mutual funds do worse than their benchmarks over long periods of time and this would not happen if these managers and teams of analysts knew when to get in and out.

Sitting through a bear market like we are facing might make you question how risky you want your portfolio to be.  Risk is sometimes considered to be volatility in your portfolio but being too conservative over the long run is another kind of risk if you lock in low returns that barely beat inflation.  But your portfolio should be suitable for your horizon.  If your horizon is short and your portfolio is too risky, waiting for a recovery before adjusting your risk can be very dangerous.  And don’t believe you know more than the rest of the world’s investors.  Markets are priced at a level where global investors believe risk and reward is fairly balanced.  If a stock or the whole market were obviously cheap or expensive, investors would quickly trade on that until it was no longer true.  

Please let me know if you would like to receive an email of my full letter to investors.

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com
Blog: clientpriority.blogspot.com

Hourly, Fee-Only Financial Planning and Advice.

No Commissions.  No automatic, annual fees.

Being Smart with $$ -- Don't Fall in Love...With a Stock.

 

Don’t fall in love…with a stock.
Many people develop an unhealthy obsession with one company and own far more of a stock than they should.  Stocks are risky as we know.  The market can fall 30% almost overnight.  But each individual stock can also fall by a lot even if the rest of the market doesn’t.  When you diversify your portfolio and hold small amounts of many different stocks, which is what you get when you buy stock mutual funds, you get rid of the risk that any one company’s problems will impact your wealth too much.  Many people fell in love with Netflix which is down 24% in the last year, and Facebook (Meta) which is down 10% in the last year, and Peloton which is down 83% in the last year.  But what makes these returns worse is that mutual funds that hold a diversified portfolio of all U.S. stocks are UP 12% in the last year.  Investors should think more like robots.  Let’s say you own $300,000 of a particular stock in your retirement account and that is 30% of your $1 million portfolio. It may be something you invested $50,000 into a while back. Many people choose not to sell any of that holding.  Now ask yourself how much of that stock you would buy today if you didn’t own any of it but had $300,000 of cash in the account.  Very few people would spend all the cash on that one stock which shows that people make decisions irrationally since their desired position is based on a starting point that no longer matters.  A robot would just decide how much of the stock is right for its portfolio and buy or sell as necessary without regard for any historical data that has nothing to do with the right exposure today.  A diversified portfolio gives you market returns without the risks that come from owning too much of one company. (Past performance may not be an indicator of what to expect in the future and your individual circumstances should be considered in any investment decision.)

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com

Hourly, Fee-Only Financial Planning and Advice.

No Commissions.  No automatic, annual fees.

Being Smart with $$ - Did You Earn Enough in 2021

 

The books are closed on 2021.   So, how did your portfolio do?  Did your adviser boast that he or she earned you a 7% return on your investments, or maybe a more-impressive 10%?  Before you send out a thank-you note, those returns are less than you should have earned for most people.  A simple investment in the Vanguard Target Retirement 2035 Fund (for those in their early 50s) returned over 13-1/2% in 2021.  The 2045 Fund (for those in their early 40s) earned over 16%.  While your circumstances and risk profile may be somewhat different than others who are in their 40s or 50s, this comparison may put your 2021 performance in perspective.  Are you 60? The conservative Vanguard 2025 Fund returned almost 10% in 2021.  And these are all static portfolios without a manager guessing what to buy and sell.  Many advisers claim they have a special ability to give you extra returns but much research suggests that the majority of advisers are unlikely to beat the markets after their high fees are taken out. And what’s worse, many guess wrong on market direction and cost you a fortune in lost earnings.  If you are 50 and paid 1% of your assets in fees to an adviser for a 10% return this past year, then your $1 million portfolio may have earned $35,000 less than it should have and then you paid $10,000 in fees on top of that for poor advice.  If you earned returns this year that were well below those provided by Vanguard target retirement funds matching your horizon, then you might want to question your adviser’s investment strategy and why you are paying such high fees for someone who shouldn’t be gambling with YOUR money.  Consider speaking to an hourly, fee-only adviser who doesn’t time the market or make false claims that he has a crystal ball.  (Past performance may not be an indicator of what to expect in the future and your individual circumstances should be considered in any investment choice. 2021 market returns were higher than historical averages.)

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com

Hourly, Fee-Only Financial Planning and Advice.

No Commissions.  No automatic, annual fees.