Just last month, we were marveling at how quickly the coronavirus had arisen. As we continue to reflect on unfolding news, it now somehow feels as if COVID-19 has been a part of our lives forever. There’s even a well-known behavioral bias for this. It’s called recency.
As an advisor, one of my greatest roles is to help investors combat recency, and replace it with a longer, clearer view. This means ensuring you have a plan in place. It means maintaining a source for dependable income for any hard times to come. It means stress-testing your plans as realistically as possible before the next bear market roars to life.
When the inevitable bears arrive, as they periodically do, we want to eliminate the usual anxieties. We can then make the best of it by rebalancing back to plan, harvesting appropriate tax losses, seeking opportunities for Roth IRA conversions, and otherwise staying the course.
Only a few months ago, few of us had even heard of “novel coronavirus.” Today, it’s hard to avoid the latest news about it. Thankfully, U.S. citizens and markets alike have remained relatively immune so far. But still, you may be wondering whether you should try moving your investments out of markets that have been, or may be exposed to its economic impacts.
Our advice is simple, and grounded in experience gained from past, similar episodes: Do try to avoid this or any other health risk through good hygiene. But do not let the breaking news directly impact your investment stamina.
If you’re already following an evidence-based investment strategy …
• You’ve already got a globally diversified investment portfolio.
• It’s already structured to capture a measure of the market’s expected long-term returns.
• You’ve already accepted (at least in theory!) that tolerating a measure of this sort of risk is essential if you’d like to actually earn those expected long-term returns.
• You’ve already identified how much market risk you must expect to endure to achieve your personal financial goals; you have allocated your investments accordingly.
The setting every community Up for retirement act better known as the secure act was signed into law.
Here are the major changes:
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Wealth Advisor and Founder
OCTO Capital Wealth Management
What happened during the "Lost Decade" in the U.S and is there anyway to avoid another?
Some might familiarize the "Lost Decade" with Japan's years of economic downturn in the 90's, where the term originated after years of serious economic stagnation. The term paints a picture of a 10 year span of time of wealth that was completely wiped out. The years following, the U.S dealt with its own "Lost Decade", starting with the dot-com bubble from 200-2002 and ending with the housing bubble in 2007-2008. These two recessions at the start and end of the decade meant that any market gains in between were essentially wiped out. The question is, have we actually learned anything?
Having a plan for taking money out of your retirement accounts can help ease your worries about income when you're no longer working.
How much can I spend in retirement and not run out of money? This or similar questions are probably some of the most “googled” topics.
The “4% Withdrawal Rule” is one of the most well-known studies on this topic, originally published in 1994 by William Bengen in the Journal of Financial Planning.
His conclusion: “Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe.”
Mr. Bengen also noted that his research strongly indicates that as long as the client’s goals remain the same, there is no need to change the initial asset allocation.
What does it mean to rebalance your portfolio, and how often should you be doing it?
An important part about investing is choosing how much of your money will go into each asset within your portfolio. For a simple explanation, let's say you want to have 70% of your portfolio allocated to stocks, and 30% to bonds. Your goal would be to maintain that 70/30 balance. Most portfolios have more than just one stock fund and one bond fund, so there is often a further balancing act within each category of fund.
Portfolios are rebalanced when the allocations are no longer what they started as. This is a natural occurrence, because the prices of stocks and bonds will always fluctuate, and they will not move in perfect sync with the other positions in your portfolio. So over time, your once 70/30 allocation could end up looking like a 80/20, or a 60/40. To stay in line with your goals, one would rebalance, which means selling some of the overweighted portion, and using the cash to buy more of the underweighted assets, until your portfolio is back to its target allocation.
There are quite a few theories addressing rebalancing. Some suggest monthly, quarterly or annual rebalancing. Others suggest rebalancing based on how far off the asset class has drifted from the target. In the later, rebalancing can be triggered by setting up a rule to rebalance when the positions weight drifts by more than a tolerance value, which can be 10%, 20%, 25%, 50%, etc. ...
There are many management styles when it comes to investing your money, but two are most common- Active and Indexing. Understanding management styles can help you identify which is best for you and your financial goals.
Traditional managers fall into two groups – active and indexing.
Active managers normally have a goal of outperforming a benchmark or index, and they aim to do so by looking for market inefficiencies or mispriced assets. This results in a lot of buying and selling, and decisions are normally based on predictions of where the manager thinks the market is going. This style leads to frequent trading, higher turnover, increased costs and lack of diversification.
Rather than trying to beat the market, an index managers goal is to closely track the index results. This style is also known as passive management, because there is a lot less trading. Although index managers will have less buying and selling activity, this style can still lead to forced trading.
Index managers are judged by their ability to track the index. As indexes change the list of stocks once or twice a year, index fund managers are forced to buy and sell the same securities... all at the same time as the other index managers tracking the same index. With hundreds or thousands of index funds all attempting to place the same trade at the same time, index managers are consequentially affecting the price of that security and driving the cost up. This results in buying and selling at the worst possible time and price.
Dimensional Fund Advisors (DFA) is one of the leading evidence-based investment management firms, yet their funds are only available through a select network of advisors.
OCTO Capital has established a relationship with Dimensional Fund Advisors (DFA), an investment management firm based in Austin, TX with offices across the globe. Established in 1981, Dimensional and its affiliates manage approximately $576 billion in assets globally as of March 31, 2019, and offer funds to individual investors through a select network of fee-only financial advisors.
DFA maintains close links with the University of Chicago and other research centers for financial economics. Board members and consultants include some of the nation’s most distinguished academic theorists and Nobel laureates, including Eugene Fama, Kenneth French, Roger Ibbotson, Donald Keim, Merton Miller, and Myron Scholes.
We strongly believe this relationship can help address your financial objectives and help you pursue an even more successful investment experience. One of our explicit goals is to assist clients in achieving outstanding investment results using disciplined, well-established practices. Dimensional strategies are grounded in the research of leading financial economists. The firm's broadly diversified portfolios, consistent investment approach, and trading expertise seek to provide low expenses and turnover.
How does the stock market actually work? Understanding this can help improve your personal investment strategy.
The stock market is essentially a big auction where buyers and sellers negotiate their transactions and are able to efficiently exchange shares of existing companies.
A transaction always includes two parties – a buyer and a seller. As with any free market, stock prices are based on expectations and demand. A stock’s price is a reflection of the collective view of all buyers and sellers in the market. Their opinions are affected by new information related to the specific company.
According to financial theory, a stock’s price is determined by three forces: (1) expected company earnings (dividends), (2) the expected rate of return, and (3) the expected earnings growth rate.
Nobel laureate, Gene Fama explains why long-term investors should know the reasons they’re investing, understand risk, and not focus on short-term ups and downs.
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Wealth Advisor & Founder