Protecting, Maintaining and Enhancing Your Credit

You have to know the rules, if you want to play the game.

For years, there has been a fairly profitable industry in credit reporting.  In this age of Big Data, the trafficking of personal information feeds the marketing machine that drives the spending of the all important greenback in our global economy.   But how can the average consumer protect, maintain and even enhance his or her credit?  The fundamental thing to understand from a lender’s point of view though is whether a loan will be paid back –  this is known as default or credit risk.  Typically speaking, lenders are interested in two things:  principal repayment and cash flow while the loan is outstanding.  So, having a good system to evaluate the likelihood of a borrower’s ability to repay is crucial to: whether the loan should be made at all, and what interest rate should be charged.  So let’s see if we can uncover some ways to understand and even take advantage of that system to benefit you!

Continue reading “Protecting, Maintaining and Enhancing Your Credit”

When Is Enough, Enough?

Is there a point at which we won’t hear so much about athletes being the victims of financial fraud?

For years, it seems the spotlight has been inexorably drawn to athletes (as opposed to Joe Blow consumer) that have been prey to bad financial advice.  We’ve all read the stories of grand fraud perpetrated under the guise of “financial advice”.  I wonder just how de-sensitized have we become to this phenomenon.  Just recently, 60 Minutes aired yet another example of fraudulent behavior that cost athletes $43 million (of which in all likelihood, there will be little to no recovery).  Couldn’t the major sports organizations create higher barriers of entry to current and “would-be” financial advisors wanting access to their players?  I think having not done so at this point sends a certain message. (I’ll leave that message up to your own imagination.) It has been estimated that just since the NFLPA’s financial advisor program launched in 2002, athletes receiving advice from advisors approved by the program have lost $150 million.  Obviously, there are a lot of ways to attack this problem and it may indeed start with better athlete education.  If so, maybe it is incumbent on organizations like the NCAA to get more involved since the large majority of athletes have to spend some time in an undergraduate classroom before their pro career.  How about making a personal budgeting and financial literacy class mandatory in order to continue NCAA eligibility?  Oh, I’m sure it would get a lot of pushback, but after all, we are asking them to look beyond the next 10 years to their “future” self.  Sports leagues with formal programs like the NFLPA’s Financial Advisor program could radically help efforts by just requiring (or even engaging in) an annual audit of participating advisors (something similar to what FINRA or the SEC would conduct).  We all know that the “Top Four” professional sports leagues have deep enough pockets to fund something like that.

Ultimately, it may have to begin with the athletes willing to speak up to allow change to occur.  Considering the relatively short career of the average athlete, that time may need to come sooner than later.  But then again, maybe no one really cares…

The Branding Series: Developing Focus (Part 4 of 4)

Lesson #6 – Ignore the bling. No really, ignore the bling.

As a culture, we are naturally drawn into things that shine and pop.  I think this is best proven by how quickly bad news travels or how people are drawn to the scene of an accident.  Thus, the lure of “fast” branding is just that…a lure.  (Most fish might tell you to stay away from lures as their famous last words.)  Many of the stories of fraud perpetrated upon athletes have had a common theme …the very provocative lure.  Having been in the financial markets for nearly half of my life, I realize there are no guarantees.  If something sounds too good to be true, generally speaking, it is. However, as an expert (not by cognitive aptitude but by Malcolm Gladwell’s concept of 10,000 hours) I know better.  Unfortunately, without the proper instruction and guidance, novices can be exploited like has been the case many times before.  So what is my advice here?  Be patient and realize everything that glitters is not gold.  Your brand (and consequently, your wealth) will take time to build.  It cannot and will not happen overnight.  Usually any thing (or anyone) that promises you a quick return or profit is likely a wolf in sheep’s clothing.  You should run far, far away.  In speaking with Chase Carlson, a Florida attorney that has represented over a dozen of athletes in fraud cases, he gave some common tell-tale signs for athletes to avoid.  “A lot of these deals [that blow up] are private deals”.  (Private deals are not registered with a centralized exchange or clearinghouse and therefore are more risky).  He also mentioned the type of individuals to avoid.  “A lot of these guys [that defraud the players] are living very large, driving very expensive cars, wearing very expensive jewelry”.  You may want to read an earlier post I wrote if your financial advisor is a bigger celebrity than you are.

Lesson #7 – Listen for perspective, only implement wisdom.

Finally, while I personally may allow for a lot of different perspectives to be voiced, I only implement what amounts to wise counsel.  How do I tell the difference between perspective and wisdom? Experience–and not just my own either.  For years, I have sought mentors much older to provide me with invaluable nuggets of wisdom.  What if you don’t have this type of access to wisdom?  My advice is that you find it.  Seek it out.  Having a superb brand is not for the lazy or faint of heart.  Particularly, crucial to protecting your brand will be what you allow into your psyche from friends, family and other associations.  Make all those relationships pass a “mental” filter.  Some may call it common sense.  Unfortunately, common sense is not all that common anymore.  Only listening to the input of your peers can be a recipe that cooks up a “one-sided” perspective.  In a recent conversation with four-time Olympian Lauryn Williams, she mentioned that “youth and inexperience” as key reasons that athletes don’t consider the years after they retire.  Lauryn, who is now reciprocating some of her life lessons as a financial advisor to current and future Olympians, understands the challenges young athletes face.  When I asked her why younger athletes were not implementing better financial strategies, like those of Kobe’s and LeBron’s mentioned earlier, she responded that, not only is there “limited exposure to [that type of] advice to help younger athletes”, but “younger athletes often don’t have the knowledge or education that helps them apply the advice [that] is given”.  Most successful professionals will agree that applying the hunger and drive that got you to where you are won’t necessarily take your brand to where you want it to go.  This is why a healthy dose of wise perspective is like a dietary supplement that should be taken daily.

One way to define wisdom is the ability to see, into the future, the consequences of your choices in the present. That ability can give you a completely different perspective on what the future might look like.”  -Andy Andrews

So let’s recap the seven lessons:

  1. Recognize you are a brand;
  2. Use good associations to create brand value;
  3. Start planning your transition early;
  4. Practice personal responsibility;
  5. Replace negativity with positivity;
  6. Ignore the shine
  7. Listen to different perspectives,  but only accept wisdom;

So what will you do with what you know? Athlete or not, implementation of these principles will help you build and preserve your brand.

(Special thanks to Lauryn Williams, Marques Ogden and Chase Carlson for their contributions to this mosaic of thought.)

The Branding Series: Developing [Brand] Character (Part 3 of 4)

“Character is like a tree and reputation like a shadow. The shadow is what we think of it; the tree is the real thing” – Abraham Lincoln

 Lesson #4 – Practice the highest level of responsibility–personal accountability.

The new owner of an office building hires two different cleaning companies to clean his building.  His secretary is puzzled about the decision of hiring two companies, but doesn’t make a fuss.  After a week of letting each company alternate on the nights they cleaned the office building, the owner decides he will award the cleaning contract to the winner of a final test.  The next morning both cleaning company supervisors are asked back at the same time to visit the owner.  Neither are aware of the test and nonchalantly greet each other as they sit and wait on the owner to arrive.  After a short wait, the owner brings them into his office one at a time.  After supervisor #1 is asked in, the owner proceeds to raise his voice about how someone from his cleaning crew left a faucet on during the cleaning shift flooding one of the floors of the building.  The bewildered supervisor stands and pleads that he is only just a supervisor and didn’t know how this could have happened.  The unrelenting owner demands to know who is responsible for the mistake.  Supervisor #1 frantically responds, “Let me call my crew and see what happened”.  The owner dismisses the supervisor to make the call.  Meanwhile he invites supervisor #2 into his office proceeding to do the same thing.  With the same emotion and fervor he demands, “who is responsible for this?”  Supervisor #2 politely stands and says, “sir, if my crew was in the building then I’m responsible.  I’ll personally see to that we fix the problem right now.”   

Who do you think won the contract?  The difference between responsibility and accountability is the personal ownership that is taken.  Accepting blame is easier, when the responsibility is shared, but it is much more difficult to (excuse the term ladies) “man-up” and isolate yourself as the loan scapegoat.  How does this relate to branding?  It has everything to do with how people perceive your personal integrity.  When you make a mistake, own it and move on.   Public speaker, author and former NFL offensive lineman, Marques Ogden had a surprisingly refreshing perspective when I asked his opinion about getting more athletes financially educated.  Players “must take more personal responsibility for their actions” and “realize the long-term effects of their decisions.”   In talking with Marques, you cannot help but be infected by his deep sense of integrity and accountability.  “When my business failed, I didn’t blame anyone but myself…those were my decisions, no one else’s.”  How can athletes avoid potentially brand-destroying advice, especially that of the financial variety?  Be informed.  Do you research.

Lesson #5 – You’re not what you eat…you’re what you think.

I once heard that:

BELIEFS are how you view past experiences 

DECISIONS are made based on those beliefs

RESULTS are based on the quality of those decisions

The theme underlying here is psychological in nature.  Our belief system frames how we think about things.  More damaging than someone bad-mouthing your brand is YOU bad-mouthing your brand.  You might say, “I’d never bad-mouth my brand”.  But what are you saying to yourself constantly?  What negative “self-talk” are you using that becomes your script for the day?  Many people unconsciously berate and tear themselves down and wonder why they achieve bad results or attract bad relationships.  Successful athletes may learn to distance themselves from that type of thinking on the field to only be haunted by it off the field.  This compartmentalization only works to devalue your brand also.  Being a giant on the field of play means nothing, if you squander it away in a moment by a bad choice produced from a poor belief system.  The only way to break this cycle is to start “mentally” ingesting the right things.  A friend once told me that you can make a glass full of sand eventually be clear as water if you poor enough water into the glass of sand.  This is how our minds work.  Fill them with enough positivity, and the negativity will be pushed out. Sustaining your brand depends on whether you are able to replace the bad with the good, and the old with the new.

The Branding Series: Building Sustaining Brand Value (Part 2 of 4)

“Your brand is what other people say about you when you’re not in the room.” – Jeff Bezos [ecae_button]

Lesson #2 – You either create or destroy value by brand association.

There’s a cute anecdote that my wife loves to tell that you’ve probably heard, and it goes like this:

Once the President and First Lady went out for a night on the town.  Toward the end of their evening as they were driving back to the White House, the car stopped at a traffic light.  At the same time they both noticed the foreman at a small construction site repairing what seemed to be a large pothole in the street.  The First Lady looked intently at the foreman and said, “Well I’ll be!”
“What?”, replied the President.
“If I didn’t know any better I’d say that foreman over there is the same man I dated in high school and went to prom with.  At one time, we were madly in love.  My, how things change”.
With an air of confidence, the President replied, “Well it is a good thing you didn’t stay together, you’d be the wife of a construction foreman now.”
To which the First Lady replied, “No dear, he’d be the President now”.

We often go about, not really understanding the power of brand association.  It is said that you can take your top ten associations, and your household income will probably be within 5% of that average number.  Well what if it is not?  You probably need to re-evaluate your associations.  You can either create or destroy value by brand association.  Don’t make the mistake of destroying your brand’s value by making bad associations.

Lesson #3 – Consider your transition plan earlier rather than later.

Unfortunately, athletes know all too well that their “big chance” can be here today and gone tomorrow.  Most athletes are just an injury away from not being able to do what they love the most.  If so, what will happen?  If you haven’t created other streams of income, through saving and investing, then you will have a long road ahead of you of “normal living”.  Don’t get me wrong, there’s nothing wrong with this as most individuals live this type of life, but they are not adjusting to having access to six or seven figures either.   Unless you’re Ryan Broyles, living on a fraction of your current player salary would be a hard adjustment. This is why I recommend working on your transition plan as soon as your career begins.  Maybe Murphy won’t darken your doorstep, but you can never be too sure.  In any case, it helps to be prepared for 50-60 more years of living expenses after your playing days are over.

The Branding Series: Brand Recognition (Part 1 of 4)

Do you think of yourself as a brand? If you don’t, you should. [ecae_button]

I’m typically known for discussing topics relevant to personal finance and asset markets, however, for the next few posts I thought that I’d step off the “beaten path”.  Why?  In the process of launching a new business, I have naturally had to expand my network which, consequently, has allowed me to have some very interesting conversations.  Being who I am, it didn’t feel right keeping what I’ve learned from those conversations along with my own thoughts a secret.  My big dream is that someday current and former professional athletes will use their life lessons –including successes and failures–to help a younger generation not only avoid those mistakes, but meaningfully impact “off the field” what their fame, wealth and influence has gained them “on the field”.  But before that can be done, you have to understand that you are a BRAND.  From a former Olympian, to a goliath of the gridiron, to legal representation for famous athletes, I hope you enjoy these seven lessons I’ve prepared from their and my own observations.

How it all started….

Recently, it hit the news that two of the biggest names in global sports continue to diversify their investment portfolios with different ventures.  Kobe Bryant, a recent retiree from the NBA, has launched a venture capital firm to exploit opportunities in the information technology world (see YouTube video here).  LeBron James, still an active NBA player, is executive producing a reality TV series designed to highlight the entrepreneurial ventures of local Cleveland-ites.  I’m sure there are others.  However, what struck me about these two, besides their notoriety, is that they seem to represent what all current and former athletes would like:

  • a smooth transition from the game they once loved to play, and
  • a source of residual income, other than their sports paycheck.

So how does this happen for someone–especially the “new money millionaire” as Phillip Buchanon refers to them in his book New Money:  Staying Rich.  Over the next few entries, I will highlight some of the takeaways from “brand-building” that I’ve observed in my two decades as a financial services professional working with successful individuals from all walks of life.  If successful, I will:

  • convey some key lessons learned from former athletes and industry experts, in order to
  • provide a “blue-print” of brand management to the many thousands of current and future participants that plan to make a living in professional sports.

Here we go…

Lesson #1 – First you must recognize that you are a brand.

This is probably the most crucial and important of lessons.  Not only athletes, but often most individuals retain an “employee” mentality in whatever earns them income.  Most entrepreneurs adopt the owner mentality as they quickly realize like the lion, you only eat what you kill.  No matter your vocation, anyone and everyone who works for compensation can be considered to be in business and building a brand.  What you do is a reflection of you.  If you believe this principle, it gives you a brand to recognize (and protect).  How you interact with people will be a reflection of your brand. One common adaptation of this for famous individuals is product endorsements.   When asked to endorse the brand of a major corporation by marketing a specific product or service, you attach yourself to their reputation–good or bad.  Therefore the real takeaway becomes…what’s in it for you?


The Fallacy of Chasing Market Returns – Part 2

A formula for not chasing after market returns…[ecae_button]

So the last post, we began discussing the extreme fallacy in trying to beat the markets.  Although I believe it is truly a fool’s errand, I won’t spend as much time or words ranting and pontificating (so you can thank me later!) in this post.  Today will be spent giving you what you should be doing or at least thinking about.  As always, these are merely suggestions.  Any advice I give you here should be considered in context of your entire financial plan, so be sure you consult with a financial professional prior to implementing anything.

 Leave behind the days of “in and out” of the market. 

One of the more insightful quotes of Sir John Templeton was when he said,

“The best time to invest is when you have money.  This is because history suggests it is not timing which matters, but time”.

Now, who are you and I to question one of the most successful investors of all-time?  Let’s explore his perspective because there is a simple wisdom behind what he says.  Googling Sir John’s history is helpful, because it will uncover that he and his family survived some of the worst times in US economic history.  Despite the struggle his outlook remained positive.  My observation in all my years of helping individuals invest their money is that, rarely is the focus not on the myopic goal of beating the market.  Sir John’s simple wisdom suggests a singular focus,  but on something much more valuable than the money we invest—it is time.  All around us we see the result that time has on nature (probably the most profound of all) and in all aspects of our lives.  And although we all learn the lesson of compounding interest from books like The Richest Man in Babylon or the lesson of discipline and frugality from The Millionaire Next Door those lessons are not applied.  Whereas, if the average investor spent less than he or she made, invested 15-20% of their gross income in low cost funds into a qualified retirement plan, he or she would have accumulated a tremendous amount of capital to live on throughout retirement.  However, more often than not, news and print media panic individuals into buying and selling their investments far too often incurring fees and taxes that erode their investment capital leaving them frustrated and effectively poorer.  My simple suggestion is to let time be your ally.  If you are in your 20s and you are reading this, good for you.  You can literally start a savings discipline that could last the better part of 40 years and the older you will thank the younger you for it, trust me.  For those of us that are older, we can still start with the caveat of less time, but hopefully with enough wisdom not to repeat foolish mistakes of the past.

Diversify not just across asset classes, but goals. 

If I have mentioned it before, it deserves another mention, I consider The Aspirational Investor by Ashvin Chhabra a must-read for the DIY investor.  If you consider yourself smarter than the average bear based on your current portfolio, please do yourself a favor and pick it up. He establishes a good foundation for how investing should be broadened to include our life goals and not just the pursuit of better than market returns.  I think he uncovers something key and it leads to my next suggestion.  Finding more contentment in your life will be the key to increasing your net worth (and thus your wealth).  We all see the struggles that some “wealthy” people have and wonder why their money doesn’t bring more happiness in their life.  This is because wealth does not bring happiness to you unless you are already content.  Contentment has to do with understanding that what you value and what you believe is worth more than just money.  This inevitably leads to finding ways to use your money to promote your values and what you believe in.  This is the “quan”, as it were, that Cuba Gooding, Jr. mentions in the movie Jerry Maguire.  In the movie, although he chases the big contract, Cuba’s character realizes it means nothing without his values and the people he loves around him to enjoy it ( (his “quan”).  This realization hits Tom Cruise’s character also when he realizes that what he values is not the chase of being this hot shot agent, but being there for people.  This becomes his source of true contentment. (Pardon my Rotten Tomatoes review!)  What’s my point?  Understand what you value, then use your money for those things.  This will lead to financial contentment, which will inevitably lead to increasing your net worth.  All of which have nothing to do with beating the market.

Don’t Ignore the Importance of Human Capital!

Recently I was revisiting a very interesting parallel drawn between human capital and financial capital as they both relate to building a portfolio. In 1980, R.A. Campbell developed a framework for life insurance that involves the trade-off between risky vs. non-risky assets. The parallel when applied to how financial wealth is derived is actually pretty interesting.

Given that…

Human Capital + Financial Capital = Total Financial Wealth

If the average individual will have about 40 years to monetize the value of their human capital (e.g. earn a living) AND some of those earnings will be translated into financial capital (e.g. stocks, bonds or other investments), then investors should be focused on building a wealth creation plan that will maximize those two components at their peaks. It is likely you have been told over your life about “financial capital” but how well have you focused on human capital, or better yet, you have probably ignored the value of human capital–the power to earn.

Imagine the following is true:

human capital

If the above graph is of a typical working person earning $35,000 per year, let’s do some quick math (thanks MS Excel!):

  • Over the next 40 years, with no pay raises and inflation (of 3%), cumulative earnings are $2.99 million, or
  • Over the next 40 years, with 1% annual pay raises every 2 years and inflation (of 3%), cumulative earnings are $3.38 million, or
  • Over the next 40 years, with 1% annual pay raises every year and inflation (of 3%), cumulative earnings are $3.85 million

So let’s just take the average of those 3 scenarios (assuming most Americans fall into at least one of those categories) and earn about $3.41 million dollars over a 40 year career. Realizing that represents a gross number, without taxes and living expenses, what amount of financial capital could be achieved by just taking 10% of that total human capital?

(Just a bit more math…)

  • Saving 10% which is $341,000, is just about $327 per pay period (assuming a pay schedule of twice a month) over 40 years. Assuming the rate of return averages 7.5%, the retirement nest egg would be $2,159,566!

So why aren’t investors placing higher value on their human capital in order to create more financial wealth? Here’s three reasons I think this is not happening:

There’s too much focus on the wrong thing…

Ashvin Chhabra, chief investment officer at Merrill Lynch, says “If the markets don’t really care about you, as surely they do not, then why should you spend all your time and effort trying to beat them?” This is such a good point. In his book, he expands on a concept called the “Wealth Allocation Framework” that is much more about capital allocation across a spectrum of goals as well as asset classes. Too often, the focus is myopically on investment returns when an investment portfolio only represents a “portion” of one’s financial wealth. Other things to consider are personal use assets like your home, and the most powerful of all (at least until later in life)–human capital.

Investing has become far too emotional, and not logical enough…

I’ve seen a lot of instances where the emotions of investing take over sound reasoning. Many investors are doomed to failing at leveraging their human capital to achieve maximum financial wealth because of mistakes made during the investment cycle. So many times good discipline is overridden by irrational behavior. This is why, often times, it makes more sense to hire someone to help you make decisions. As Carl Richards puts it, financial advisors are there to “keep you from doing something stupid”. I think this is a valid point, because human capital cannot be replaced as time passes, only financial capital can.

Ignorance…maybe? Or just not informed…

Unfortunately, this type of thinking is not widely known or discussed. I actually learned it during my master’s program at Creighton. So although somewhat intuitive, I’d never explored this topic in any depth (and I’ve been in the industry for almost two decades!) I believe the takeaway is that, financial advisors have to start discussing the importance of human capital and its relation to financial wealth. They also must begin to start practicing it by considering it in client wealth allocation models.

When it is all said and done, time will have passed and your power to earn will have diminished. The question will be: Did you ignore the value of human capital in your overall financial plan?

Hold Up, Wait a Minute!

Last week I was invited on NetWorth Radio to discuss the municipal bond market (link to interview here).  Afterwards, I thought of the dilemma most investors must be in when it comes to deciding on what asset classes they should hold in portfolios.  This is an interesting topic of discussion and worth the time to visit at least two points of contention investors may run across.

Point of Contention #1: Can I use a traditional mix of 60% stocks/40% bonds to make money in this market?

The short answer is probably not.  Why you can’t is an in-depth discussion but revolves around relatively slow global growth and divergent monetary policies (just Google “divergent monetary policy” to see what I’m talking about).  Historically, investors could associate expected return with the amount of risk being assumed with an investment.  The risk being assumed is referred to as a risk premium.  The risk premium is the amount of return over the risk free rate you expect to be compensated.  The risk-free rate has always been assumed to be positive, but in certain economies it is now negative.  This does two things mainly:  it lowers the amount of expected return of most asset classes since the risk free rate is now negative and it forces an investor into riskier asset classes to avoid negative returns.  So, using traditional investment methods may not achieve investment goals.  This may lead to the next obvious (or not so obvious) conclusion: Does this flight into riskier asset classes foreshadow the collapse of the market for risky asset classes?  Possibly.  What usually happens when everyone piles into a good idea…

Point of Contention #2: What are the implications of using a non-traditional asset mix to achieve my investment goals?

One implication, which is probably the hardest to hear, is that investors will need more financial capital.  Investors should be prepared to work longer and delay retirement.  This does two things to improve their situation:  it produces more actual dollars to retire on, and it shortens the length of time in retirement.  Traditionally, stocks have averaged between 7-10% annually (I’m using both high-tide and low-tide averages), but this has lately not been the case and will not be the case in the future.  Consider that most pension plans are underfunded because of their utilization of traditional investment strategies to produce 8+% returns for future liability payments to plan participants.  If pension plan managers have struggled to achieve returns for the millions and billions they invest, why would it be any different for individual investors?  The answer is that it isn’t.  That said, individual investors have the advantage of using non-traditional asset mixes to achieve their goals.  Portfolio construction with non-traditional asset classes can be a refreshing drink of water to parched portfolios.

Point of Contention #3: Ok. You’ve got me thinking, what should I do?

Consider getting the perspective of an investment professional for your investment goals. I’m happy to say that day in and day out, I gladly assist investors in navigating what can be a very confusing and intimidating investment landscape. Consider that the Department of Labor just issued rules on how investment professionals should interact with investors’ retirement assets, so you may realize a change in how you receive investment advice. I won’t go into the rule in this writing, but the implications for the investor could be higher costs as firms adjust to comply with the rule. These firms will be those that have not been operating at the fiduciary standard all along. Natural to this process may be shifts in and out of asset classes (e.g. fund flows) that will affect future investment returns. With literally thousands of retirement plan participants and trillions of dollars at stake, investors should be prepared to hire an investment professional to help co-pilot what could be a bumpy ride.

The January Effect—Not!

It has been said that although history does not repeat, it surely rhymes.  According to the Stock Trader’s Almanac, the direction of January’s trading predicts the course for the year 75% of the time.  If this is the case, the infamous January effect for 2016 would seem to be ominous for investors, right?  I hope to make the case that with the right approach, investors can likely ignore the performance of their portfolios in January as it only represents yet another cog in the machine.  Long term results in a goal-based investment plan is what investors should covet.

What the January effect is and what its results have been

This article describes the January effect pretty well so I won’t use this blog post to do us.  Suffice to say, the formula is pretty accurate in most years.  However, I believe the power of the effect often gets lost.  I will explain.  The power of the January effect happens to be the depressed pricing of stocks relative to normal levels.  And how do they get to these depressed prices?  Well, typically investors (both retail and institutional) will sell stocks to trigger a taxable event. (You can read more of why this happens in an earlier post.) This tremendous selling pressure results in prices for stocks being lower relative to where they have traded the whole year.  Subsequently, investors realize that prices are lower and do a lot of purchasing in the month of January.  But perhaps the only reason this even happens during this time of year is because the IRS imposes a deadline to claim investment losses as a deduction by December 31st.  My point being that bargain prices can be sought for assets at any time and the power of the effect comes when selling pressure is exerted on the market.

How a goal-specific investment plan will help calm investor anxiety regardless of market performance

So now you may be saying that is great, but how does that help my investment portfolio.  I would argue that it will if you are not trying to trade the market via timing or any other method.  However, if you are investing with a specific long-term goal of gains exceeding inflation along with current income, you can benefit nicely.  I think that most investors fail to realize the merit in this approach because they “chase returns”.  Further, they fall prey to anchoring bias, by focusing on one piece of largely irrelevant information to formulate their investment strategy.  The benefits of using a broader perspective is rarely sought and they subsequently underperform the market.  Whereas, if they approached investment with a goal to earn x% over a set period of time, adjusting for live events and other important considerations they would find much more success.  I have conversations all the time with clients that agree that this approach makes sense, but several obstacles stand in the way of their “follow-through”.  More than likely, their fear of repeating a disastrous loss in the past outweighs the logic of a sound plan for the future.

What you can do to formulate a goal-based plan

Some of the best work I have read on goal-based investing is by Ashvin Chhabra.  His approach is an expansion of modern portfolio theory with the incredible insight to consider what I would call “life checkpoints”.  Each investor has in their mind what would send them into poverty, keep them at their current lifestyle or catapult them into another tax bracket. These three checkpoints provide all the context needed to form a goals-based plan. Incorporating these into an investment plan allows both the investor and adviser to have a language to communicate what defines success.  Rather than it being a number that is basis points above or below a market index, it becomes a way to articulate “how we are doing”.  Regarding Chhabra’s approach, a recent blog sponsored by the CFA Institute read how it “goes beyond modern portfolio theory by shifting investment strategy from a focus on the securities held in your portfolio to a consideration of your personal objectives” — for example, saving for college, retirement, or to start a business.”  These tangible objectives should help to ease anxiety during market turmoil.  Why?  Because if you have set aside enough capital to live on for the next 2-3 years regardless of what the market does, you will rest easier if you see your portfolio going down.  This does not mean you may not need to make an investment plan adjustment, but it should keep you from calling your adviser requesting him or her to sell everything.  Just some food for thought.

Invest wisely.