Cyber Security Best Practices

Posted on by

“Good cybersecurity practices help protect both your privacy and your money.”

2020 was a record-breaking year for data breaches and cyberattacks with cyber crimes becoming an increasingly clear and present threat, both in terms of the sheer number and sophistication of attacks. 

The bad guys always appear able to devise methods to steal your personal financial information, according to The Street. It would be very prudent for investors to embrace a few recommended cybersecurity best practices:

  1. Secure Your Home Wi-Fi & Avoid Public Networks – Cybersecurity starts at home. The best practice is to encrypt your home network, which makes it more difficult for other people to monitor your activities and steal your personal information. In addition, avoid using public Wi-Fi and it may be worth investing in a virtual private network (VPN) service.
  2. Update Your Operating System – Out-of-date operating systems, browsers and antivirus software make it easier for hackers to compromise your devices and access your personal data. Keeping these up to date is a cybersecurity best practice.
  3. Use Strong Passwords & Two-Factor Authentication – Do not use the same password across multiple accounts, one compromised account can result in a major cybersecurity threat. In addition, turn on two-factor authentication, when possible, to further safeguard your accounts.
  4. Beware of Email Scams – Phishing continues to be one of the most prevalent cybersecurity threats. To avoid these scams, the best practice is to never click on suspicious links in an email, especially if you don’t recognize the sender. A good rule of thumb is to never share sensitive information over email, as it can be easily compromised. 
  5. Monitor Your Credit & Digital Footprint – One way to catch financial identity theft early is to keep a close eye on your credit score and report. An additional best practice is to monitor the internet for potentially compromising personal information. For example, you can set up a Google alert for your name, so you’ll receive an email if anything new appears in your search results.  

Investors seeking to preserve and grow their wealth can’t afford to ignore the existing threat of cyber crime.

References :

  1. https://www.thestreet.com/retirement-daily/.amp/lifestyle/5-cybersecurity-best-practices-investors-should-embrace-in-2021

Warren Buffett Defines “True Success”

Posted on by

“True success’ in business and life has nothing to do with money.

In an interview, legendary investor Warren Buffett offered his definition for “true success.”

“Well, I’ve said many times that, if you get to be 65 or 70 and later, and the people that you want to have love you actually do love you, you’re a success,” Buffett said in the Yahoo Finance interview.

Buffett doesn’t believe money or power or social status makes a person successful. “I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them,” said Buffett. “If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”

Buffett offers three pieces of advice for people looking to succeed in business and life.

  • Invest in yourself, and in particular, try to improve your communication skills. “If you can’t communicate to somebody, it’s like winking at a girl in the dark,” Buffett quipped.
  • Take care of your mind and body. “You get exactly one mind and one body in this world. And you can’t start taking care of it when you’re 50,” he said.
  • You should associate yourself with others who “are better than you are.” He added, “Basically, you’ll go in the direction of the people that you associate with. And you want to have the right heroes.”

Key takeaway — the amount you are loved — not your wealth or accomplishments — is the ultimate measure of success in life. “The problem with love is that it’s not for sale,” Buffett explains. “The only way to get love is to be lovable. It’s very irritating if you have a lot of money. You’d like to think you could write a check: I’ll buy a million dollars’ worth of love. But it doesn’t work that way. The more you give love away, the more you get.”

The most important lesson of a life well-lived, according to Buffett, has nothing to do with wealth and everything to do with the most powerful human emotion: love. 

“Basically, when you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you.

I know many people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them.

That’s the ultimate test of how you have lived your life. The trouble with love is that you can’t buy it. You can buy sex. You can buy testimonial dinners. But the only way to get love is to be lovable.

It’s very irritating if you have a lot of money. You’d like to think you could write a check: I’ll buy a million dollars’ worth of love. But it doesn’t work that way. The more you give love away, the more you get.” Warren Buffett, The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

References:

  1. https://money.yahoo.com/warren-buffett-definition-success-174700744.html
  2. https://selfmadesuccess.com/warren-buffett-success-quotes/
  3. https://app.landit.com/articles/buffets-5-step-process-for-prioritizing-true-success
  4. https://www.cnbc.com/2019/02/13/billionaire-warren-buffett-says-this-is-the-only-measure-of-success-that-matters.html‬
  5. https://www.inc.com/marcel-schwantes/warren-buffett-says-it-doesnt-matter-how-rich-you-are-without-this-1-thing-your-life-is-a-disaster.html

Peter Lynch’s Investing Maxims

Posted on by

Here are several investing maxims that every investor should memorize and insight repeatably to pick winning stocks, according to Peter Lynch:

  1. A good company usually increases its dividend every year.
  2. You can lose money in a very short time; it takes a long time to make money.
  3. The stock market really is not a gamble; as long as you pick good companies that you think will do well and not because of the stock’s price.
  4. You can make a lot of money in the stock market; but then again, you can lose a lot of money.
  5. You have to research the company before you put your money into it.
  6. When you invest in the stock market, you should always diversify.
  7. You should invest in several stocks becasue for every five you pick, one will do very great, one will be very bad, and three will be okay.
  8. You should never fall in love with a stock…you should always have an open mind.
  9. You shouldn’t just pick a stock: you should do your homework.
  10. Buying stocks of utility companies is good because it gives you higher dividends, but you will make more money in growth stocks.
  11. Just because a stocks goes down doesn’t mean it can’t go lower.
  12. Over the long term, it is better to buy stocks in small companies.
  13. You should not buy a stock because it is cheap, but because you know a lot about it.

Look for shares that offer “growth at a reasonable price” which helps you to avoid two common investment mistakes:

  1. Either paying too much for fast-growing companies;
  2. Or buying seemingly cheap firms without realizing that they have stopped growing.

https://youtu.be/hKdtS_0vQ48

References:

  1. https://www.safalniveshak.com/value-investing-course-peter-lynch-way
  2. https://sites.google.com/site/changechina2050/investment/learn/peter-lynch-s-investment-rules

Building Wealth

Posted on by

“Building wealth has almost NOTHING to do with your income or your background. It doesn’t matter where you come from. It matters where you’re going.” Chris Hogan

In Everyday Millionaires, author Chris Hogan reveals how ordinary Americans built extraordinary wealth over the long term. In his book, he demonstrates how these ordinary American millionaires live on less than they make, avoid debt, invest, are disciplined and responsible. In short, most accumulated their wealth over the long term by being disciplined and making wise financial decisions, according to Hogan.

Having a particular mindset almost universally contributed to millionaires’ success, Hogan said. Building wealth has almost nothing to do with your income or your background, he states. “It doesn’t matter where you come from. It matters where you’re going.”

“These numbers show that becoming a millionaire doesn’t happen overnight. It’s a marathon, not a sprint. By using the basic tools of saving and investing, you can make your money work for you to build wealth.” Chris Hogan

The National Study of Millionaires is a research study conducted by Ramsey Solutions with over 10,000 U.S. millionaires to gain an understanding of personal finance behaviors and attitudes that factored into their financial success.

The research study provides the facts about what it takes to become a millionaire:

  • Consistency and discipline through investing in a company-sponsored 401(k) is how most millionaires accumulated wealth.
  • Most millionaires are self-made.
  • Many millionaires surveyed never made six figures in a year.
  • Most millionaires come from at or below middle-class income levels.
  • Most millionaires have regular jobs.

About 20 million people in the U.S. have accumulated enough assets to fit the definition of millionaire, according to a 2020 study by Credit Suisse.

According to Hogan, more than 90% of millionaires used several tools to build wealth:

  1. Take personal responsibility – around 97% of millionaires surveyed believed they were in control of their own destiny. That is much higher than the 55% of the general population who held the same opinion.
  2. Practice intentionality (make a plan) – invest in 401k p, get out of debt and stay out of debt.
  3. Spend less then the earn – 94% of millionaires live on less than they make, compared to 55% of the general population”
  4. Look for deals – 93% of millionaires use coupons, some or most of the time, 85% of millionaires use a shopping list and spend less than $200 a month in restaurants eating out
  5. Make a budget – 93% stick to a budget they create and 64% still live on a budget
  6. Consistent – 96% of millionaires do not carry a balance on their credit card”

Most wealthy people end up financially secure because they make distinctly different financial decisions throughout their life than the majority are willing to make. A few of these decisions are the manner in which they spend, save, invest and use debt.

By staying disciplined, living small by significantly spending less than you earn, and understanding how to use debt strategically, you can too build wealth. The process of building your wealth may require you to get comfortable using leverage.

The wealthy tend to use debt in a very strategic and deliberate way. They mostly use it to purchase income-producing assets and rarely to purchase liabilities like the hot new luxury car or to take the desirable exotic vacation (at least not until later in life).

References:

  1. https://www.amazon.com/Everyday-Millionaires-Ordinary-Extraordinary-Wealth_and/dp/0977489523/ref=nodl_
  2. https://cdn.ramseysolutions.net/media/company/pr/everyday-millionaires-research/National-Study-of-Millionaires.pdf
  3. https://www.ramseysolutions.com/store/books/everyday-millionaires-by-chris-hogan
  4. https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html
  5. https://www.cnbc.com/2021/08/24/more-than-90percent-of-millionaires-used-these-five-tools-to-build-wealth.html
  6. https://www.alex-owens.com/rich-use-debt/

Power of Compound Interest

Posted on by

It is said that Albert Einstein once commented that “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

The Power of Compound Interest shows that you can put your money to work and watch it grow. The power of compounding works by growing your wealth exponentially. It adds the profit earned back to the principal amount and then reinvests the entire sum to accelerate the profit earning process.

When you earn interest on savings and returns on investments, that interest (or returns) then earns interest (or returns) on itself and this amount is compounded monthly. The higher the interest rates, the faster and the more your money grows!

The sooner you start to save, the greater the benefit of compound interest. This is one reason for the success of many investors. Anyone can take advantage of the benefits of compounding through starting a disciplined savings and investing program.

Yet, compounding interest can be good or bad depending on whether you are a saver or a borrower, respectively.

Three factors will influence the rate at which your money compounds. These factors are:

  1. The interest rate or rate of return that you make on your investment.
  2. Time left to grow or the age you start investing. The more time you give your money to build upon itself, the more it compounds.
  3. The tax rate and when you pay taxes on your interest. You will end up with more accumulated wealth if you don’t have to pay taxes, or defer paying taxes until the end of the compounding period rather than at the end of each tax year. This is why tax-deferred accounts are so important.

Finally, it’s important to resist the temptation of seeking higher interest rates or returns, because higher interest rates and returns always bring higher risk. Unless you know what you’re doing, no matter how successful you are along the way, you always want to avoid the possibility of losing money.

Benjamin Graham, known as the father of value investing, was aware of the risk of ‘chasing yield or return’ when he said that “more money has been lost reaching for a little extra return or yield than has been lost to speculating.”

References:

  1. https://www.primerica.com/public/power-compound-interest.html
  2. https://www.thebalance.com/the-power-of-compound-interest-358054

Financial Metrics for Evaluating a Stock

Posted on by

“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” Peter Lynch

Anyone can be successful investing in the stock market. But, it does take thorough research, patience, discipline and resilience. And, it’s important to appreciate that “Behind every stock, there is a company. Find out what it’s doing”, says Peter Lynch, who managed the Fidelity Magellan Fund from 1977 to 1990 and achieved an impressive return which reportedly averaged over 20% per year.

With a long-term view to investing, Lynch would patiently wait for the company to become recognized by Wall Street for its growth, which subsequently unleashed an explosive rise in its stock price as smart money and institutional investors rush to buy stock.

In his book “One Up On Wall Street”, he reveals his principles and metrics for successful investing. Here are 11 financial metrics investors can utilize to evaluate a company’s value:

  1. Market Cap – Shows the current size and scale of the company. “If a picture is worth a thousand words, in business, so is a number.” Peter Lynch
  2. Strong Balance Sheet (Cash on Hand / Long Term Debt to Equity) – Shows how financially sound a business has become and its capacity to withstand an economic downturn. Determine if the company’s cash has been increasing and long term debt has been decreasing?
  3. Sales and Earnings Growth Rates – Shows if the business model works & current growth rate
  4. Free Cash Flow – Shows if company generating or burning through cash
  5. Returns on Capital (ROE / ROIC / ROA)- shows capital efficiency of business
  6. Margins (Gross Profit Margin / Operating Margin / Profit Margin / Net Income) – Shows current profit profile of products, spending rates, & potential for operating leverage
  7. Total Addressable Market – What is market size and long term growth potential for the company.
  8. Long Term (5+ years) Stock Performance vs. market – has the stock created or destroyed value for shareholders. “In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.” Petere Lynch
  9. Current Valuation (Price to Sales / Price to Earnings / Price to Book / Price to FCF) – How expensive or inexpensive is the stock price.or is the company reasonably priced. “If you can follow only one bit of data, follow the earnings (assuming the company in question has earnings). I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction.” Peter Lynch
  10. Mission and Vision Statement – Understand why the company exist.  What is it doing. “Behind every stock is a company. Find out what it’s doing.” Peter Lynch
  11. Insider Ownership – Do insiders have skin in the game. SEC Filings. Information available on proxy statement.

Additionally, it is important to figure out:

  1. What is changing
  2. What is not changing
  3. Is there an underappreciation for either. “Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.” Peter Lynch

Do that well, move on #3, you’re the best investor in the world.

As an investor, unless you understand the underlying business of a company, you will not be able to hold its stock when the price is falling. You could end up selling a great company out of fear – even though its price will recover in the future and give you great returns in the years to come. The ability to hold a good company even when its stock price is falling or undergoing a time correction – will play a crucial role in you becoming a successful investor.

In the long run, the stock price will go up only if the business of the company does well.

In Peter Lynch’s own words “I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies”

If you like a stock, buy small quantity of shares. Study the company in more detail. Buy more shares if you like its business. As your understanding of the business increases, your conviction (confidence) will also increase, this will allow you to give higher allocation in your portfolio.

Categories of Stocks in the Stock Market

Peter Lynch divided different stocks into six categories

Slow Growers – Slow growers are those stocks that have a slow growth rate i.e. a low upward slope of earnings and revenue growth.These slow growers can be characterized by the size and generosity of their dividend. According to Peter Lynch, the only reason to buy these stocks are dividends.

The Stalwarts – The Stalwarts have an average growth rate as that of industry and are usually mid to large companies. They have an earnings growth between the 8-12 percent CAGR range. According to Peter Lynch, investors can get an adequate return from these stocks if they hold these stocks for a long time.

The Fast Growers – The fast growers are generally aggressive companies and they grow at an impressive rate of 15-25% per year. They are fast-growth stocks and grow at a comparatively faster rate compared to the industry average and competitors. However, Peter Lynch advises that one should be open-eyed when they own a fast grower. There is a great likelihood for the fast growers to get hammered if they run out of steam or if their growth is not sustainable.

The Cyclicals – Cyclical are stocks that grow at a very fast pace during their favorable economic cycle. The cyclical companies tend to flourish when coming out of a recession into a vigorous economy. Peter Lynch advises investors to own the cyclical only on the right part of the cycle i.e. when they are expanding. If bought at the wrong phase, it may even take them years before they perform. Timing is everything while investing in cyclical stocks.

The Turnarounds – The turnarounds are characterized as potential fatalities that have been badly hammered by the market for one or more of a variety of reasons but can make up the lost ground under the correct circumstances. Holding turnarounds can be very profitable if the management is able to turn the company as these stocks can be bought at a very low valuation by the investors. However, if the management fails to bring back the company on track, it can be very troublesome for the investors.

Asset Plays – Asset Plays are those stocks whose assets are overlooked by the market and are undervalued. These assets may be properties, equipment, or other real assets that the company is holding but which is not valued by the investors when there has been a general market downturn. The real value may be worth more than the market capitalization of the company. Peter Lynch suggests owning a few of these stocks in your portfolio as they are most likely to add a lot of value to your portfolio. However, the biggest significant factor while picking these stocks is to carefully estimate the right worth of the assets. If you are able to do it, you can pick valuable gems.

“Average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research.” Peter Lynch

Infinity income – When your income from investments is higher than your expenses, you might be able to live off those returns for 10 years, 30 years, 50 years… or forever!

References:

  1. https://stockinvestingtoday.blog/the-investing-style-of-peter-lynch?
  2. https://www.thebalance.com/peter-lynch-s-secret-formula-for-valuing-a-stock-s-growth-3973486
  3. https://goldenfs.org/wp-content/uploads/2020/12/summary-One-Up-On-Wall-Street-Peter-Lynch-2-scaled.jpg

Proactive Mindset

Posted on by

Your mindset is the lens through which you see your life, your relationships and your entire world. 

In investing and building wealth, as in life, it’s important to focus and act on those things in life that you can control and influence, instead of what you can’t. Effectively, your financial success and your success in builidng wealth should not be left to chance.  Instead, you can and must take resposibility for your financial success  and the your financial outcome can be distilled down to being proactive.

Being proactive is about taking responsibility for your actions, behavior, results and growth. Proactive people recognize that they are “response-able.”  They know they choose their responses, behavior, actions and thoughts.

One of the most important things you choose is how you think and what you say. Your thoughts and language are a good indicator of how you see yourself. A proactive person has faith in their abilities and uses proactive language–I can, I will, I prefer, etc, when they speak.

Proactive thinking means always thinking about the future, planning and preparing for what lies ahead. It means taking action today to make tomorrow better. the most powerful thing you can do to adopt a more proactive posture is simply to take action. As you take action, you’ll begin to show yourself that you can have an influence on the your llife and your world.

There are 7 attributes that you can focus on that will help you shift toward being more proactive and successful mindset:

  1. Focus on the future. It’s more important to know what lies ahead.
  2. Take personal responsibility for your success. Always focus more on and plan on what you can do to be successful.
  3. Think big picture. It’s important to consider your ultimate goals and not lose track of what you are really trying to accomplish.
  4. Focus on what you can control. Think ahead and focus on factors you can control will cause less stress and enhace your wellbeing.
  5. Prioritize. You can’t do everything. Focusing on a few big goals will lead to better success than focusing minimally on lots of goals.
  6. Think through scenarios. Focus on likely scenarios and create a plan. By considering the most likely scenarios in advance, you will increase your chances of being prepared and remaining a step ahead of your competition.
  7. Make things happen. Don’t sit on the sideline. Take initiative despite uncertain and the unknown even though you may fail, but you will win more.

“The word proactivity … means more than merely taking initiative. It means that as human beings, we are responsible for our own lives. Our behavior is a function of our decisions, not our conditions. We can subordinate feelings to values. We have the initiative and the responsibility to make things happen.” Stephen Covey

Always remember that you are a product of your decisions resulting from your mindset, and not your personal circumstances or environment.

“To achieve financail freedom, focus your time, resources and energy on things you can control!”

References:

  1. https://www.franklincovey.com/habit-1/
  2. https://becomingbetter.org/the-most-important-mindset/
  3. Covey, Stephen R. The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change. Fireside, 1990.
  4. https://www.inc.com/david-van-rooy/7-ways-to-adopt-a-proactive-mindset.html

Four Secret to Investing Outperformance – Motley Foolo

Posted on by

“The average investor’s portfolio lags the performance of the S&P 500 by nearly 4 percentage points.”

The average retail investor’s portfolio lags the performance of the S&P 500 by nearly 4 percentage points, a DALBAR study shows. The lag is a result of bad behaviors by investors because investors jumped into funds when they were already at a high mark—with lower returns in their future—and dumped funds when they were on the way down, without waiting for a rebound.

The returns received by investors vs. returns earned by funds based on Morningstar data

There are four secrets to outperformance, according to Motley Fool, and the secrets are simpler than you might expect.

  • You take market returns – According to a 2020 study by financial research company Dalbar, average investors earned about 5% annual growth in their accounts over the last 30 years. That’s roughly half the average growth rate of the S&P 500 in the same time frame. You can avoid lagging the S&P 500 index by 4% to 5%. If you invest in S&P 500 index funds, you should see performance that’s only a fraction below the index.
  • You stay calm – The Dalbar report finds that 70% of the average investors’ underperformance occurred in volatile markets. Specifically, most of the investors who performed the worst sold their securities when the market was in crisis. Had they held on to those investments, they would have ultimately fared better. The takeaway here is it’s usually best to stay calm and stay invested.
  • Selectively, you do the opposite of the crowd – When everyone else is selling, it’s often a good time to buy. By following best practices such as not investing in a downturn unless your finances are in order; not expecting a quick return; and investing in a “quality” stock of an established company with low or manageable debt, experienced leadership, and consistent cash flows and profits.
  • You buy and hold  – The Dalbar report also concludes that a buy-and-hold strategy with the S&P 500 would have returned more than the average investor’s portfolio. Buy-and-hold investing is the practice of investing in stocks and funds that you intend to keep for years or decades. To implement this approach, pick quality stocks or funds and hold them indefinitely. You might sell if the company changes in some fundamental way, but you won’t sell because the market’s having a temporary crisis.

Hopefully, these four secrets to beating the average investor sound easy. They are, as long as you can resist making emotional decisions.

The average investor can get anxious about market volatility, and that’s often when shortsighted decisions are made. Even investors who can tune out market noise sometimes find it hard to avoid tinkering with a portfolio that doesn’t seem to be growing as anticipated.

When it comes to investing, patience is a virtue.

References:

  1. https://investor.vanguard.com/investing/portfolio-management/performance-overview
  2. https://www.fool.com/investing/2021/07/22/4-secrets-to-beating-the-average-investor/

Investing Behavior

Posted on by

“Sometimes investors can be their own worst enemy.”

When it comes to investing, we have met the enemy, and it’s us, according to Forbes. Excited by profit and terrified of loss, investors let their emotions and minds trick them into making terrible investing decisions. “As humans, we’re wired to act opposite to our interests,” says Sunit Bhalla, a certified financial planner. “We should be selling high and buying low, but our mind is telling us to buy when things are high and sell when they’re going down. It’s the classic fear-versus- greed fight we have in our brains.”

Understandably, successful investing is challenging, but it doesn’t require genius or years of deliberate study. However, it does require rare investing qualities of faith, self-discipline, patience, and the ability to identify and overcome one’s own psychological and behaviorial weaknesses. Charlie Munger, Vice Chairman, Berkshire-Hathaway, said it best, “You don’t make money when you buy and you don’t make money when you sell. You make money when you wait.” In short, every investor wants to invest well, but the reality is that most investors vastly under perform the market, according to a 2021 Dalbar study of investor behavior.

The study found that individual fund investors consistently underperformed the market over the 20 years ending December 31, 2020, generating a 5.96% average annualized return compared with 7.43% for the S&P 500 and 8.29% for the Global Equity Index 100. The DALBAR Ratio, referred to as the “Behavior Gap”, demonstrates that what investors actually earns from their investments is not the officially listed returns on a financial fund prospectus.

“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” Warren Buffett

When the market is melting up, investors are more eager to jump into the frenzy and participate. When the market is melting down, investors are more eager to flee to the exits and sit it out on the sidelines. Generally, this causes investors to “buy high, sell low” their stocks, ETF and mutual funds.

Despite the many challenges, there are several important takeaways for investors to better understand why they tend to make financial decisions that are contrary to their own best interests and continue to get them into trouble, such as:

  • Checking Portfolios Too Often – The problem is that people are generally loss-averse. They experience negative feelings from a loss that are stronger than the positive feelings they get from a gain. Measuring performance on a daily basis seems certain to drive the risk premium even higher, costing investors considerably return.
  • Trading Too Often – Over-trading is what gets most investors in trouble. When markets get drops, investors tend to bail out of the market. “It’s only natural–literally, our brains are wired this way. “Trading is hazardous to your wealth.”
  • Getting Distracted by Shiny Objects – Invesors are bombarded with stock ideas and some decide that the latest hot stock is a better idea than a stock they own, and they make a trade. Unfortunately, the stock comes to the public’s attention because of its strong previous performance. When this is followed by a reversion to the mean, new investors get burned.

In a nutshell, it is somewhat obvious that investor’s behavior is the biggest factor that drives long-term success. Yet, investors do hold the keys to their own long-term success through regular, consistent, disciplined investing.

Many individual investors hurt themselves by making too many trades for too many dubious reasons. You can be a much better investor when you learn to research and select stocks carefully, to be patient and wait, and to learn to block out the incessant financial news media noise. The takeaway should be that behavior is clearly the single most important variable in the long-term performance results of investor and that you should focus on how not to be your own worst enemy.

References:

  1. https://www.forbes.com/sites/brianportnoy/2016/06/13/a-good-example-of-some-bad-decisions/
  2. https://www.morningstar.com/articles/100594/investors-can-be-their-own-worst-enemy
  3. https://www.kiplinger.com/investing/603153/the-psychology-behind-your-worst-investment-decisions
  4. https://www.forbes.com/sites/johnjennings/2021/07/28/five-ways-to-be-a-terrible-investor/
  5. https://www.dalbar.com/Portals/dalbar/Cache/News/PressReleases/2021QAIB-VAPressRelease.pdf

Loss of Purchasing Power: Is $1 million enough for retirement?

Posted on by

“One million dollars doesn’t buy as many Cadillac Escalades as it used to.”

Today, $1 million no longer buys as many McDonald’s Big Mac sandwiches or Rolex Submariner watches or Ford F150 trucks as it once did thirty years ago.  There’s a good reason for that called ‘loss of purchasing power’ which is a byproduct of inflation. That’s because $1 million of purchasing power in 1970 was the equivalent of nearly seven million dollars today, according to Motley Fool. And as recently as 1990, a million dollars has lost half its buying power since then, meaning you’d need two million today to have the same buying power as you did in 1990.

As a result of normal inflation and loss of purchasing power, $1 million retirement nest egg today definitely will not offer you as comfortable a retirement lifestyle as it did a few years ago or a few decades ago.

Retirement is not an age, but a number

Financial preparedness is more important than reaching a certain retirement age. And, to answer the question of whether $1 million or any amount of money is enough for retirement, the answer depends on what you want your retirement to look like.

It’s important to ensure you have enough savings and income to sustain your spending and lifestyle in retirement. If you don’t have enough money set aside to pay for your retirement, then you may have to delay retiring. And no matter where you are on your retirement journey, you can make your financial number. No matter how little you have or how much time you have left until you want to retire, you can always improve your financial situation. Getting started and creating a retirement plan can carry you a long way.

A 2018 Northwestern Mutual study found that one in three Americans has less than $5,000 saved up for retirement, and 21% of Americans have no retirement savings at all. Overall, Americans are feeling underprepared and less confident regarding the financial realities of retirement, according to the data.

Despite these findings regarding the woeful retirement savings rate by Americans, it’s still not too late to enjoy the kind of life you’ve worked so hard for… and the retirement you deserve.

One of the most important goals for Ameriocans facing retirement is knowing that they can sustain their desired level of spending and lifestyle throughout their lives, with a sense of financial peace of mind and without the fear of running out of money.  For our purposes, financial peace of mind is the knowledge that, no matter your level of savings or degree of market volatility, you are confident that you are unlikely to run out of money during retirement to support your level of spending and  lifestyle.

Taking the financial road less traveled

Conventional wisdom recommend that older Americans should reduce their stock allocation in retirement and move into more safe investments such as bonds and cash.  Although this may seem the less risky road to take in your retirement years, a few experts do not agree.  If you expect to maintain your purchasing power into future, you must stay invested in stocks.

“The idea that a 60-year-old retiree should be investing primarily in conservative investments is an antiquated way of approaching personal finance”, says Jake Loescher, financial advisor, at Savant Capital Management in a 2017 U.S. News article. “Historically, the rule of thumb stated that an individual should take the number 100, subtract their age, which will define the amount of stocks someone should have in their portfolio. For a 60-year-old, this obviously would mean 40 percent stocks is an appropriate amount of risk.”

“A better approach would be to perform a risk assessment and consider first how much risk an individual needs to take based on their personal circumstances,” Loescher says.

According to the article, there are five circumstances when retirees should eskew conventionl wisdom:

  1. The likelihood you’ll live into your 90s or beyond. Since life expectancy is much longer these days and in today’s low-interest environment, you face an increase risk of your nest egg not keeping up with inflation over the long haul.
  2. If you don’t have enough cash for retirement. If you didn’t accumulate enough retirement assets to sustain an expected lifestyle, it becomes essential to decide how much capital in a retirement portfolio you’re willing to risk for the potential upside appreciation.
  3. When interest rates are low. Low interest rates makes the capital risk seem greater than the value bonds might provide due to a loss of purchasing power.  Taking a total-return approach, using low volatility, dividend-paying stocks to replace part of our typical bond component seems the best approach.
  4. If you have estate planning needs. If you don’t depend totally on your investments for income, then your money may be providing a bequest for charity or an inheritance for children.
  5. For historical purposes. The stock market has outperformed all other asset classes over the last century.

In retrospect, retirees will need to allocate a certain portion of their assets to higher-return equity investments to achieve long-term retirement objectives – be it longevity of assets, a desired level of sustainable income, the ability to leave a legacy, etc.

Essentially, the stock market has outperformed all other asset classes over the last century. And studies continue to show that unless you are within three years of retirement, the average variability of stocks relative to their returns is superior to that of Treasurys, municipal and corporate bonds.  Thus, the right course of action is for older Americans to stay invested in the stock market past age 60 which will provide you at least 20 years, on average, to ride out the long-term volatility inherent in equities.

References:

  1. https://www.fool.com/ext-content/is-1-million-enough-for-retirement/
  2. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/worried-about-retirement-pimcos-plan-to-help-retirement-savings-last-a-lifetime
  3. https://money.usnews.com/investing/articles/2017-07-24/5-reasons-to-stay-in-the-stock-market-in-your-60s
  4. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/income-to-outcome-pimcos-retirement-framework
  5. https://money.usnews.com/money/blogs/on-retirement/2011/03/22/why-retirement-is-not-an-age