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All Posts By Michael Lecours, CFP®

The Usefulness of Market Outlooks

“Who knows” was my answer when I was recently asked about my own outlook on the markets for 2018.

Over the last few weeks, my inbox has been flooded by dozens if not a hundred market outlooks by prominent research firms, economists, and strategists.  And they are all completely different.  Some see significant stock market appreciation while others see little to no growth. Some see more growth in the US than abroad.  Others see more growth in the foreign markets than in the US.  Some see rising rates to be an issue.  Others do not.  And some even predict a negative year for the stock market. Chances are they are all wrong!

They are interesting to skim through to understand what they believe are the biggest issues to occur in 2018.  But it’s just as fascinating to see what is not included in their outlooks.  There are even some research groups that make a living by reading through old Market Outlooks and calling out all the wrong predictions.

Think back to this time last year.  Trump was just sworn into office and it seemed like everyone was waiting for some kind of market correction to occur.  But it didn’t!  Volatility is now way down.  Markets have shrugged off much of the bad news that has come out in recent months (such as North Korea).  Any market outlook that expressed these kinds of views would have been quickly dismissed if written in early 2017.

It’s a reminder to stay focused on your investment strategy.  There is a lot of noise that distracts investors and all to0 often leads them into making poor investment decisions.

The Optimists View of 2017

So often the headlines are dominated by bad news.  The headlines capture our attention.  They scare us.  They make us feel less safe.  But the facts simply do not support this view.  In reality, the world shows remarkable signs of progress.  Here are three amazing stats that just blew me away:

 

People living in extreme poverty decreases by 217,000 people per day!

325,000 more people are able to access electricity every day!

300,000 more people get access to clean water every day!

Source.

Diversification Lessons Learned From Venezuela and Saudi Arabia

This winter we are excited to introduce you to our winter intern, Armani J. Nieves. Armani is a freshman at Bryant University and is majoring in finance. He first became interested in the world of finance in middle school when he started purchasing stocks. Armani envisions himself working with people to support them in achieving their financial goals when he receives his undergraduate degree.

The following post is written by Armani Nieves:

Inflation, poverty, starvation are words that are synonymous with the economic situation in Venezuela. In addition, investment, growth, diversification are words that are almost synonymous with the economic situation in Saudi Arabia. How can two countries, in a world of overall growth and prosperity, vary so much? It all stems from asset diversification.

In 1970, the price of oil skyrocketed and increased to $120 a barrel. As a result, this caused Venezuela to become the richest country in Latin America. Venezuelans lived lavish lifestyles and enjoyed earning high wages. However, when oil decreased in in the 1980s, inflation rose 80% in this country.  The temporary adjustment to this problem was to cut government spending as well as open financial markets. Although this supported an increase of GDP from -8.2% to 4.4%, employee wages continued to remain low while unemployment remained high. This was only a warning of the dangers when countries predominantly invested in oil.

In the summer of 2014, a strong US dollar and higher output of oil resulted in the price of oil decreasing. Now, Venezuela experiences inflation like never before. In 2016, Venezuela experienced a 2,000% inflation. Although the price of oil is steadily rising, it will take a long time for Venezuela to recover as a result.

On the other hand, Saudi Arabia has undergone a massive initiative to get its country’s economy not to rely on oil. Saudi Arabia started this initiative after observing how dependency on oil may negatively impact a country’s economy. Saudi Arabia is diversifying its investments from oil to real estate, technology, and startup companies. Furthermore, they have been developing new solar farms. Research labs have been created in the King Abdulaziz city of Sciences and Technology to study and improve solar technology. They have invested over $50 billion into producing wind and solar projects by the year 2023. Saudi Arabia is pushing to become a global player in the renewable energy market.

From examples provided with both Venezuela and Saudi Arabia, we learn the lesson of not “putting all our eggs in one basket”. Venezuela put predominantly their “eggs in one basket” cited for oil. However, when oil lost its value, this country lost a lot of its financial resources. On the other hand, Saudi Arabia placed their “eggs in various baskets.”  So, when oil prices lower again in the future, Saudi Arabia will be ready and may continue to profit in other manners. As a result, it is important that we do not put all of our financial resources into one stock. For example, if we place all our financial resources into the technology or healthcare sector we could be taking on a significant risk. If healthcare were to have a bad year, your portfolio could be negatively impacted. It is always important to invest in different sectors. The example of Venezuela and Saudi Arabia can serve as a good reminder of the importance of diversification – not just at the individual level, but at all levels of investment (including government investments).

The Art of Investing: Introduction

This post kicks off a series that delves into an important debate unfolding in the finance community – is there an art to investing or is there a science to investing?  Often times, this leads to a lot of other debates such as the active versus passive investment debate.  It should come as no surprise, that we believe in both.  There is a role for art in investing and that it works in tandem with the science of investing.

What makes this series especially interesting for me is that I am joined by my colleague, Cliff Jarvis.  He has been a financial advisor with Ohanesian / Lecours for over twenty years and brings a wealth of strategic insights and perspectives that round out our investment committee.   So let’s delve into it with Cliff providing an overview of the art versus science debate:

Many years ago economists developed mathematical models to optimize investing. Sounds simple. But is it really in a world of changing rules, unexpected events, and evolving individual needs? The following series explores why investing is more than math and why a constantly changing macro-environment and evolving personal circumstances demand a human touch that is set apart from mechanical empiricism. Our belief is that investing is an art not just a mathematical science. The following series starts with the world as it currently is and, hopefully before the series ends, will enhance the investor’s ability to successfully cope with investing.

My Take On “What I’ve learned after 14 years at the most ‘depressing’ job in America”

This article has been shared widely since it was published a few days ago.  I appreciate the perspective the author shares as a journalist who’s covered personal finance topics for 14 years.  He has had to share many sad truths with his readers about how the majority of Americans are not saving enough for retirement, and how an increasingly complicated field of products and services leaves many Americans confused.

I agree with many of his comments and a lot of his lessons.  I have a different takeaway from the article.  It’s more proof that personal financial planning is more challenging than ever before and a trusted financial advisor is needed to help navigate the obstacles and set a proper course for people to reach their goals.

With all the tools and products that exist in the market, it is now possible to build a truly customized one-of-a-kind plan to help a client reach his or her financial goals.  Annuities may be a bad idea for most investors, but for some, an annuity is exactly what is needed.  Same goes for a reverse mortgage.  Most people will never have a need for one.  But for a select group of people, it may be a much-needed lifeline.

When someone gets their paycheck, they have lots of decisions on how to spend it.  As a society, we spend too many of those dollars in the present and save very little for the future.  Americans, in general, opt for things like a daily cup of coffee without realizing how much it adds up in the future ($3 a cup every workday for 30 years totals $23,400).  They make these decisions all day long without realizing the kind of impact this has on their future.

This, again, is where a financial advisor can help.  We often help to coach our clients in deciding how to pay off debts and nudge them into saving a little more for retirement.  In a sense, we are advocating on behalf of their future self.  And when market volatility returns, we are there to coach them to stay the course with their investment strategy.

To summarize, Roberts article provides a great perspective. I just wish he talked about how a financial advisor can help to provide guidance on many of these decisions that most Americans struggle to solve on their own.

How to Protect Yourself From Identity Theft

In the weeks that followed the Equifax data breach, our office received about a dozen calls from clients about what should be done to protect themselves from the data breach.  It’s understandable given how much it has been in the news.  But the shocking issue to me is that I received 5 separate phone calls/emails from clients who experienced some sort of identity theft related to their email system.

While so much of the media is concerned about the big data breach – Equifax – there are many other vulnerabilities that could cause hours and hours of frustration.  Here are a few pointers to consider:

  • There is no simple solution to protect yourself.  Freezing your credit scores can help in some areas. Using LifeLock can help.  But there is no single solution to fully protect you.
  • It’s more than just accessing credit.  Email hijacking is a huge issue, where hackers pretend to be you.  Make sure your email password is secure.  Opt for two factor identification, if available. Be suspicious of every email, even ones coming from people you know. When in doubt, call to confirm that the email is valid.
  • Watch the IRS.  Don’t forget that hackers can file fraudulent tax returns on your behalf and collect a bogus refund.  You will only discover this problem when you file your own tax return. If you’ve had a cyber-security event, tell the IRS with Form 14039.
  • Protecting yourself needs to be thought of as an ongoing task.  How can you better protect yourself?  How can you make your information even more secure?  You need to stay one step ahead of the hackers and the bad guys.
  • Most of what I read over simplifies the issues that must be addressed to protect your Identity.  This is a great resource to stay on top of Identity theft issues and how to protect yourself…. And what to do if you become a victim. http://www.idtheftcenter.org
  • For more on how privacy and cyber-security, see privacyblog.com by Dick Eastman.

A 28 Mile Day Hike with Finance Nerds

In what is going down as the weirdest and best experience of the year for me, I recently completed a 28-mile day hike with 60 other finance professionals to remember the soldiers who had fallen in battle.

Among those who I hiked with was a journalist from the New York Times who covered the event.  He does a great job describing the event and the asset management firm, Alpha Architect, that helped to organize our squad of 60.

Also in our squad was Patrick O’Shaughnessy, a prominent blogger and podcaster.  His recap sums up my own experience and is well worth the read.

What started off as small talk about our own profession and thoughts about asset allocation, slowly moved to more personal and deeper conversations.  With hours and hours of time on the trail, many conversations got deep.  And as Patrick mentioned in his blog post, he had deeper conversations with practical strangers than with people he has known for years.  I felt the same way and am glad I was not the only one who had that experience.

Never in my life would I have imagined doing such an event with so many strangers.  And now, I can’t wait to be part of it again next year.

A Simple Strategy To Save a Million Dollars (And Why It Is So Tough)

Over the last few years, I have worked with a lot of young families to plan how they will save for retirement and fund education costs for their children.  Their problem was simple: they knew they needed to save more but they didn’t know where to trim their budget.  Or their budget was already trimmed if a spouse was staying home to raise children and they lived on one income.  They didn’t know how to get started.

One solution that I brought up was to earmark the majority of any future raises (or future income from the spouse not currently working) to be directed into savings (college, retirement, other).  On paper and in concept, it makes a lot of sense.  This post shares the experience of someone who carried out the same kind of strategy for many years.

The problem that ends up holding many people back from reaching their goal with this kind of strategy is a concept called Lifestyle Creep or Lifestyle Inflation.  This occurs when someone receives a raise and instead of immediately increasing their 401(k) contribution amount, they put it toward something to make their life more enjoyable.  It could be an improvement to the house, an extra vacation, a new car, or just eating out more frequently.  The “needs” of today end up outweighing the “needs” of tomorrow.

Turns out, there is an evolutionary reason for this mindset.  In the early days of our existence, it was feast or famine. Our ancestors adapted to their reality by consuming as much food as possible when it was available so they could survive when food was scarce.  Unfortunately, we have not yet evolved to shed that mindset from our thinking.  Short article here helps explain the concept.

The solution to this evolutionary crutch is to systematically and regularly increase savings rates.  I work with some clients where we are increasing the rate at which they save two or three times a year.  Mentally, it is easier to increase your savings rate by an extra $100/mo every few months rather than increasing the savings rate by $400/mo every year.

But even then, that solution doesn’t make up for good-old-fashion discipline.

How Retirement Planning Goes Off Track

Money Magazine’s August issue had a very good (but perhaps too short of an article) on five common reasons someone’s retirement dreams never actually become a reality or become a reality much later than originally planned.  I have summarized the major derailing actions (or inactions) from the article but have added my own perspective for each:

 

  • No periodic check-ups.  We have seen clients with large portfolios, a clear indication that they have saved a lot over their working career, but may be making some other large mistakes.  They range from concentrated stock positions and uncoordinated investment strategy to unrealistic expectations about spending in retirement and life expectancy in retirement.   We liken the financial planning process to a ship leaving port.  When a ship leaves port, it has to exert a lot of effort to get the ship pointed in the right direction, just like one does when starting a financial planning process.  During the voyage, the ship must make hundreds of course corrections along the way to arrive at the destination. The same goes for a financial plan which may require tweaks each year.  The key to a successful financial plan lies not in the initial planning process, but in the periodic check-ups that occur.
  • A lack of a disciplined portfolio strategy.  This brings to mind two different issues that we see.  First, we see clients who think they have a diversified portfolio of mutual funds.  But in digging into the funds themselves, we see a lot of overlap of the underlying investments.  There was one case in which the client had two investments and thought he was well diversified.  When we looked at the two positions, we quickly realized that they were each a passive index trying to replicate the exact same index.  There was no diversification at all and served as a big wake-up call for the client.  The second issue involves clients who cannot stomach the down turns in the market and sell out when the markets become volatile.  I’ve written about that at length.  To help, we have begun using special tools to quantify a client’s risk.
  • Plan to delay retirement.  The recent trends show people working longer and longer into retirement.  The benefit is that the retiree will not have to tap his investments as much as he might if he retired at 65 (or earlier).  But in some cases, clients put off saving knowing they will work later into their retirement years.  What happens if an injury or illness forces them out of work sooner than they planned?  We see this happen all the time.  In fact, the one study suggests about half of all retirees leave work earlier than planned.
  • Saving and spending mindset.  Someone may save all her life for retirement.  It takes years of dedication. It becomes a habit to save.  But then comes the day when she no longer needs to save. Upon retirement, she must learn to switch gears and turn savings into a stream of income.  Not knowing how that 401(k) will impact her income, or when to turn on social security are serious issues that must be decided.  In my experience, the transition from saving to spending will take a few years to adjust to with proper guidance.

In some cases, we have seen retirees come to us with unrealistic expectations of how long they believe their savings will last in retirement. The difficult conversations must begin about what must be done.

How Prospect Theory Affects Investment Decisions

Daniel Kahneman, a 2002 Nobel memorial prize recipient in economics had stated that people might drive all the way across town to save $5 on a $15 calculator but wont drive across town to save $5 on a $125 coat. Even though the end result is the same, more people would rather save $5 on the cheaper item because they believe the significance of the amount their saving is greater.

Similarly, Richard Thaler had conducted an experiment where students were told they had just won $30. They were then offered a coin flip, where they would either win or lose $9. 70% of the students chose to do the coin flip. Other students were told they had also won $30 and then offered a different coin flip, this time they were told that after the coin flip they would either have $21 or $39. Even though there was a nine-dollar difference in both scenarios, this time only 43% of the students had to choose to do the coin flip. According to the results of this experiment, most people wont comprehend the entirety of the situation unless they are specifically told the parameters of the end result.

The average person has an entirely different attitude towards risk associating gains compared to risk associating losses. An example of this would be the joy of gaining $500 compared to the joy of gaining $1500 and then losing $1000. Even though the end results are the same, most people would prefer the gain of $500. This irrational way of viewing gains versus losses is illustrated below.

 

Most people will be more devastated with a loss than happy with a gain. The best way to avoid this is to understand your own risk tolerance. Before you invest into something ask yourself how much you would be okay with losing. New tools have been incorporated in how we help our clients assess their own risk tolerance by asking questions very similar to the ones that Kahneman and Thaler.

Try it for yourself

 

*Special thanks to Edward Butterly for his contributions to this blog post.