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Comparing Chess To The Stock Market And The Election

The average chess player can see 1-3 moves ahead in a game of chess. But a grandmaster chess player can see 10 moves ahead and sometimes up to 20. More interestingly, when they look at the board they see shapes and patterns not number of moves.

Playing chess is like connecting the dots between the stock market and the election. The media, think tanks, special interest groups and the talking heads are focused on the implications of the election on the stock market and the economy. If Trump is elected, the pundits are predicting one outcome and comparing it to the hypothetical outcome if Clinton wins.

They try to paint a very clear, logical picture of the how one policy will help America and the economy. But the oversimplification does not properly consider the hundreds or thousands of variables that affect the economy or stock market. While these experts try to account for as many variables as possible, it’s simply impossible for them to do so with any sense of reliability or accuracy.

These supposed experts see one set of moves and believe that’s how it will play out. If they were playing chess, they would be an amateur chess player who could only see the logical progression of their agenda if their opponent performed exactly as expected. And when their opponent did something unexpected (which usually happens), their plan would be thrown out the window.

When it comes to listening to these experts talk about the effects of the stock market as a result of the election, keep in mind that there are thousands of variables that will affect the stock market. In fact, there is a lot of research that suggests the election has no effect on the stock market in the long term.

The Election, Your Investments and Why The Experts Get It Wrong

It didn’t take long for someone to make a connection between Clinton’s health scare on Sunday and the stock market.

How Hillary Clinton’s Health Scare Threatens The Markets

The premise is that the markets have always expected Clinton to win the presidency, but with a possible health issue it could hurt her chances.  It leaves the door open for Trump to win and the markets will become volatile.

The article goes on to suggest that certain industries and asset classes will do better (or worse) with Trump. For example, Trump has suggested the creation of a wall along the border of Mexico which will require construction crews and new infrastructure.  The journalists suggests that investors reevaluate their portfolio now.

On the surface, the story seems reasonable:  There is a new problem (Clinton may not sail into the White House), there is an alternative result (Trump wins the election), and there are implications of that result (The stock market could be affected).  The logic seems reasonable – It presents a clear and simple narrative.

In reality, the logic is broken.  It oversimplifies all of the concepts in politics and economics.  It does not take into consideration of all the nuances and complexities that exist in our world. Drawing a connection between Clinton’s health and your investments is a real stretch.

So why are articles like this so common? It deals in part with our desire to understand implications.  We think of issues in terms of “cause and effect” just as the article illustrates.  Our brains are wired to think in these terms because it creates a simple narrative for us to remember. But the sort of analysis needed requires thinking in terms of correlation and probabilities.  These are complicated forms of analysis and their results are not specific and concreate in a way that the average investor would find useful. It’s completely contrary to the “cause and effect” approach.

 

The Secret to Growing Your Retirement Account

Stay the course. That’s the secret.

The pain we experience when we see the account balance drop is much greater than the joy we feel when we see the account balance increase by the same amount. Imagine you have a retirement account with $500,000 in it and it declines by 20% to the end the month at $400,000. That can be scary – you’ll most likely question your allocation and investments. Unfortunately and in too many cases that is exactly what investors do: The sell out of their losers and buy something inappropriate for themselves.

There are still many investors that are still sitting in cash after selling out of the stock market during the worst moments of the recession of 2008.

Fidelity has some data that backs up this statistic

How To Retire in 4 Years

The story about a couple’s desire to retire in 4 year is compelling.

They have applied many of the important financial planning concepts:

1) The plan to live a very modest lifestyle in retirement – They plan to need 30,000 a year in retirement.
2) They have cut and reduced many of their expenses. They realized how freeing it is to not have a large mortgage.
3) They plan to work part time. Retirement is being redefined. Working part-time, doing a fun job, is becoming common.
4) They have a plan. While I have not checked their math, it’s appears they have thought through many of the common issues retirees face.
5) They are diversified. Between side jobs, investments, and real estate they will have multiple sources of income available for them.

Tracking Your Asset Allocation Across Multiple Accounts

Recently we introduced The Money Management Tool to help clients better organize their financial lives. The tool has lots of features and we will occasional explain how some of the features are being used by our clients (or should be used) to help them reach their financial goals.

This post will deal with a prospective client who has many accounts and struggles to keep track of how they are invested.

Situation: A prospective client couple approached us looking for help managing his investments. They had multiple investment accounts held at different institutions. And in most cases, the accounts could not be moved or consolidated.

Problem: They struggled to understand what they really owned. They thought they were diversified by owning several different funds, but in reality they owned many passive index funds that tracked the same index. Even though the fund names were different, the underlying investments were all very similar.

Solution: The Money Management Tool could be used to connect all the accounts together. After establishing the connections between the tool and their accounts, they would be able to see a total asset allocation across all their account. We were then able to work with them to adjust their allocation.

asset allocation

Using The Money Management Tool: Setting a Budget

Recently we introduced The Money Management Tool to help clients better organize their financial lives. The tool has lots of features and we will occasional explain how some of the features are being used by our clients (or should be used) to help them reach their financial goals.

This post will deal with prospective client who needed some help staying on budget.

Situation: A young couple with two children asked us for guidance on getting a handle on their debts. They had multiple credit card balances with obscene interest rates, a result of unexpected bills. They were spending more and more of their income to make debt payments instead of saving for retirement. They were slowly realizing that they would not be digging themselves out of debt anytime soon and needed a plan to get back on track to save for retirement.

Problem: During the initial meeting, we discovered a significant amount of their take-home pay was going toward non-essential expenses, such as the most premium cable package available and eating out for lunch every single day.

Solution: Directing savings originally intended for retirement to pay down credit card debt is an acceptable strategy in some cases. But when there is a lot of non-essential spending occurring, a tightening of the belt should be the first strategy. In this case, the client could connect their credit card account to The Money Management Tool and analyze their spending habits to see just how much is spent on restaurants and entertainment. They could then develop a budget to help them stay on track.

budgeta

If you or someone you know needs help getting their financial house in order, this tool can help.

Contact us today to get started.