All Things Financial Planning Blog


Young Investors Key to Beating the Market

Invest Outside the BoxWant to know how to beat the market? “Sure,” you may say, “it’s possible. If I spent my every waking hour researching undervalued companies.”

But, what if I told you I had a fool proof way for those with time to spare to win against the market, without searching rummage shops for discarded crystal balls, or trusting in your uncle’s stock advice? And on top of that, even the most novice investor can use this strategy and win?

Impossible? Read on.

The way to beat the market isn’t by finding the next hot mutual fund manager or dedicating yourself to becoming the next Warren Buffett, it’s simply how you manage your tilt.

Your “tilt” is how your portfolio is invested in the market. You hopefully are diversified over the universe of stocks, but your tilt tells your holdings of large or mega companies versus small or medium sized firms. It also tells if you tend to invest in companies trading at premiums or discounts to the overall market.

More often than not, most retirement investors I meet are “top heavy,” investing in a mix that doesn’t stray too far from the market represented to a higher degree by largest companies, or a mix that resembles the S&P 500 (most people refer to this as the market). This is often the case if you’re investing in a Target Retirement Date fund, or any other fund or funds, or have a managed account.

However, is this the best mix when you’re young and have time to take risks?

By shifting the weights of your portfolio towards areas of the market that tend to have higher degrees of return (and volatility), you may supercharge your retirement accounts when starting out, specifically by using a greater share than the market of smaller companies with more room to grow, and stocks that are trading at a discount to the market (value stocks).

How much better can you do than the S&P 500 by including more small and value in your mix?
The S&P 500 averaged 9.5% per year since 1928. One can not invest in an index, but if you could and had invested $1 in the S&P 500 way back then, you would have had $3,530 at the end of 2012.

Using a similar strategy of owning the stock market, but by shifting the tilt to include more small, and more value, a portfolio that tracks Dimensional Fund Advisors US Adjusted Market Value Index would have averaged 11.7% during the same period. An investment of $1 would have grown to $11,998.

A strategy of tilting more towards small and value stocks will be more volatile than the market, so don’t think this approach will only lead to gains; you still have to master the skill of not watching your accounts rise and fall in the short run. However, while you’re accumulating and have a long time horizon, volatility can be your friend.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI


How Do Options Work?

The Economics of FearWhat if you had had a hunch that Microsoft stock would skyrocket when it introduced Windows 8? Would you have risked purchasing Microsoft stock on just a hunch? Or what if you owned a hundred shares of Apple but wanted to protect yourself from the stock’s recent declines? Well you can do both through options. An option is a standardized contract to either buy or sell a stock at a pre-determined price within a specific date. The key word is option; if you buy an option contract, you have the option, not the obligation, to exercise your contract if it makes financial sense for you at that future date. Option trading has been around for thousands of years and is widely used by many people to either protect the value of an existing investment or speculate on the future movement of an asset. There are two types of option contracts: calls and puts. A call option gives the owner the option to buy a stock at a set price in the future, whereas a put option gives the owner the option to sell a stock at a set price in the future. Let’s see how each one works.

Example of a Put Option:

A put option grants you the right to sell a stock at a set price. An investor buys a put option if she feels the price of a stock is going to decline and wants to lock-in a particular price. Let’s look at a specific example: It is March, and you own 100 shares of Apple stock (symbol: AAPL) that you bought for $400. You think that the price of Apple will decline from its current price of $457 in the coming months and you want to protect your gains. Each option controls 100 shares of the underlying stock, so 1 put option would give you the protection you seek. You could buy a $450 put option that expires in 3 months (May). If the price of Apple goes below $450 between now and May, you can exercise your option and sell your shares at $450. If the price of Apple doesn’t get that low, then you would keep your shares and simply let your option expire.

Example of a Call Option:

A call option grants you the right to buy a stock at a specific price. You would buy a call option if you think the price of a stock will rise within a given time and you wanted to benefit from the expected rise. Continuing with our Apple example, assume you don’t own the stock, but you think that Apple stock will rise in the next couple of months. You could buy an option that expires in May that allows you to buy Apple stock at $500. If the price of Apple rises above $500, you could exercise your call option and buy the stock at $500. Again, if the price of Apple does not rise by the May expiration date, you simply let your option expire.

As you can imagine, options can be useful for certain investors who are interested in: protecting a large gain; benefiting from a stock’s rise/fall without actually owning the stock; and in some cases, diversifying. While there are only two types of options (calls and puts), there are a multitude of strategies an investor can employ by combining calls and puts.

Though it may seem that options as part of your portfolio is a no-brainer, this article is simply an introduction to options. It is important to understand that options are quite complicated and can be rather risky. Options should only be used by experienced investors who really understand the mechanics of options – note, there is no easy money in trading options. Some people brag about making a lot of money in options, but be careful because option prices move very quickly, and while you can quickly make a lot of money, you can also easily lose a lot of money in just a single day.

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA


When to Rollover Your 401(k)

The financial industry wants to make sure you are fully aware you left something behind at your old employer. That retirement account that is “just sitting” there needs to be moved over to an IRA for you to invest in someone else’s mutual funds or investment products.

Generally speaking, it makes sense to rollover your 401(k), 403(b), or other retirement account to an IRA when you retire, or for any other reason are allowed to move your funds. The reasons to rollover a retirement account include:

  • Control. You no longer have to live with the changes your investments that are dictated by your employer.
  • Diversification. Most retirement accounts lack in their ability to diversify over all asset classes an investor may want. By rolling over your account, you can access the world of investment products. It used to be said that some (though definitely not all) retirement plans may provide institutional level pricing for investments that otherwise would require an investor have a significant amount to buy into a particular fund (hundreds of thousands of dollars, if not millions).

While that still may be true if you are concerned with having access to certain investment managers, most low-cost index funds today are available at reasonable minimum investment amounts.

However, there may be reasons to not rollover all or part of your account. They include:

  • You need access to the money before age 59½. IRA accounts are subject to a 10% early withdrawal penalty before age 59½ whereas your retirement account may allow access without penalty as early as age 55.
  • Have a significant amount of money in company stock that has appreciated above your purchases. There may be tax benefits to not rolling over company stock, if it has appreciated greatly and if you own a lot of it.
  • Possibly better creditor protection. A 401(k) is protected from lawsuit, while state laws can vary on the protections provided to IRA accounts.
  • If you expect to do a Roth Conversion with after-tax IRA accounts. If you have been accumulating after-tax IRA money, and plan to convert those funds in the future, it may be in your benefit to do so prior to rolling over a retirement plan.

Clearly every individual’s decision to rollover a retirement plan requires a review of their personal circumstances, so be sure to discuss your rollover potential with your financial and tax advisors before assuming a rollover is the best move for you.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, M


Invest in Your Company Stock Like an Executive

Have you ever worked at a job that gave you access to more of something than you could ever want?

You might be a pizza lover, but let me assure you from my own experience that a few weeks of full time work at a pizza shop will lessen that craving quite a bit. The same feeling can be had with any profession you may love from the outside, but find that having access to too much of whatever it is lessens the allure.

I imagine that this feeling can be the same with executives of corporations, though they tend to not only have a great job and perks in their businesses, but also have access to company stock in ways the average employee does not.

When I look at how successful executives invest in their own companies – these individuals that have stock options, stock grants, restricted stock, and a myriad of other plans that incentivize them to be owners and have a stake in the company’s success – it can be somewhat surprising to watch their behavior towards owning stock and how it can be different than the average employee.

They own stock (and often times lots of it), but perhaps it’s similar to having ‘too much’ of something that makes you appreciate what ‘it’ is in different ways.

I find executives who own stock in the many ways they do often exhibit the opposite behavior of regular employees when it comes to holding stock in the company they work for.

Regular employees often:

  • Hold too much of their company stock as a percent of their investments,
  • Have a tendency to think the stock will do better than other similar companies,
  • Hold onto it based on emotion both during goods times and bad, and
  • Generally want more rather than less.

While it’s true many executives have minimum stock ownership requirements that can result in their holding a substantial amount of company stock, they don’t often go out of their way to buy substantial amounts, or gamble on where the stock may or may not go. Many look for opportunities to sell and diversify their holdings. The first move many make at retirement is to sell stock they previously were restricted from doing so and creating a diversified portfolio. \

We want to feel like the stock of company that provides us with an income and our benefits will do well, but attaching those feelings to any stock can be a HUGE investing mistake! Investors who do this carry significant risk, as not only is their income and company benefits based on the company, but so is the success of their investment plans!

Executives that already have more company stock also seem to appreciate diversification over many companies other than just their own. While we often think we have great knowledge about how a new product will impact a company’s stock performance, business leaders that have been around know it’s not what they think they know that will determine the stock price, but it is what they don’t know about the event that can drive the stock price up or down.

If you are an investor in stock of the company who employs you, think as if you are investing like those that are successful and diversifying your risks, or if you have a tendency to invest in your company based on emotion.

A rule of thumb to invest by: Never allow any investment to be more than 10% of your total portfolio.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI


Are You Holding? How Long Should You Hold Equity Securities?

Are you holding equity securities? How long do you plan to hold them? Will you hold them overnight? Will most of your current securities still be in your portfolio in February 2021?

There have been a couple of articles recently stating the average period of holding stocks was declining to 7 months or less. This is a concern for a number of reasons but most importantly because you are less likely to realize the value of the security with a short holding period.

In the 1990s the media was reporting about “day traders,” people who would purchase securities with the expectation that they would sell within the day for a profit. For these purchasers, owning a mutual fund was too restrictive because mutual funds are only priced once per day. Stocks were the way to go because you get a new price quote with every purchase.

I never thought day trading made sense. I lean more toward fundamental analysis where you look for value in the company’s sales, sales growth, assets, etc. I recently reviewed a company stock report that said the shares last traded at $20.72 and that the 12-month target price was $24.00. A report on a different company said the current price was $22.95 and the 12-month target price was $20.00. The analysts reviewed the shares for a one-year holding period.

But the common recommendation is that you should “invest for goals exceeding five years and save for goals shorter than that.” Day trading and investing with a one-year time horizon conflict with that advice. Of course, while you would like your investments to go up all the time you do not expect it. You knew, in January of 2008, that you were not going to use your retirement funds for ten or twenty years so you stayed invested in the market. You continued to know that, perhaps with a little less certainty, in January of 2009. You have been rewarded for that faith in the long-term return of the market.

Perhaps you were not so faithful (who can blame you with all the jabbering going on around you) and you reduced your equity exposure. Later you got back in or you are getting back in now. You know that the price of your securities does not matter except on the day (or days) you buy them and the day (or days) you sell them. The long-term trend for equity securities in the United States is up. By staying invested, you now know you can take advantage of that long-term trend.

So you should be planning to hold securities until you meet your goal. You may not hold a particular security that long. Perhaps you decide you made a mistake in buying the security. Perhaps you made the right decision to buy, the security has already reached its potential and now has limited additional prospects (for example, Circuit City was one of the great companies highlighted by Jim Collins in Good To Great because, among other things, it returned 18.5 times the market return from 1982 until 1997 but the company is now defunct). Perhaps you did not make a mistake but the environment has changed so the conditions that existed when you bought the security are no longer in place (think buggy whips and VHS tapes).

To uncover circumstances that might make you sell the security before you achieve your goal, you will want to monitor your investments. When you monitor your investments you will compare the investments to the reason you originally purchased them. You may want to compare the investments to other opportunities in the market (although this one might tempt you to buy bank CDs when the equity markets go down 40%).

Barring changes in the investment fundamentals, you should hold investments for the long term. You might even consider the holding period recommended by Warren Buffet. Mr. Buffet has been quoted to say, “Our favorite holding period is forever.”

John Comer, CFP®
Comer Consulting, LLC
Plymouth, MN

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Shedding the Pain in Your Assets

Most of us make transactions in our financial lives on a relatively frequent basis and then at some point as we organize everything in the planning process, we realize we’ve been collecting and carrying assets that are what might be called ‘nuisance’ assets. They made sense at the time we took them on, but looking at it now, they are just kind of hanging out there on their own. Let me share a few examples:

When my father-in-law passed away, his estate included 10 acres in near Elko County, Nevada, that he took on in a trade for some stock he no longer wanted. There was a side of beef involved as well as I recall but that was consumed the winter of the deal many, many years ago. These 10 acres were to go next to my mother-in-law who had no desire to keep them. Ten acres in northern Nevada were not worth very much 20 years ago and are not worth much more today. But you never know, so the solution we came up with was for her to quit claim them to our two sons who were about 8 and 10 years old at the time. A quitclaim deed is a term used to describe a document by which a person (the “grantor”) disclaims any interest the grantor may have in a piece of real property and passes that claim to another person (the grantee). A quitclaim deed neither warrants nor professes that the grantor’s claim is valid. So my mother-in-law is free of this nuisance asset and my sons can hang on to 5 acres each for the next 40-50 years and then dispose of it in similar fashion if it remains valued low or enjoy the gains should the value of the property rise.

Many years ago, it was fashionable to buy your child a single share of a recognizable stock for them to both follow and learn about the stock market. We did this and the boys got a few shares each of Coca-Cola and Wrigley. Every Christmas, Wrigley would send a huge box of fresh chewing gum for each of them as stockholders. But last year, Mars, the candy company, bought Wrigley and not only did the boys not receive any chewing gum, the ensuing paperwork reminded us that we had straggling shares of stock that needed attention. These days, the boys have shareBUILDER® accounts where they hold individual stocks they want to own. So in an effort to clean up their finances, we sold the Coca-Cola shares that were in electronic form. They will have to visit a discount broker in person to sell the certificate shares. The boys received forms for the Wrigley stock back in the spring of 2009 to easily complete a cash exchange by mail. They promptly ignored these and a call to the company that handles those shares resulted in a new form being sent to each of them. They’ll have to sign the form, send the certificates back in with it and send it all registered mail. They didn’t realize their investment of a few shares many years ago resulted in about $1,000 of shares today so now that they know, they seem a little more anxious to get the form signed and sent.

The last bit of clean up in this new year is getting my account closed for a prepaid toll program in another state. It’s not an account I get billed on – just one that puts money on the account so I can fly through toll booths without stopping but my car has my current state’s prepaid pass on it so I don’t need the other one anymore and haven’t needed it for six months. I just never got around to closing the account and getting my refund. When I called the program to close the account, they put $66.99 back on my credit card which will certainly pay a few tolls in my new state. 

I can’t explain why inertia takes over for in some cases decades on these outlier details in financial planning but now that we’ve taken all the steps above, there’s some pocket change around as well as the knowledge that we are now being intentional about all our money; even the little bits that add up.

bonnieHughesBonnie Hughes, CFP®
American Capital Planning, LLC
Reston, VA / Miami, FL


Beware Barnyard Rules Investing

In early grade school, my next door neighbor and best friend Mike and I were absolutely inseparable. Any free time you could find us engaged in all varieties of physical games — from basketball, football, to roller hockey. You name the sport, and we could be seen trying to make a one-on-one game of it in our parents’ yards.

Often, Mike’s older brother would challenge us to a game, any game, of two-against-one. Inevitably, when the tide turned against him, anyone within a hundred yard radius could hear a shout of “Barnyard Rules!”  This was our warning that the accepted rules of the game were off. The law of the jungle prevailed.

Having grown up in the suburbs of Detroit without a farm within miles, to this day I can’t fathom where he came up with the term, Barnyard Rules. To me, it has always meant using whatever advantage you have to get the job done in the short-term, ignoring the principles (the rules) of the game, and the consequences (generally physical injuries) of breaking them. 

Barnyard Rules has come to mean even more to me as I’ve read Dr. Stephen Covey’s books on principles. He frequently uses the example of life on the farm to describe what principled living means. Farmers do not simply declare ‘Barnyard Rules’, and harvest a higher yield of crop. Principles might best be described as things that are, simply because they are.

Likewise, a principled investing plan requires accepting the fundamental truths of markets, your role as an investor, and the knowledge that speculative investments that would tempt us out of greed, or fear, to ‘win’ the game, are simply the ‘barnyard rules’ seeking to gain hold.  

Reacting to the downturn, many investors have shed principles. They believe they are adjusting to ‘new realities.’ But in truth, they are ignoring — consciously or not — time-tested sound investment principles. Those include seeking higher returns and yet ignoring the risk, giving into fear or greed and pursuing speculative investments, and not maintaining investments whose purpose is to provide safety and stability, despite their yield. It is true that we have endured a far worse than expected investing “season.” And yes, systematic economic and financial threats, just like hurricanes or droughts, could always bring hard times to the farm again.

But, ask yourself:  Is your objective in the new strategy investing for sustainable crop yields, year in and year out? Or are you trying to scratch out a little more yield this year, to next year’s detriment? Or are you running for cover because the sky looks threatening?

Interestingly, I see many investors beginning to ask the same questions that burned them before the downturn — where can I get the most yield; what investment will generate the highest return; should I buy a risky stock; who has the advantage — and how can I get a part of it?

Thanks to Morningstar’s monitoring of investor returns, we can see the consequences of this line of thinking.

For example, one of the best performing domestic mutual funds over the last 10 years, CGM Focus Fund (CGMFX), has a 10 year average annual return (through 11/30/09) of 18.79 percent — handily beating the S&P 500. However, due to the nature of many investors that such performance attracts — i.e. those impatient investors looking for spectacular returns — the average investor in the fund fared dramatically worse. Specifically, the average CGM Focus Fund investor lost an average of 11 percent over the same time period.

On the farm there are no shortcuts for long-term success. Shortcuts — failing to invest in proper equipment maintenance — only create long-term problems. The Barnyard Rules always end in pain and loss. Farms would not produce if their farmers dumped principles. Investors that continuously leave investing principles for the latest pitch or product likewise should be concerned about their prospects for achieving their long-term goals.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Northern Financial Advisors, Inc
Franklin, MI