market turmoil: why you shouldn’t care while we wait for folks to log on, try looking up the...
TRANSCRIPT
Market Turmoil: Why You Shouldn’t Care
While we wait for folks to log on, try looking up the “expense ratios” of the funds you are currently invested in.
Would you rather….
Have 3.5 million dollars up front?
Start with a penny and have your balance double every day for one month?
or
Where my approach/advice comes from
Although I have a passion for these topics, the views expressed are not intended to serve as a forecast, a guarantee of future
results, investment recommendations or an offer to buy or sell securities. This should not be interpreted as tax advice and please consult your personal tax advisors if you have any questions.
Housekeeping
@FutureAdvisor
Who I am
Who I’m not (Disclaimer)
Topics Behavioral Finance
Understanding your current situation
Credit Scores
Retirement, the time value of money, & 401k / 403b
Investing 101
Savings accounts & fees
Love & Money
Home ownership, mortgages, refinancing, & renting
Tax strategy
Life insurance / Health Insurance
Tactical next steps
Happiness & Wealth
Wealth
Happin
ess
Why we need an automatic plan…
People are not rational with financial decisions (susceptible to framing, prospect theory, anchoring, choice architecture, & the default option)
Study: the more often you check your portfolio the worse you do
We don’t like losing! (Prospect Theory) (DMR) Commitment devices!
Google’s anchoring experiment (3% increase)
Why we need an automatic plan (cont.)“Save More Tomorrow” (12% vs 4%)
Allocation decisions & 1/n:
Scenario 1:
Fund A: StocksFund B: Bonds
54% allocation to stocks
Scenario 2:
Fund A: StocksFund B: ½ Bonds ½ Stocks
73% allocation to stocks
Scenario 3:
Fund A: ½ Bonds ½ StocksFund B: Bonds
35% allocation to stocks
“I’ll worry about retirement later…”
Time Value of Money is HUGE!
Frick & Frack brothers
The “Rule of 72”
$$ saved from 25-35 > $$ saved 35 on
Everyone should have a (ROTH) IRA & 401k!
Are you on-track?~75% of ending salary per year
Share this!See handout
Retirement AccountsIRA
• 2014 Limit: $5,500
• No matching
• Hold at any institution
• Thousands of investment options
• Only contribute cash
• Income limits • Different for Roth vs Trad
• Jan 1 – Apr 15 (of following year) open period
401(k) / 403(b) / TSP
• 2014 Limit: $17,500
• May get matching
• Hold at company’s chosen firm
• Limited choices
• Only contribute from payroll
• No income limits
• May get a Roth option
• Jan 1 – Dec 31 open period
Uncle Sam will always get paid
Roth
• After-tax contributions (pay tax now)
• Earnings grow tax-free
• Roth IRA’s have no RMD’s
• Roth IRA income limit: < $114k
• “Backdoor Roth” option
• Better inheritance options
Traditional
• Pre-tax contributions (get a tax break now)• $120k salary, contribute max
amount of $17,500• Taxable income now $102,500• 28% x $17,500 = $4,900
• Taxed on the way out
• Traditional IRA’s have RMD’s
• Really depends on tax bracket now vs. retirement• Beliefs on long-term tax brackets / code / law• Solution: have some in each
• Cash
• Bonds• Debt instrument• Corporate, government, municipal• Value fluctuates based on demand and interest rates
• Stocks• Underlying ownership in a publicly-traded company• Value fluctuates based on demand in the marketplace• All research shows stock picking does not work!
• Mutual Funds• A pooled basket of cash, bonds, and/or stock• Can be actively managed or track an index (called index funds)
• Exchange-Traded Funds (ETFs)• Also a pooled basket of cash, bonds, and/or stock• More tax-efficient than mutual funds• Typically cheaper• Trade & settle quicker than mutual funds
Exchange Traded Fund (ETF)
Mutual Fund
Cash
Bond
Stock
Investment Types
I N V E S T I N G 1 0 1
CashBond
Stock
Mutual Fund Exchange Traded Fund (ETF)
Invest
ment
Types
Acc
ount
Types
Checking Taxable Account
(Individual, Joint, Trusts)
Traditional IRA
Roth IRA 401(k)
(Can be Roth or
Traditional)
Goal
s Expenses and Emergency
Savings
Expenses prior to retirement: house, college,
wedding
Expenses in retirement
Investing 101
I N V E S T I N G 1 0 1
CashBond
Stock
Mutual Fund Exchange Traded Fund (ETF)
Checking
Taxable Account
Traditional IRA
Roth IRA 401(k)
Expenses and Emergency
Savings
Expenses prior to retirement: house, college,
wedding
Expenses in retirement
Invest
ment
Types
Acc
ount
Types
Goal
sInvesting 101
CashBond
Stock
Mutual Fund Exchange Traded Fund (ETF)
Checking
Taxable Account
Traditional IRA
Roth IRA 401(k)
Expenses and Emergency
Savings
Expenses prior to retirement: house, college,
wedding
Expenses in retirement
Invest
ment
Types
Acc
ount
Types
Goal
sInvesting 101
Investing 101 & active vs. passive
Write down your financial principles / guidelines
20-25% for “fun” if you must
Active vs. Passive Investing: research shows ~80-90% of active funds underperform their benchmark
8,000 2,000 500 125
20% most actively traded accounts performed much worse -men worse than women
Past fund performance has very little predictive power to future performance!
In fact, expense ratios are the best predictor
Expense Ratios (the enemy)
Industry average (0.80% 2.50%)
Low cost options (0.06% 0.50%)
Get angry…it’s your money!
Use the calculator
Why “Rollover”
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” – Upton Sinclair
Asset allocation & rebalancingWith proper allocation, you should reduce risk
(volatility) and outperform the S&P 500 Rebalancing: meeting long-term policy target
weights
Use it as a disciplined way of buying low and selling high
“..shunning the loved & embracing the unloved. Most people do the opposite.” (Swensen)
“Contrarian behavior lies at the heart of most successful investing programs.” (Swensen)
Example: 1990-2012 portfolio: +0.5% difference in return, -2% difference in volatility
My target allocation:
You Can’t Control the Market, But….
You can control:
1. Your asset allocation
2. Your reaction to the markets
3. Your expenses
Never underestimate the value ofdoing nothing!
Why does Warren Buffett hate dancing?
Peter Lynch, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Precedence of Saving1. Matching 401(k) or 403(b)– Max it!
2. Emergency fund (~6-9 months)
3. Pay down debt(s)
4. Roth IRA / Roth 401(k) or TSP
5. Taxable account
6. Alternatives (exotics)
Invest in yourself too!
Tactical next stepsAutomate your savings (pay yourself first)
Open a (ROTH) IRA
Enroll in your company’s 401k
Stick to low-cost index funds
Help a friend (ER) or 19 yr old cousin
Company stock plans
Don’t let inaction win!
Schedule a call w/ FutureAdvisor
My favorite personal finance resources
Fatwallet Finance Forums
Bogleheads
Blogs: Mr. Money Mustache, Oblivious Investor
The Coffee House Investor
*Bonus Material*Tax Loss Harvestingthe Credit Card game
Questions?What is FutureAdvisor?
Free product – analysis & advice Premium product – does it all for you + Tax-Loss
Harvesting – for 0.5%
How do you differ from the competition? We are holistic – they are not! Where you have to hold your $$
Why would I pay 0.5% for this service? Because it’s 1/2 to 1/3 the price of a traditional advisor Because it will actually get done! (80% fact) Tax-loss harvesting can recover > 0.5%
What funds do you use & are there commissions?
A free analysis takes two minutes:www.FutureAdvisor.com