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Nov / 22

What Are The Different Types Of Assets?

There are many different types of assets, but some of the most common include cash, stocks, bonds, and real estate. Each has its own set of characteristics and risks.

Cash is the simplest asset, and it includes things like savings accounts, checking accounts, and money market accounts. It’s easy to use cash to buy things, but it doesn’t usually earn a lot of interest.

Stocks are ownership shares in a company. They can be bought and sold on stock exchanges, and they usually go up or down in value based on the company’s performance.

Bonds are like IOUs. When you buy a bond, you’re lending money to a government or a company. They usually pay periodic interest payments, and you get your money back when the bond matures.

Real estate includes things like land, buildings, and homes. It can be bought and sold, and it usually goes up in value over time.

Each type of asset has its own risks and rewards, so it’s important to understand the differences before investing.

There are many different types of assets, but some of the most common include cash, stocks, bonds, and real estate. Each has its own advantages and disadvantages, so it’s important to understand the differences before investing.

Cash is the most liquid asset, which means it can be easily converted to cash. However, it also has the lowest return potential.

Stocks are ownership shares in a company. They can be volatile, but have the potential for high returns.

Bonds are debt securities that pay periodic interest payments. They tend to be less volatile than stocks, but have lower returns.

Real estate can be a tangible asset, such as a house or land, or an intangible asset, such as a lease. It can be quite volatile, but has the potential for high returns.

What are the different types of liabilities?

Liabilities are obligations that must be paid. The most common types of liabilities are credit card debt, mortgages, and student loans. Each has its own terms and conditions, so it’s important to understand the difference before taking on any debt.

Credit card debt is unsecured debt that must be paid back with interest.

Mortgages are secured loans that must be paid back over a set period of time, usually 15 or 30 years.

Student loans are unsecured loans that must be paid back after graduation.

Nov / 15

Why Personal Financial Planning Is Important

Personal financial planning is important for a number of reasons. It helps you to understand your current financial situation, set goals for the future and develop a plan to achieve those goals. It can also help you to manage your money more effectively, reduce your overall financial stress and build your financial confidence.

There are a number of different aspects to personal financial planning, and it is important to consider all of them when developing your plan. These include budgeting, saving and investing, retirement planning and insurance.

Budgeting

Budgeting is a key part of personal financial planning. It involves setting up a system to track your income and expenses, so that you can see where your money is going. This can help you to identify areas where you are spending too much money, and make changes to your spending habits.

Saving and investing

Saving and investing are important aspects of personal financial planning. They can help you to reach your financial goals, and provide you with financial security in the future.

There are a number of different ways to save and invest your money. These include setting up a savings account, investing in stocks and shares, and buying property.

Retirement planning

Retirement planning is an important part of personal financial planning. It involves thinking about how much money you will need to live comfortably in retirement, and making sure that you have enough money saved to reach your goal.

There are a number of different retirement savings plans available, including pension plans, 401(k) plans and Individual Retirement Accounts (IRAs).

Insurance

Insurance is another important aspect of personal financial planning. It can help to protect you and your family financially if you are ever faced with an unexpected event, such as an accident or illness.

There are a number of different types of insurance, including health insurance, life insurance, disability insurance and long-term care insurance.

Nov / 05

5 Tips For Successful Personal Financial Planning

Financial planning is a process that will help you determine where you are today, where you want to be in the future and how you can get there. Although it may seem daunting, personal financial planning is not rocket science. In fact, with a little time and effort, anyone can develop a plan that will work for them.

Here are five tips to help you get started:

1. Know Where You Are Today

The first step in any financial planning process is to take stock of your current financial situation. This means knowing how much money you have coming in, how much you have going out and what your net worth is. This will give you a starting point to work from and will help you to set realistic goals.

2. Know Where You Want to Be

The next step is to think about where you want to be in the future. What are your financial goals? Do you want to retire early? Buy a new home? Send your children to college? Once you know what you want, you can start to develop a plan to help you get there.

3. Make a Budget

One of the most important aspects of personal financial planning is creating and sticking to a budget. This will help you to keep track of your spending and ensure that you are not spending more than you can afford. A budget will also help you to save money for your future goals.

4. Invest in Your Future

Another important part of financial planning is investing in your future. This can be done in a number of ways, such as contributing to a 401(k) or IRA, investing in stocks or mutual funds, or even just saving money in a high yield savings account.

5. Get Professional Help

If you are having trouble getting started with your financial planning, or if you just want some professional guidance, there is no shame in seeking out the help of a financial planner. These professionals can help you to develop a plan that is tailored to your specific goals and needs.

Personal financial planning is not something that you should put off until later in life. By taking the time to develop a plan now, you can ensure that you are on the right track to a bright financial future.

Nov / 02

What Are The Different Types Of Financial Planning Strategies?

Most people understand the basics of financial planning â€“ save money, invest wisely, don’t spend more than you earn. However, there are different approaches to financial planning, and the strategy you choose should be based on your unique circumstances.

The most common financial planning strategies are:

1. Save first, spend later

This is the most basic approach to financial planning. You simply put aside money each month into savings and investments, and only spend what is left over. This strategy can work well if you are disciplined with your spending, but can be difficult to stick to if you have a lot of expenses.

2. Pay yourself first

This strategy is similar to the save first, spend later approach, but with one key difference. Instead of saving what is left over at the end of the month, you put aside money for savings and investments first, and then spend what is left over. This helps to ensure that you always have money set aside for your future, even if unexpected expenses come up.

3. The 50/30/20 rule

This approach, popularized by Senator Elizabeth Warren, involves dividing your after-tax income into three categories â€“ 50% for necessities, 30% for wants, and 20% for savings and investments. This can help you to strike a balance between spending and saving, and make sure that you are not neglecting your future in favor of immediate gratification.

4. The debt snowball method

This debt reduction strategy, popularized by financial expert Dave Ramsey, involves paying off your debts from smallest to largest, regardless of interest rate. Once you have paid off your smallest debt, you use the money you were paying on that debt to pay off the next smallest debt, and so on. This method can help you to quickly pay off your debts, and give you a sense of accomplishment as you do so.

5. The debt avalanche method

This debt reduction strategy is the opposite of the debt snowball method. Instead of paying off your debts from smallest to largest, you pay off your debts from highest interest rate to lowest interest rate. This approach can save you money in interest charges, but can be more difficult to stick to, as the debts with the highest interest rates are often also the largest debts.

6. The envelope system

This cash management system, popularized by financial expert Suze Orman, involves dividing your spending money into different categories, and putting that money into separate envelopes. When the money in one envelope is gone, you can’t spend any more in that category until the next month. This can help you to stay within your budget, and avoid overspending in any one area.

7. The zero-based budget

This budgeting method, made popular by financial expert Dave Ramsey, involves setting aside money for all of your expenses, and then assigning every dollar a job. This can help you to make sure that your money is always working for you, and that you are not spending more than you earn.

8. The 50/30/20 portfolio

This investment strategy, popularized by financial advisor William Bernstein, involves dividing your investment portfolio into three parts â€“ 50% stocks, 30% bonds, and 20% cash. This approach can help to provide a balance between risk and reward, and can provide a steadier return than a portfolio that is 100% stocks.

9. The aggressive growth portfolio

This investment strategy is for investors who are willing to take on more risk in pursuit of higher returns. An aggressive growth portfolio is typically composed of 80% or more stocks, and can provide the potential for higher returns, but also comes with the risk of more volatile market swings.

10. The asset allocation approach

This investment strategy involves dividing your assets among different asset classes, such as stocks, bonds, and cash. This approach can help to provide diversification and minimize risk, but can also lead to lower returns than a more aggressive portfolio.

Which financial planning strategy is right for you?

The answer to this question depends on your unique circumstances. If you are young and have a long time horizon until retirement, you may be able to take on more risk in pursuit of higher returns. If you are closer to retirement, you may want to focus on preserving your capital and generating income.

It is also important to consider your risk tolerance. Some people are comfortable with the idea of volatile markets, while others prefer a more stable investment approach.

The Most Common Investment Mistake and What To Do About It

Investors are well aware that financial markets go up and down. That is the essence of business and economic cycles. What is difficult for individual investors to master is how to act in the face of market advances and declines. Unfortunately, most people become very tolerant of risk and increase their exposure to the stock market when the market is advancing. Similarly, they avoid risk and clip their exposure to stocks when markets are declining, or after a large correction. It is human nature and “recency bias” that create this visceral response to market perturbations. Recency bias occurs when investors believe that the most recent performance of their investment portfolios will continue indefinitely in the future. It is just one factor that results in investors consistently underperforming the stock market.

Brad M. Barber and Terrance Odean, in their 2011 study “The Behavior of Individual Investors,” conclude that individuals routinely underperform benchmarks through 1) selling winning investments and holding losing investments, 2) being heavy influenced by most recent past returns (repeating investment behavior that coincides with pleasure and avoiding behavior that is painful), and 3) holding undiversified portfolios.

Dalbar studies have also shown that most individual investors typically trail the market rate of return, and they typically do so by a fairly wide margin.

The message from Dalbar since its first study in 1994 is that investment results are more dependent on investor behavior than fund performance and that mutual fund investors who tend to buy and hold are more successful than those who attempt to time the market.

Investors who attempt to time the market are often acting irrationally out of fear of a potential loss. Stocks and investment funds happen to be the only assets that people buy less of when they become less expensive. Let’s think about buying food at the supermarket, if the price of steak rose considerably, you would be more inclined to reduce your purchase of steak or buy something else, but if the supermarket suddenly reduced the price of the steak by 30%, you would stock up. However, you do the opposite when it comes to stocks and other investments. The stock market can foster a gambling mentality. When you are on a roll you hate to stop, but that is exactly when you should cash some chips in.

So how does an investor counteract the tendency to time the market and invest based on most recent results? Rebalancing is great way to fight the effects of recency bias. Rebalancing to your target asset allocation is a mechanistic and unemotional way to fight these counterintuitive emotions. I sometimes get an odd look from my clients when I suggest that they rebalance after a market run-up. “Why would I want to do that, the market is hot?” might be a typical comment. But that is exactly why rebalancing is so important. It removes the emotions, market noise, and other extraneous factors, and reminds the investor of their original financial plan and goals.

The best value-added proposition a financial advisor provides is to set the target allocation and then monitor and adjust it based on the client’s personal goals and life events. The asset allocation is set within the investment policy statement and the portfolio is rebalanced yearly, or as needed, after large market advances or declines. The asset allocation is revisited periodically, at least every 3 years, and is adjusted in response to a client’s retirement goals, change in health or marital status, or market valuations.

Rebalancing in this way, will not only help the client attain rates of return closer to the respective benchmarks for his or her portfolio, it can actually be a source of additional return. In a recent article in Financial Planning magazine, “Portfolio Rebalancing: Get It Right,” Allan Roth underscores the incremental benefit of rebalancing. His analysis shows that “over the past 15 years, the portfolio that stuck to its allocation earned 1.54 percentage points more each year than the average portfolio that tried to time asset classes.”

Rebalancing is just one area where advisors add incremental return and why it is essential for our clients to commit to the annual review and rebalance exercise. Emotions can be hard to control, let your re-balancing take them out of the mix, so you can maximize your long range returns.

Dec / 19

Is the Stock Market Starting to Blow Bubbles?

If you have planning to invest your money in the stock market, you need to read this carefully. It cannot be denied that every investment has its own risk. Today’s article gives an overview of the situation in the stock market today and the prediction about what will happen in the future.

Client meetings over the past year have been quite sanguine. Investments and assets are up. People seem to feel better about job security. The housing market is slowly recovering, and retirement projections look rosier. Strong stock market performance is good, in that it gets us closer to our goals; however, it can also breed a false sense of complacency.

Valuations are high and reaching points not seen since 2007, 1929, and by some metrics, even 2000.

Overvalued Stock Market

Stock markets become overvalued when stock prices rise at a much faster rate than earnings, which is what has occurred for the past several years due to the belief that the Federal Reserve’s quantitative easing policies will continue to force investors into stocks in order to get a decent return on their money; low-interest rates punish savers and cause them to seek yield by investing in increasingly speculative investments. But even members of the Federal Reserve are warning about frothy segments of the market as they tiptoe toward shutting off the quantitative easing spigot.

debt is increasingly being purchased on the basis of yield rather than the careful evaluation of repayment prospects. John Hussman Hussman Funds

The Cycles In Financial Markets

It is important to remember that financial markets move in cycles, and just because this multiyear stock market advance has been rewarding, it does not mean that it can continue indefinitely. In fact, the longer it persists, the greater the chance of a severe correction.

One way to evaluate whether or not the market is expensive is to look at the current PE10 or CAPE ratio. This valuation method was developed by Robert Shiller from Yale, and it historically has been helpful in forecasting market crashes as well as future rates of return.

This article in the WSJ “Yes, Virginia, You Can Time the Market” explains that, although no one can time the market with precision, using the Shiller PE as a method to modify your stock exposure by overweighting or underweighting by up to 30 percentage points has resulted in stellar returns since 1926.

The Prediction of Bubbles

It is a strategy, however, that requires patience. A high CAPE ratio can persist for years. It tends to have a better success rate for predicting 10-year future returns and is less accurate in predicting returns less than 5 years out. In fact, in 2000 it was over five years early in diagnosing an overvalued market. The article acknowledges that extreme market timing by moving all of your assets in and out of the market based on certain parameters is very difficult and not a recommended strategy. Using Shiller’s ratio, though, can provide some guidance in dialing down equities when markets are overvalued and dialing up exposure when markets are undervalued, thus protecting investors from large corrections and enhancing long-range returns. See the chart to the left.

John Hussman has been warning about stock valuations for years as the Shiller PE, as well as his additional proprietary methods, indicate that returns over the next decade will be roughly 2%, before inflation. His weekly commentaries are a must-read.

He makes this powerful assertion in, Yes, This Is An Equity Bubble:

Make no mistake – this is an equity bubble, and a highly advanced one. On the most historically reliable measures, it is easily beyond 1972 and 1987, beyond 1929 and 2007, and is now within about 15% of the 2000 extreme. The main difference between the current episode and that of 2000 is that the 2000 bubble was strikingly obvious in technology, whereas the present one is diffused across all sectors in a way that makes valuations for most stocks actually worse than in 2000.

The question a rational and prudent investor should as himself is this, “ is it prudent for me to take additional risk in the stock market at this juncture, given such dismal future returns?” This is a particularly important consideration for those people who are looking to retire in the next 7-10 years, as well as those how have recently retired.

For more information on the Shiller PE and market valuations you may want to read the following:

Market Valuation Overview- Yet More Expensive

The Mystery of Lofty Market Valuations by Robert Shiller

Is the CAPE Ratio Good at Predicting Future Returns? (Yes) Is it Perfect? (No)

The Most Common Investment Mistake and What To Do About It

Dalbar studies have also shown that most individual investors typically trail the market rate of return, and they typically do so by a fairly wide margin.

Being a Smart Investor in Turbulent Times

Can We Still be Smart Investors?

Any other week would be a better one in which to write a financially-themed article. While this article will be in the November issue, the context from which I write is immediately following the announcement that the House of Representatives voted NO on the Bailout plan. We all know that this sent the stock market tumbling, causing many people to feel fear— perhaps the first real time in our generation’s adult life (except maybe some from the dot com bust but that was “fun money” before we had families!!).

While a revised Bailout Plan will likely pass and a few more banks may fall by the time this is published, the events of the past few weeks have made many people question whether or not they are handling their money the “smartest” way.

As a fee-based financial planner who does not manage portfolios, I cannot recommend individual stocks or funds to buy and sell. Nor do I think that will help the families with whom I work at this juncture. I can, however, help you take a macro-perspective on what is smart for you and your family.

“Smart” begins with the basics:

What is your family’s vision and what are you creating?
What is your relationship with money? How do you handle fluctuations? How anxious are you?
What are your financial goals? When do you need the money?

VISION:

You’ve heard me say it time and time again if you read my column with regularity. What is the life you want to create for your family? What does it look like? How do you define success?

Are you living in a hillside cottage with a large yard or do you have an apartment with a home in Tahoe? Do you pick a new country to visit with your children every year? Do you want to settle into a community where you will root for the next 20+ years? Do your children walk to the locale public school or will they be attending a private school?

The vision you create for your family trickles down to the types of investments you make also called an investment vehicle (such as stocks, bonds, mutual funds). Before you can decide into which vehicle you will invest, you need to know for what you want the money.

YOUR MONEY PERSONALITY:

A fascinating area of financial planning is how people relate with money. This alone can fill pages upon pages of articles and keep me reading for weeks (I am endlessly intrigued by this topic). At the very fundamental level, you have to know what is commonly talked about in the financial planning world as your “risk tolerance.” I find that concept hard to grasp, so with my clients I like to hear more about what keeps them up at night. What makes them anxious?

Is it any negative movement in a 401k or is it not having enough money in cash in a savings account? Do they ride out the drops like the one on Sept 29th with grace and ease saying “it’ll come back” or “this is expected” or do they run for the bank and hide their money in their mattress? Everyone is different and understanding your level of anxiety with investment fluctuations is an imperative input factor to deciding how to invest.

YOUR FINANCIAL GOALS:

Taking your vision and translating it into financial goals is where I find the financial planning process helps the couples with whom I work the most. This makes the softer airy vision a dollars and cents reality. Smart investing requires that you know:

The amount the goal will cost
The Time horizon over which you are investing (that is, when do you need the money)?
The amount of money you are starting with for the goal
The amount you are contributing along the way

All of these factors will let you know what the return you need for your money will be. To say that another way, it will tell you how much you have to make each year on the investment to reach the goal. And different investment vehicles offer different possibilities for returns. Holding investments in cash will probably stay within a few % points, while stocks can jump all over the chart — in both directions. To get higher returns, you also will take on higher risk. The return you need combined with your personal tolerance for fluctuations will determine the investment vehicle.

For example:
If you already have $100,000 that you want to put toward a home down payment in one year, you only need a very conservative investment vehicle. Keeping that cash in a money market account would give you the best assurance that your money will be there when you want it.

I see many clients who come to me with next year’s house down payment in stocks or equity mutual funds. Perhaps that is how they built up the money or maybe they just like to participate in the market. In a week like the ones of late, however, a portfolio may drop 10%, making a $100,000 down payment now a $90,000 one. For the exceptionally daring individual, this may be okay, but as a financial planner, I advise people to match their investment vehicles with their time horizons.

If you want access to your money soon, keep it in a cash-equivalent vehicle. This way the market can jump all over the place and you can rest assured that you have what you need when you need it (caveat from the recent events: up to the FDIC insured limits of $100,000 – or more if you set up a certain kind of account designed to expand this limit) . The longer you have before you need the money, the more fluctuations you can likely tolerate. So while you may not be thrilled that your 401k invested in a mix of mutual funds, for example, has decreased, you will likely have more tolerance if you do not need the funds for another 30 years.

PARTNER FOR SUCCESS:

Granted there are those among us who will feel compelled to switch to other asset classes if ours are not performing just because of their personality and risk tolerance. Whether or not this is the smart way to go depends on your personal situation only. To help you handle the next bump, I encourage you to be prepared to act with knowledge and not emotion. The best way to do this is to partner with a financial professional who can help you ride out these rough times and stick with a “system” that works for your anxiety level and your goal achievement timeline. With a plan in place, you can approach the times when everyone else seems to panic with the desired calmness that comes with real knowledge of your own smart investing strategy.

Is the Economy Signaling Green Shoots or Rotten Tomatoes?

The economy appears to be making strides as it emerges from critical condition and enters into rehabilitative mode. Some positive signs include increasing bank lending, auto sales, and consumer confidence. Unemployment is also declining, especially for skilled labor. Both the US budget deficit and state budgets are improving. Corporate infrastructure such as plants, buildings, and equipment are overdue for upgrades, suggesting substantial future increases in capital expenditures.

Headwinds from the Euro debt crisis have subsided to a large extent, with credit spreads collapsing. In fact, spreads seem unusually tight given that Spanish bond yields are currently lower than US Treasury yields. This is quite unusual, and likely due to the European Central Bank’s announcement that they will engage in more aggressive monetary easing policies to halt disinflation and spur growth.

Japan and China are still muddling through their own economic malaise attempting to establish equilibrium. In short, the global financial landscape seems eerily quiet, especially given the growing geopolitical pressures. Increased tensions in the Ukraine, civil war in Iraq, and continued presidential scandals have failed to disrupt financial markets. The US stock market, in particular, is experiencing reduced volatility. We are now going on almost three years with no correction of 10% or more (since August of 2011).

The current situation reminds me of my garden. This year I made a vow to finally grow vegetables. I decided to start with something easy and small. I filled a cement container with soil and compost and planted two tomato plants. The plants grew tall quickly; and before I knew it, I had about 15 shiny green tomatoes. I was so excited that I started to plan my recipes, who I would share my bounty with, and what I was going to add to my garden next year. Then one day when I went to check my plants; I found a shriveled up tomato and one that had brown rot on the bottom. Uh, oh. I researched the disease online and now realize that I may not be able to save my tomatoes. I am taking steps to reduce the risk of further rot, but I am concerned that I may be fighting a losing battle.

I may lose a lot of my tomatoes, or I may be able to minimize the losses and still have plenty of tomatoes for weeks to come. The same may hold true about the financial landscape. Although the economy is starting to improve, the stock market seems to have gotten a bit ahead of itself. The market appears frothy, with little room for future growth, but a correction may come in days, months, or maybe years.

Why are stocks and investors so complacent?

The Fed Reserve’s policy of printing money has resulted in a massive increase to their balance sheet from $800B in 2007 to over $4.5T today.

This massive flood of money into the system has drastically devalued the dollar and has forced investors to put their cash in riskier investments. This has been the main reason for the overly ebullient markets since the Great Recession of 2008. In this zero interest rate world, desperate retirees and savers are reaching for yield in risky areas of the market in order to get more return on their money. This has resulted in overvalued fundamentals. Valuations are rich for US equities using metrics that have traditionally been highly correlated to market performance.

Using the CAPE (Cyclically adjusted PE) ratio developed by Robert Shiller from Yale University, the market may be signaling that US stocks are possibly overvalued by 50%, as the ratio is approximately 51% above its average (arithmetic mean) of 16.5.

Of course, valuations can’t be used as market timing techniques, as markets can stay overvalued or undervalued for long periods of time. But at these levels, it does suggest that loading up on equities, especially if you are a new or soon to be retiree, may not be a good long-term move.

According to John Hussman, “The median price/revenue multiple for S&P 500 constituents is now significantly higher than at the 2000 market peak.” He is currently forecasting weak returns over the next decade with negative returns for period of 7 years or less.

Similarly, James Montier from GMO expects that large U.S. stocks will have a return of -1.6% a year for the next seven years.

Mebane Faber in a recent conference suggested that not only US stocks, but particularly dividend stocks are severely overvalued. He also warned that “home bias” skews our portfolios in favor of our own country’s stocks. Right now international markets, especially certain emerging market countries, have better valuations.

The point is that shocks occur when you least expect it. They are often caused by some triggering exogenous factor and are met with disbelief, which in turn leads to unpredictable human behavior.

We need to prepare for inevitable corrections as they are part and parcel of business cycles.

Since this rally is particularly long in the tooth and has created severe overvaluations, it may be a time to mentally and financially prepare for a market setback. While I do not espouse market timing, I do think it is prudent to reduce exposure by 10-20% in the event of extended markets, impending retirements, or in the event that you have reached or surpassed your target financial goals.

Times like these also underscore the importance of re-balancing your portfolio. Re-balancing is the best way to keep yourself unemotional, since you invest based on your target allocation as opposed to market noise. This is why I always urge my client’s to be faithful regarding their annual reviews.

When you re-balance or take some actions to reduce risk, you not only enhance your awareness of your financial well being, but you feel more in control of your situation. When it comes to investments, we can’t control the economy or the direction that the markets will turn, but we can and should control the things that we can, such as reducing costs, planning to avoid tax spikes, and maintaining an exposure to the stock market that is consistent with our risk profile and market valuations.

In order to reduce the risk of losing more tomatoes to disease, I bought some gypsum and added it to the soil in my tomato plant container. I don’t know if it will work, but I at least feel better that I did all that I could to help prevent the spread of the disease. I hope to have an abundant garden this summer, but only time will tell.

May / 11

Has the Fed created a Madoff market?

We are now experiencing the fifth most powerful bull market in stocks since 1900. The Federal Reserve, through its quantitative easing program, has lowered interest rates to near zero, thereby forcing investors to search for income in nontraditional places. In response, dividend yielding stocks and high yield “junk” bonds have soared in price. If you review the trajectory of the S&P 500 over the past year, it appears that the market is advancing without any significant corrections.

The market continues to shrug off risks. Despite poor economic data, decelerating growth in China, still unresolved European debt woes, and increasing tensions between Russia and her neighbors, the market continues on its march upward. The only data the market seems to respond to are signals from the Federal Reserve that they may increase interest rates. For now, the stock market assumes that new Federal Reserve Chair Jerome Powell “has its back.” The dovish Powell appears to be an advocate of an accommodative policy through 2018.

Investors can become complacent believing that this pattern will last indefinitely. To wit, the flow of money into stock funds reached an all-time high in 2013-2017 as memories of the crisis of 2008 faded. The belief that market gains can be achieved consistently with no apparent risk of correction is not only naive, but dangerous. Investors in Bernie Madoff’s fund were likewise transfixed by the steady, impressive returns that seemed to move with no correlation to the financial markets. Sometime when things seem to be too good to be true…..
We only need to look back to the more recent examples of complacency and calls of “this time it’s different,” to remind ourselves of the dangers that can result from this mentality.

In the 2000 tech implosion, the market finally came to the reality that stocks with non-existent earnings and lofty prices were not necessarily a good buy. We were told that “earnings did not matter” and that this was “the new paradigm.”

In 2007, when everyone was buying second homes, flipping “spec” homes, and loading up on a McMansions they could not afford, the party line was that, “housing is an investment that never goes down in value.” The financial crisis was created in part due to this mentality, and we are still feeling the painful repercussions. In this article , Peter Schiff discusses the implications of the massive debt the US has incurred post 2008. He states,

“America is trying to borrow its way out of recession. We are creating debt now in order to push up prices and create the illusion of prosperity.”

He opines further that:

“The red flags contained in the national and global headlines that have come out thus far in 2014 should have spooked investors and economic forecasters. Instead the markets have barely noticed. It seems that the majority opinion on Wall Street and Washington is that we have entered an era of good fortune made possible by the benevolent hand of the Federal Reserve. Ben Bernanke and now Janet Yellen have apparently removed all the economic rough edges that would normally draw blood. As a result of this monetary “baby-proofing,” a strong economy is no longer considered necessary for rising stock and real estate prices.”

It is important for investors to remind themselves of the following:

Markets are cyclical

Corrections are normal consequence of business cycles: We can’t predict when they will occur, but we should prepare mentally for their eventuality.

Market timing is extremely difficult.

Who would have predicted that in 2013 the S&P 500 would increase over 30%? This occurred despite the debt ceiling and budget showdowns, sluggish economic growth, and other geopolitical events. Few if any analysts, predicted this incredible performance, giving further credence to the notion that the so called “experts” are not particularly prescient.

Chasing performance can lead to pain

Investors have a tendency to pile into segments of the market that have recently performed well , buying more of the recent winners and eschewing the “dogs” that underperformed. But short term performance is not indicative of longer term returns. Overexposure to one asset class, say large-cap US stocks, will reduce your portfolios diversification, thereby increasing the overall volatility of your investment mix. Discipline in the form of rebalancing would be a better tactic. In this related article, Craig Israelsen discusses this behavioral tendency and how it can be avoided through proper diversification.

Looking at traditional measures of valuation, the current stock market is overvalued. According to John Hussman, current valuations suggest that equities are poised to deliver paltry returns of roughly 2.3% before inflation over the next 10 years. Even the Fed’s own Richard Fisher, president of the Federal Reserve Bank of Dallas, recently said he was concerned about “eye-popping levels” of some stock market metrics warning that the Fed must monitor the signs carefully to ensure bubbles were not forming.

In irrational times like this, it is important to maintain perspective; we don’t know exactly what the stock market will do in the short run. We can’t control inflation, taxes, political turmoil, the weather, our health or major geopolitical events. We must instead focus on the things we can control like the following:

Our emotions– It is essential that we have a portfolio of investments that we can stick with through thick and thin.

Review your investment policy statement that was prepared as part of you plan; and specifically; revisit the potential decline for your investments based on your target allocation to the stock market to see if it is still palatable

Rebalancing –After a large market advance, it is important to prune our winners and reinvest proceeds in losing asset classes.

Most recently, that would mean selling stocks and buying bonds. While this is counter to our behavioral instincts, it is a powerful way to maximize long-range investment returns.

Costs–Given that future stock market returns are likely to be lower, costs becomes especially important.

Employing no-load, passive, low-cost funds and ETF’s will help maximize your gains. The money you save due to low fees will compound for you over time. This has an exponential effect on the growth of your portfolio. Costs are reflected in your funds’ expense ratios. Low cost investment advice helps to further reduce the overall cost of your investment management.

Diversification–resist the urge to follow performance and load up on yesterday’s star asset classes

Just because US stocks have been stellar performers doesn’t mean that this will continue. We never know in advance which portion of the portfolio will be the star performer. As this periodic table of asset class performance indicates, the stars of one year can easily turn to dogs the next. It is also important to remember that cash, CDs, and high-quality bonds, while they possess frustratingly low yields, are still an essential component of your portfolio, as they act as shock absorbers in periods of market turmoil.

Risk– if you’re planning to retire in the next five years or recent retiree, you may want to adjust your portfolio to position yourself more conservatively.

Recent studies suggest that minimizing your exposure to stocks, five years before and five years after retirement and then increasing your stocks allocation slowly over time, may be a prudent way to maximize spending in retirement as well as avoid outliving your funds.

In summary, the market over the past few years may convince you that risk will be rewarded with little chance of loss. But remember, what goes up must go down, and invariably, a tipping point emerges that changes the course of the market. History does repeat itself. Be realistic and stick to a prudent plan so you are well equipped to weather any market storm.