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The Annual Financial Check-Up

Don’t ignore it. Here’s why.

Here’s the scenario … you get a card in the mail, one of those little reminders that tells you it’s time for your annual financial checkup. Your reaction: I’ll take care of that later. Here’s why you should look forward to it.

Why do I need an annual review? Because things change, and during the course of the last 12 months, you may have … changed jobs, made major purchases, welcomed a new child, retired, bought or sold a residence, decided upon new goals. These developments can change your financial objectives. Also, it is just sensible to measure your financial progress. If you are not making progress in accumulating assets, or if you are assuming too much risk as a result of your current portfolio or financial decisions, it’s time for change.

The annual review is a “deep breath” where you can get away from daily distractions and think clearly about financial planning.

Just imagine. Imagine letting your investments go for five or ten years, assuming that they’re doing okay while you wonder what the quarterly statements mean. Imagine being a few years from retirement only to find you have less than a year’s salary in savings. Imagine passing away and leaving unresolved money issues for your loved ones, or subjecting them to a contentious probate process.

These scenarios are all too real; people run to financial advisors for help with them every day. If they had only reviewed what was happening with their lives financially, they could have planned to avoid these issues in advance. Putting things off can be dangerous.

This is an ideal time to take a look under the hood – financially speaking. During your annual review, you can estimate your net worth, and also possibly learn about any tax changes that might affect your investments, business or estate. It’s also a good time to make voluntary IRA contributions, and get college funding and financial aid applications underway.

Financial planning is not an event you do once in your lifetime and forget about. Financial planning should be an ongoing priority.

“Don’t put off until tomorrow what you can do today.” ~ Benjamin Franklin

Happy planning,

april-signature

 

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How Impatience Hurts Retirement Saving

Keep calm & carry on – it may be good for your portfolio.

Why do so many retirement savers underperform the market? From 1993-2012, the S&P 500 achieved a (compound) annual return of 8.2%. Across the same period, the average investor in U.S. stock funds got only a 4.3% return. What accounts for the difference?1,2  

One big factor is impatience. It is expressed in emotional investment decisions. Too many people trade themselves into mediocrity – they react to the headlines of the moment, buy high and sell low. Dalbar, the noted investing research firm, estimates this accounts for 2.0% of the above-mentioned 3.9% difference. (It attributes another 1.3% of the gap to mutual fund operating costs and the remaining 0.6% to portfolio turnover within funds.)2

Impatience encourages market timing. Some investors consider “buy and hold” passé, but it has certainly worked well since 2009. How did market timing work in comparison? Citing Investment Company Institute calculations of equity fund asset inflows and outflows from January 2007 to August 2012, U.S. News & World Report notes that it didn’t work very well. During that stretch, mutual fund investors either sold market declines or bought after market ascents 57.4% of the time. In addition, while the total return of the S&P 500 (i.e., including dividends) was -0.13% in this time frame, equity mutual fund investors lost 35.8% (adjusted for dividends). 3

Most of us don’t “buy and hold” for very long. Dalbar’s latest report notes that the average equity fund investor owned his or her shares for 3.3 years during 1993-2012. Investors in balanced funds (a mix of stocks and bonds), held on a bit longer, an average of about 4.5 years. They didn’t come out any better – the report notes that while the Barclays Aggregate Bond Index notched a 6.3% annual return over the 20-year period studied, the average balanced fund investor’s annual return was only 2.3% .2

What’s the takeaway here for retirement savers? This amounts to a decent argument for dollar cost averaging – the slow and steady investment method by which you buy shares over time, a little at a time. When the market sinks, you are buying more shares as they have become cheaper – meaning you will own more (quality) shares when they regain value.

It also shows you the value of thinking long-term. When you save for retirement, you are saving with a time horizon in mind. A distant horizon. Consistent saving from a (relatively) early age and the power of compounding can potentially have much greater effect on the outcome of your retirement savings effort than investment selection.

Keep your eyes on your long-term retirement planning objectives, not the short-term volatility highlighted in the headlines of the moment.

Happy Savings,

PSE Wealth Management Team

Citations:
1 – finance.yahoo.com/news/p-fund-tops-p-500-142700129.html [5/3/13]
2 – marketwatch.com/story/7-reasons-why-retirement-savers-fail-2013-06-26 [6/26/13]
3 – money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2012/11/05/herd-behavior-hurts-fund-investors [11/5/12]

 

 

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The Top Six Myths About Introverts

“If you’re reading this, chances are you’re an extrovert. Upwards of 65 percent of registered financial advisors working on the retail level are extroverts, according to estimates by a number of social scientists. But what about your clients?”

Myth #1 – Introverts are shy

Fact: Shyness has nothing to do with being an introvert. Extroverts can be shy, too. Introverts are not necessarily afraid of people. What they need is a good reason to interact. Extroverts sometimes interact for the sake of interacting.

 

Myth #2 – Introverts always want to be alone

Fact: Introverts are more reflective and seek out time to be with their own thoughts. But they often seek out one person at a time to share their discoveries with.

 

Myth #3 – Introverts don’t like to go out in public

Fact: Introverts like to go out, but not as much and for not as long. Large crowds can be draining. When they go out, introverts prefer structure and a place to retreat to recharge.

 

Myth #4 – Introverts are aloof

Fact: Introverts can be fully engaged if the environment allows them to be reflective and have quiet space to consider their thoughts and emotions.

 

Myth #5 – Introverts don’t know how to relax and have fun

Fact: It is true that introverts don’t tend to be thrill seekers or adrenaline junkies. But they can have as much fun as extroverts, doing the things from which introverts draw energy.

 

Myth #6—Introverts can fix themselves and become Extroverts

Fact: Introverts don’t have to be fixed or managed.

 

To read the article click here.

 

Kind regards,

 

PSE Wealth Management Team