,

Home Buying Season – What You Should Know!

At Rockbridge, we take a holistic approach to personal wealth, and home buying is the single biggest transaction most of us will ever make.   We have simplified the process through an easy to understand white paper on what to expect when purchasing or refinancing a home.  The paper provides valuable information on the major considerations and describes how to get the best deal for your individual situation.

When you have  personal financial planning questions, please contact us.  As an objective advisor, we can often provide clarity and insight when making important financial decisions.

Download here: Rockbridge Investment Management – Home Mortgage Search Process

/0 Comments/by
, , ,

Gambling with Retirement? It’s Time You Take Control!

Over the years there has been a shift of burden in retirement savings from the employer to the employee.  The era of company pension plans is fading, leaving Americans on their own to save for retirement; primarily through company-sponsored 401(k) plans. 

Frontline recently aired The Retirement Gamble, where it highlights some of the downfalls of company 401(k) plans and how they are keeping many investors from ever reaching a successful retirement.

Have you ever looked at one of your 401(k) statements and asked yourself “Why does it seem like this thing never goes up in value?”  The market has been good and you are making regular contributions to it, so why does it seem like something is eating away all your return?  It’s because there is:  FEES! 

So how can you control or minimize your fees?  The easiest way to do so is to cut your mutual fund costs.  The average actively managed mutual fund costs 1.3% annually to own, when you can purchase a passively managed mutual fund for a fraction of that price.  Very few actively managed mutual funds outperform their benchmark index, and picking which ones will do so ahead of time is yet another challenge.  Jack Bogle, founder of Vanguard, states in the documentary “that to maximize your retirement outcome you must minimize Wall Street’s take”!

Jack Bogle goes on to say that if you expect to get a 7% gross return each year and give 2% of that up to fees, then you are ultimately sacrificing almost two-thirds of your potential return! 

Assumptions: Start with $100,000 earning 7% annually for 50 years.  Red line
shows 5% annual return (7% return reduced by 2% of annual fees)

Jack continues by saying that “if you want to gamble with your retirement, be my guest.  Yet be aware of the mathematical reality that you may have a 1% chance of beating the market.  This has been proven true year after year, because it can’t be proven wrong”! 

Jason Zweig, an investing columnist for The Wall Street Journal, added that “one of the ultimate dirty secrets of Wall Street is that a great deal of fund managers own index funds in their own retirement portfolios.  This is something they don’t like to talk about unless you put a couple beers in them!”  So if these highly paid fund managers don’t even believe in their ability to outperform index fund returns, then why should we?

Remember, that as investors, we have to control the controllable, and mutual fund costs is one cost we can control.  We can’t know what direction the market will be heading in or what our annual return might be, but we can maximize the percentage of that return that goes into our pockets and stays out of Wall Street!

/0 Comments/by
,

Are You A Casually Competent Investor?

Steven Grey and Advisor Propsectives recently published a stellar article titled “The Myth of the Casually Competent Investor”.  Not only was he spot on with his analysis, he gave some great analogies about how everyone considers themselves qualified to beat the market.

A small snippet of the article shows two great examples of how silly it would sound for other professions to be casually involved.

In most serious undertakings, the barriers to entry rise and fall with the complexity of the task.  No one becomes an airline pilot merely by pinning a pair of plastic wings to his lapel.  Nor is anyone permitted to perform an appendectomy simply because she had decided that morning that she was qualified to do so.  And yet every day apparently intelligent people essentially declare themselves competent investors, as if the act of deciding somehow makes it true.

Much of this comes down to self-realization and self-awareness.  We all have our own strengths and weaknesses, but they are often very difficult to identify.  An example that I use quite frequently for individuals that pick stocks is:

As an electrical engineer, do you feel more knowledgeable about Apple than the dozens of technology experts sitting on Wall Street analyzing the stock 24 hours a day for their full-time career?  If so, why are you an electrical engineer and not a day trader of Apple stock?

Over the weekend, enjoy this excellent article and consider if you are fall into the characteristics of a Casually Competent Investor.

/0 Comments/by
,

Hindsight is 20/20, But the Future is Unpredictable

How many times have you heard someone say, “In 2008 I knew the market was going to crash…” – or some similar statement of prescience?

 

That would be an example of how hindsight creates an illusion of understanding, as described by psychologist Daniel Kahneman, who won a Nobel Prize in economics for his work in behavioral finance.  In his recent book Thinking, Fast and Slow, he explains how hindsight alters our memory.  A result that seems obvious when viewed in hindsight is remembered as being evident at the time, when in fact it was not.

No one knew what was going to happen in 2008.  Some people thought there would be a crisis, but they did not know it.  Kahneman points out that using the word “know” fosters the illusion (an unsubstantiated belief) that we understand the past, and therefore the future should be knowable.  You will not hear anyone say, “I had a premonition that the sub-prime debt crisis was overblown and knew markets would recover nicely in 2008 – but I was wrong.”  First off, it sounds silly, and secondly, most prognosticators have forgotten they ever held that belief!  Author Nassim Taleb describes a similar effect of hindsight in his book The Black Swan:  The Impact of the Highly Improbable where he introduces the notion of a narrative fallacy, to describe how flawed stories of the past shape our views of the world and our expectations for the future. . . .  Taleb suggests that we humans constantly fool ourselves by constructing flimsy accounts of the past and believing they are true.

In the same section of his book that elaborates on many manifestations of overconfidence, Kahneman goes on to describe a specific incident where he was invited to speak to a group of investment advisors.  In preparation he asked for some data and was given the investment outcomes of twenty-five anonymous stock pickers, for each of eight consecutive years.  A careful statistical analysis of their stock-picking ability found no evidence of persistence of skill – none.  “The results resembled what you would expect from a dice-rolling contest, not a game of skill.”

The fact that he could find no evidence of skill is not remarkable.  What is remarkable is that no one changed his or her beliefs when presented with the evidence.  The advisors and their superiors went on believing that they were all competent professionals doing a serious job, when the evidence clearly suggested that luck was being interpreted as skill.  Kahneman’s conclusion:

The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry.  Facts that challenge such basic assumptions – and thereby threaten people’s livelihood and self-esteem – are simply not absorbed.

Three Lessons for Investors

1.  Overconfidence may have helped cavemen survive when facing overwhelming odds of failure, but it rarely helps investors.

2.  Beware of the narrative fallacy – A reckless leader can be labeled as prescient and bold, when a crazy gamble pays off.  So consider the role of chance and luck when an investment decision turns out well.  Luck does not equal skill, and remember that even good decisions can lead to bad outcomes, when the future is uncertain.

3.  When a mistake appears obvious in hindsight, try to remember how uncertain the situation was in advance.  No one “knew” how things would actually turn out.u

/0 Comments/by
, ,

Market Madness

During this time of the year office brackets and friendly wagers are seen everywhere, luring in even the faintest of sports fans.  This epidemic, also known as March Madness, has gotten ahold of everybody and is the craze of the nation for almost a full month!  So besides edge of your seat excitement filled games, what other takeaways can this basketball tournament bring us?

Let’s take a look at some common mistakes made when filling out your brackets and why you want to make sure they don’t translate to the way you run your personal finances!

Hometown Bias: People have a tendency to be partial towards what they know.  In NCAA Tournament brackets, this is seen by people advancing teams they know or have heard of.  They build a bias in their heads that since they know the team, they must win.  This is apparent by the plethora of Central New Yorkers advancing Syracuse to the NCAA championship, the staggering amount of all Big East teams in the Final Four, and other similar bias’ you see every day in local office bracket pools.

The key is to not let this bias run into your personal investing life.  Just because you work for a company, recognize a stocks name, or feel you know a particular industry does not mean that it is worth owning.  Take a step back and make sure you are making a sound investment decision, and not an off-the-cuff “hometown bias” guess!

Expert Analysts:  Being an expert does not always give you an edge, but rather can make you more dangerous.  This was very evident in our Rockbridge office pool where Tony’s ten-year-old daughter, Lauren, has won two of the last three years!  I’m a bit embarrassed to admit it, but there are very few college basketball games I don’t watch; however it certainly didn’t give me any strategic advantage over Lauren who filled out her bracket over a bowl of Cheerios the morning they were due!

Overconfidence can lead investors to believe they can outperform the market.  It will lead you to make non-prudent investment decisions that will ultimately have a negative effect on your retirement portfolio.  One basketball expert couldn’t see any way for this small school to make it to the Final Four.

“No. 8 Pittsburgh over No. 9 Wichita State: Pittsburgh goes 10 deep with no stars. The Panthers are a very good offensive rebounding team, ranking fourth in the nation in getting more than 40 percent of their own misses … Because Pitt is better on the offensive end, The Bilastrator favors Pittsburgh, and the Panthers will move on to face Gonzaga.  “

–        Jay Bilas, ESPN Analyst 2013

Don’t leave your retirement accounts to chance.  Make sure you have a financial plan in place and be disciplined enough to adhere to it.  Even bright people make bad predictions.  Don’t let your finances fall victim to one of them!

The Cinderella Story:  We Americans love our underdog stories.  When I glance at ESPN in the morning it is filled with the best of yesterday’s sports, which always includes a few “Cinderella-like” comebacks! Have you ever seen a movie where the worst team in the league didn’t end up winning the championship in a stunning comeback?  A team that starts out bad and stays bad just isn’t worthy of the spotlight! I certainly remember the 2010 NCAA Tournament when my alma mater, Cornell University, made it to the Sweet 16!  I seem to forget to mention their quick exit from the tournament in 2008 and 2009. Ooops!

So don’t forget the parallel that can be made to your own finances.  We all know the guy who tells you about the great stock he bought and how it has tripled in value since, but what do you think he is choosing to not tell you? Stick with what you can control when it comes to your finances and leave the guesswork to your office NCAA Tourney pools!

/0 Comments/by
,

Market Commentary- April 2013

Market Commentary

Stocks wrapped up a stellar first quarter with the S&P 500 finishing at an all-time high, besting its last high in October 2007.  For the quarter, large-cap stocks (represented by the S&P 500) were up 10.6%.  Small-cap stocks also did quite well, returning 12.4% in the first quarter.  International markets had a positive return of 5.3% January through March, while emerging market stocks lost some ground, with a negative return of -1.5%.  Domestic real estate did well, gaining 7% as measured by the Dow Jones US Select REIT Index.

Positive economic news likely fueled the excellent quarter for all stocks.  The final government report for fourth-quarter GDP showed an annual increase of 0.4%, slightly higher than the expected increase of 0.3%.   The housing market has continued its slow comeback from the Great Recession, though the housing market in general has benefited from record low interest rates and improving employment conditions.  The supply of new homes remains near record lows while median home prices rose 2.9% year over year to $246,800.  The decline in consumer confidence in March and the increase in jobless claims over expectations did not seem to have a negative impact on the strong stock rally this quarter.

It is not likely that the stocks will continue to rise at this torrid pace.  History says double-digit stock market gains in the first quarter all but assure a gain for the full year, however the average gain is 1.4% for the remainder of the year.

Challenges ahead for the bond market

Bond returns were near zero for the quarter with the benchmark Barclays US Government/Credit Bond Index down (0.16%).  The Federal Reserve is acting aggressively to keep short-term interest rates down while also buying treasury bonds that depresses long-term bond yields.  The Fed does not look to change course anytime soon. When the Fed does decide to raise interest rates, it plans to do so slowly.

The bond market had a great 10-year run that mathematically is virtually impossible to duplicate due to the very low yield environment.  However, it is critical to remember the importance of bonds in a globally diversified portfolio.  The ability of high quality and less risky bonds to smooth out the volatility of an overall portfolio that contains domestic and international stocks is critical to long-term investor success.

Investing is uncertain

Building investment portfolios is what we do.  We build them for real people who want to maintain their standard of living in retirement.  We integrate the best scientific evidence with the art of portfolio construction in an effort to give our clients the best possible chance of being successful investors.  However, markets are uncertain and risky by nature so we also spend time making sure our clients do not make emotional decisions based on short-term events or news.  Doom and gloom sells newspapers and books so we often get questions about the impact of recent events on our clients’ portfolios.

I will contrast two very different opinions that I’ve read recently.  First, David Stockman wrote an opinion piece in the New York Times promoting his book “The Great Deformation: The Corruption of Capitalism in America”.  The New York Times article was so popular it went viral on the web.  The crux of the article and the book is this: the country’s economic condition is worse than everyone thinks and on the brink of collapse in the near term future.  Stockman is a former congressman and director of the Office of Management and Budget under President Ronald Reagan.  He is clearly a smart and experienced man who has proffered his thoughtful analysis.  Stockman’s prescription for investors is to flee the stock market and keep all your money in cash.  Contrast that opinion with Warren Buffet, arguably the most successful investor in history, who shared his thoughts in his much anticipated annual letter to shareholders of Berkshire Hathaway.  Quote from the shareholder letter:

American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)

Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.

End quote.  The contrast can be boiled down to “pessimism” vs. “optimism”.  While Stockman may be correct in articulating the very big problems facing America, I do not believe that we are facing the downfall of capitalism in general. I prefer the optimistic view of the future described by Warren Buffet and I expect the markets to survive and reward those willing to endure the risks of investing.

/0 Comments/by