The Importance of Discipline

Benjamin Graham’s famous book, The Intelligent Investor, offers insight into the most important trait in investing, discipline. Graham explains you don’t have to be smarter than the rest, just more disciplined than the rest.

We often think investment success is achieved by picking the next hot stock or manager/fund that’s been beating the market, but that is a flawed approach. In the words of Graham, “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

While all advisors and managers strive to outperform the markets over time for their clients, the single biggest thing a good advisor can do is be there to act as your behavior coach.

Many studies show investors are often their own worst enemy, letting emotions drive their financial decisions. This ultimately means doing the wrong thing at the wrong time for the wrong reasons. Advisors are there to work with you to help you determine your goals and craft a long-term plan funded with a long-term portfolio. Together, you continue working the plan through all the cycles of the economy, and all the fads and fears of the market. (more…)

Hiring a Financial Advisor

So you’ve decided to hire a financial professional to help you navigate your future. You’ve talked to friends and family members, and while you trust their recommendations, putting your financial future into the hands of someone else is a very big deal. You need to do your own due diligence, but where do you start? Not all financial firms/advisors are created equal. And with all the options available to us, many people decide to go it alone out of fear. They fear they could be hiring the next Bernie Madoff, or that they might end up being a number in a long list of clients. The task can seem so daunting that it’s often easier to hire the first advisor you meet, or do nothing at all.

It’s a big decision and many don’t know what questions to ask and what to look for. The below can help provide anyone looking to hire a financial professional a place to start. The questions are not meant to sway anyone in a certain direction, but rather to help ensure you hire someone you feel comfortable with and confident in.

Understand how the advisor is compensated.

Find out exactly how your advisor is paid and make sure you understand any fees and charges – and have them in writing – before making any final decisions. Fee-only means the advisor does NOT earn any commission, while fee-based advisors can earn commissions.

I believe fee-only advisors are best. I formed this belief working for firms that were fee-based and fee-only, and witnessed the practices at each. Fee-only advisors do their best to align their interests with their clients. They don’t make money off the investments they recommend. In a fee-only structure, anything that comes out of your bottom line in turn comes out of the advisor’s bottom line. Therefore, it’s in the advisor’s best interest to only recommend investments they truly believe are in your best interest.

Fee-based advisors might have incentives to sell certain products. (Have you ever heard: “If you want to buy your financial advisor a new Mercedes, buy an annuity?”) Fee-based advisors can fall prey more easily to their clients’ views and emotions, especially during volatile markets. You want to make sure you are hiring someone that will give you the best advice, even if it isn’t what you want to hear. “The difference between successful people and really successful people is that really successful people say no to almost everything.” – Warren Buffet. You don’t want a “Yes” man. (more…)

Women in the Advising Industry

Merriman CEO, Colleen Lindstrom, was recently quoted in an article from CNBC about women in the advising industry, giving three simple ways to help women make progress and close the profession’s gender gap. Check it out here.

 

 

 

 

What’s with the Corrected 1099s?

iStock_000085316771_XXXLargeIt’s tax season, and like last year, you received a corrected 1099 in the mail from your account’s custodian, such as Charles Schwab. If you already filed your taxes and are just receiving the corrected 1099 online or by mail, there’s no need to panic.

Revised 1099s are commonplace, and in the majority of cases, the custodian isn’t causing the revisions or holding up the process. Custodians are, however, required to issue a corrected 1099—no matter how insignificant the changes are—so they can give account owners the most accurate, up-to-date information for filing their taxes before the April 15 tax deadline.

To produce a 1099, custodians receive and aggregate all available information relating to distributions made from investments in an account during the previous calendar year. This information includes the character of distributions, such as dividends, qualified dividends, interest, capital gains or return of principal. One such investment is a mutual fund, which is often composed of 100s if not 1000s of securities. A diversified portfolio is often made up of 10 or more mutual funds, and if just one of these securities within a mutual fund issues a correction, the 1099 may need to be revised.

If you received a revised/corrected 1099 and already filed your taxes, you may not have to do anything. The revisions might not be meaningful enough to require filing an amended return. The 1099-DIV, related to the characterization of dividends, is the most commonly revised 1099 form. If the revisions end up being significant enough to impact your tax return, then you can always file an amended return with the correct information. If this leads to a refund, then you have three years from your original filing date to file an amended return to receive the refund. If the revision leads to owing more taxes, filing an amended return as soon as possible will save you on interest and penalties.

Waiting until closer to the April 15 deadline to file your taxes reduces the risk of receiving a corrected 1099 and having to file an amended return reflecting the changes.

Merriman INSIGHT – This too shall pass

The stock market has delivered a very volatile week to investors, perhaps striking a nerve not felt since 2008. As I write this, the S&P 500 has dropped more than 5% in a week and almost as much today, causing many investors to recall the sickening downturn of what some called “The Great Recession.”

Since 1980, the average intra-year decline for the S&P 500 has been -14.2%, even though annual returns were positive for 27 of those 35 years, or 77% of the time.

082415Chart

The S&P 500 has more than doubled in value from March of 2009 , and we have gone more than 1,400 calendar days without as much as a 10% correction. This is the third longest stretch in over 50 years without such a decline. Since 1928 the S&P 500 has experienced a 10% correction almost once per year with an average recovery of 8 months.

082415TableCorrections of 20% or more for the S&P 500 have historically occurred at the end of market cycles. In the short run the S&P 500 has pulled back 5% an average of four times per year, or about once per quarter. In fact, the S&P 500 has experienced a 5% or greater pullback every year since 1995. Drawdowns of 2%-3% occur far more often, at least monthly on average. As such, pullbacks alone should not be a reason for panic.

In times of increased volatility such as we have experienced, it’s important to revisit these important lessons that are the underpinning of a successful investment strategy. (more…)

Old Scheme, New Tricks

iStock_000027123745LargeInsider trading is not a new concept, but it continues to be a high priority for the SEC’s enforcement program because it undermines investor confidence in the fairness and integrity of the securities markets.

Individuals are getting more creative in looking for ways to cover their tracks. In 2014 the industry has seen everything from someone attempting to hide insider trades by using a relative’s account in a foreign country, to a man writing tips on post-it notes that he then literally ate to eliminate the evidence. Meanwhile the SEC is leveraging more technology tools than ever before to strategically detect illegal trading activity.

Put simply, insider trading is buying or selling securities while in possession of material, nonpublic information about the security. Insider trading in this context is illegal – you can’t profit from information that is not available to the whole market. It is also illegal to communicate (or “tip”) material, nonpublic information to others who may trade in securities on the basis of that information. All information is considered nonpublic unless it has been effectively disclosed to the public. Material information includes anything that an investor might consider important in deciding whether to buy, sell, or hold securities. For example: new product development, earnings reports, mergers & acquisitions, major personnel changes, obtaining or losing important contracts, litigation, or a big scandal.

Just an investigation, even without subsequent litigation, can be very costly both financially and personally. Penalties for insider trading vary depending on the severity of the crime, but generally include disgorgement (forced giving up of illegal profits) plus interest, civil fines of $1 million or three times the profit gained or loss avoided through the trade (whichever value is greater), criminal penalties up to $5 million, bar from serving as an officer or director of a public company, and imprisonment for up to 25 years.

You should never trade while aware of material, nonpublic information. If you receive a tip: don’t place any trades; don’t share the information with anyone; and tell the person who gave you the tip that it is insider information that he/she should not be sharing with anyone.