Stocks and bonds are the basic building blocks of our portfolio. Think of stocks as the offense and bonds as the defense. Bonds are basically loans to a government entity or company that are paid back over time. Depending on how creditworthy the borrower is and how long the borrower will take to repay the loan, bonds can be relatively safe investments, or carry more risk. The two big factors that help investors classify bonds are referred to as quality and maturity. (more…)
Stocks represent ownership in a company and provide the long-term growth an investment portfolio needs. When you invest in stocks, you invest in the growth of companies and the economy.
While bonds provide investors with stability and are more predictable, stocks have outperformed them for decades. Whether you invest in large companies or small ones, history shows that stocks will outpace bonds, as the above graph shows. Note, too, the difference between short and long-term bond investments. Over the last 90+ years, short-term bonds barely kept up with inflation, meaning investors who committed to short-term bond portfolios over the long term may have actually lost money over time. In fact, without stocks driving growth in a portfolio, even keeping up with inflation can be a challenge. We know that without stocks, an investment portfolio isn’t going to help you meet your goals. (more…)
Seattle is still reeling with excitement from the Seahawks winning the Super Bowl! Over 700,000 Seattleites celebrated downtown to welcome the champs coming home. No matter where your team allegiance lies, it’s easy to spot the strengths of the Seahawks both on and off the field. These lessons can be applied to multiple areas of life, including your finances.
Here are 12 things everyone can learn from the Seahawks:
1) It’s never too late: Russell Wilson was a third round draft pick but that didn’t determine his performance. No matter when you start saving and investing, there is always opportunity ahead of you.
2) Diversification is key: Every player on a team has a specific job to do, just as every investment in your portfolio has a unique purpose. It’s hard to win with a team full of quarterbacks! Design your portfolio with broad diversification to cover all types of positions.
3) Defense wins championships: There is a saying that “offense wins games and defense wins championships.” Many times it’s the team’s offense that gets all the praise and glory, but without a strong defense to hold back the competition, all of the points scored are for nothing. It’s easy to get caught up in short term performance chasing of stocks, but make sure to manage downside risk with bonds so that your returns won’t disappear in a down market.
4) Find a coach: Every team needs a coach to lead them to victory. Having a financial advisor will keep you on track toward achieving your goals.
5) Don’t compare your strategy to others: Every team has a different approach on how to win games. Your friends and family have their own ideas about investment that may be different from yours, and that’s okay. Stick with the plan you make with your financial advisor – it is unique to you.
6) Break expectations: Seahawks fullback Derrek Coleman is deaf. No one expected him to be able to play in the NFL but he didn’t let other people’s beliefs hold him back. Commit to success and don’t let others get in the way of what you want to accomplish.
7) Take a look back: Teams spend countless hours watching game footage to learn from their mistakes. Look back at historical investments to learn all you can about performance volatility throughout various market conditions.
8) Go all in: The Seahawks have an “All In” sign that they hit on their way to a workout. Often we don’t want to commit to a plan unless we know for sure it will work out…but a plan can’t work unless you commit. Go all in.
9) Never give up: Even when it looks like a team has lost, there is always a chance for a comeback late in the game. Sometimes when a portfolio is down, we are tempted to switch strategies or abandon hope. If you give up too early, you might miss the winning finish.
10) Have fun: Football is tough work but it is also a lot of fun. Always make time for the activities you enjoy with the people you love. As we say here at Merriman – Invest Wisely, Live Fully.
11) Give back: In the midst of practice, games, media interviews, and sponsor appearances, Russell Wilson still makes time to visit the patients at Seattle Children’s Hospital. Appreciate the gifts you have in your life and share them with others.
12) Identify your 12s: Seattle’s fans are known as the 12th man. Even though the fans aren’t on the field, they play an important role in the game. Find fans who will support you through all your wins and losses, and recognize their contribution to your success.
Monday, October 19, 1987—aka Black Monday—was a fearful day for investors across the globe. The damage exceeded 20% in stock market declines by the time the exchanges closed. In the wake of such steep declines, investors too often are driven to act by their emotions. In this case, fear. Fear that the decline will continue. Fear that their hard earned savings will be sucked dry by the markets. A more recent example of this fear was invoked by the financial crisis. In both cases the markets recovered in short order. But, the market never recovers for those who sell out of it. Clearly, fear selling is a bad idea.
Fear is not the only emotion that muddles our investment decisions. Greed is just as dangerous.
The 1990s seemed too good to be true. Investors could not lose money in technology stocks. Valuations seemed to have changed and the exponential rising prices were within the new norm. People got greedy. Some went so far as to use their home equity to purchase stocks. And then, just like that, the party was over. The end of the decade saw technology stocks come crashing down. Those who got greedy and concentrated all of their holdings in technology stocks paid the price.
Anytime the sky is falling or the markets seem too good to be true, remember the mantra—be greedy when others are fearful and fearful when others are greedy.
While fear and greed top the list of emotions that can wreak havoc on your investments, there are others: angst and excessive pride, for instance.
The issue with angst is if you wait for events to happen (government shutdown, fiscal cliff, quantitative easing, etc.) or for the markets to “normalize,” you often miss the boat.
Excessive pride can sometimes drive people to buy individual stocks. It’s the classic cocktail party conversation where someone tells you they bought Microsoft stock in the 1990s or Apple stock at the turn of the century. They do not tell you about the other 10 stocks they bought that went south. By focusing on the one home run, people subconsciously convince themselves that investing in individual stocks is a wise venture. It’s not. In fact, it’s speculation, not investing. Do not let pride get in the way of making smart investment decisions.
Clearly we cannot let our emotions guide our investment decisions. Emotional investing is not successful investing.
Follow these steps to help avoid the pitfalls:
1) Build a plan. Write it down and stick to it. If the markets turn over, do not deviate from your plan. If anything, rebalance your accounts back to their initial targets.
2) Turn off the news and tune out the financial pundits. In the age of information, the evening news is not going to give you a leg up on investing. That is, everyone knows everything and it is all factored into the price of securities.
3) Do not assume things are correlated when they are not. GDP is not nearly as highly correlated to stock market returns as people think. Nor, for that matter, are political events.
4) Diversify your portfolio. Put another way, do not put all of your eggs in one basket. Remember what happened to technology stocks in the 1990s.
5) Focus on what you can control. You can control how much you save and whether or not you succumb to your emotions. You cannot control the markets and politicians.
Here’s the exciting part: if you can keep your emotions at bay, invest wisely and let the markets work, you can reduce your stress and increase the likelihood of a successful retirement period.