Psychology of Investing

How to Use Poker to Become a Better Investor

by Merriman | Jul 20, 2022 | Psychology of Investing, Tech Focus, Wealth Enhancement

Investing can be a challenging and precarious endeavor.

There are a host of common mistakes investors make, and they almost always have serious consequences. Even the most stable investment can go wrong, and often forces outside your control affect your ability to make sound decisions. Consider those who had investments in Russia before the war broke out in Europe—they couldn’t foresee the impact here in the US, but it is real.

Outside of those market forces, there are skills that investors must possess which don’t seem to come naturally to all; indeed, some skills are in direct contrast to each other. For instance, you must be able to act quickly and decisively but also be restrained and assemble facts before investing. You must understand the complexities of the market, but sometimes you may need to go with your gut feeling. You must invest big for significant returns, but also take care never to overreach.

Where can one learn the skills required for such a complicated project? Oddly, the poker world can teach us many lessons, and good poker players have gone on to be good investors and vice versa. Vanessa Selbst, one of the most prominent poker players in the world, joined the world’s largest hedge fund, Bridgewater Associates, in 2018. She made the claim that there were similarities between the world of investing and the poker circuit and that, subsequently, her skills were transferable. Her success with Bridgewater underlined that belief.

What aspects of poker can help make someone a good investor? In essence, poker is a game of investing: you invest chips in a hand for different reasons. You are then either rewarded or suffer losses because of your actions. However, specific elements of poker make it a great game for investors to indulge in to test their skills.

Here’s why.

Informed Decisions

Like poker, investing is a game of skill and chance. You must make decisions based on the information available but also be aware that market forces, like other people’s hands in poker, can change your luck. Skill in poker comes by calculating pot odds, working out the possibility of winning a certain hand based on your information and factoring in the potential variables. Investing is pretty much the same if you scratch the surface; you have some information available, and you work out how much to commit based on that knowledge.

Bankroll Management

That brings us to a critical part of both poker and investment: your bankroll. To invest, you must have stake money, and to play poker, you must have a stack of chips. Managing your bankroll and ensuring you’re in the game every time a hand comes up is a real challenge. During a poker game, you use the information available to you to make your choices. You may go all-in if you have two aces, and there are two on the table—that’s a solid hand. Would you do the same on a pair of twos, even with a third on the river? Possibly not. In investing, it’s much the same. You commit to something that guarantees a return but hold some back for an investment that isn’t quite as certain.

Deal with Losses

In poker, losses are inevitable. Nobody wins every hand, and sometimes you’ll commit to a play that sees you take a hit. It might be a simple case of having a weaker hand than an opponent, or you might have been bluffed. Either way, you’ll lose chips. The best players lose chips, just like the best investors lose money. Not every foray into forex is successful, and not every stock option goes up. Being a good investor is about handling that loss. Don’t chase the money back; move on and learn from the experience. In poker, if you threw a stack of chips into a hand but the river didn’t bring the cards you needed, you’d need to cut your losses, get out, and start again. That’s solid advice for investors to heed: deal with the loss and move on.

Written exclusively for Merriman.com by: Breanna T. Worden.
Breanna is an investor and poker enthusiast from Carson City. Having spent many years working for investors in London and Tokyo, he settled in the desert with his partner Charley.

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

The Building Blocks of Portfolio Risk Management

by Lowell Parker | Jul 12, 2022 | Advisors, Goal Planning, Lowell Parker, Psychology of Investing, Risk & Reward, Tech Focus, Wealth Preservation

When markets are rising, risk management seems easy—invest, sit back, and watch your investments grow. Things get a bit trickier when the markets experience volatility and decline. These are the times when you need to understand the amount of risk your investments are subject to and how that risk relates to your financial plan.

The first and least tangible measure of risk is qualitative in nature: how much risk are you willing to take? How would you feel, for example, if the markets declined more than 20%? What if the markets fell by more than 40%? Generally, what is the level of decline that you are comfortable with that will encourage you to stay invested and allow for your plan to thrive? Take some time to think about it. While it is easy to come up with a threshold or a hypothetical number, it is different in real time (consider the financial crisis or the markets’ initial response to the COVID outbreak, for example).

Once we have a handle on your subjective feelings around risk, there are a variety of tools we use here at Merriman Wealth Management to help our clients manage the quantitative measures of risk.

First and most important is answering this question: what is the amount of risk my portfolio can take within the context of my financial plan? This is a super important question. Too often, folks will bifurcate their investment and financial plans. This does not typically lead to successful outcomes. We manage this for clients by calculating statistically valid risk and return measures for our clients’ portfolios—i.e., we expect an all-equity portfolio to return 9.52% net of fees per year with a standard deviation of 20.49. A more moderate 60% equity portfolio would return at 7.95% and 13.06, respectively. Understanding these figures within the context of your accumulation and distribution plans is what matters. The typical recipe is for folks in their early years to take on more risk, as they have time for the markets to recover from declines. In contrast, folks later in life have less time to recover, and a more moderate portfolio is conducive to their plan.

The next risk management tool to understand centers around the sequence of returns. While one can craft statistically valid long-term expectations for portfolio risk and return, it is extremely difficult to predict returns in any given year. Consider 2020: who would have thought the markets would have rebounded so swiftly?

One thing to keep in mind with respect to sequence risk is what we call “bad timing.” What happens if you retire (switch from accumulating to decumulating) and the markets have two successive bad years? This is a good stress test for your portfolio. Pass this test, and your plan is likely in good shape.

The next measure to consider is the longer-term variability of returns. We measure this by running 1,000 different return trials for our clients (Monte Carlo analysis), effectively looking at everything from years of sustained above-average performance to years of sustained below-average performance and everything in between. The results are considered a success if greater than approximately 80% of the trials result in money remaining at the “end” of your plan.

In conclusion, consider the list of questions below as you evaluate the risk metrics of your plan:

What are the risk dynamics of my current portfolio, and how do these relate to my financial plan?
What is the outcome of my financial plan if I retire and the markets have two successive bad years?
How am I accounting for the sequence of returns? What is my plan’s probability of success—will I have money left at the end of my plan?

Here at Merriman Wealth Management, we live by our tagline of “Invest Wisely. Live Fully.” If you are a Merriman client, we’ve got you covered. If you are not a Merriman client and would like a holistic review of your financial plan and corresponding risk metrics, let us know, and we would be happy to take you through our complimentary Discovery process.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Nothing in this presentation in intended to serve as personalized investment, tax, or insurance advice, as such advice depends on your individual facts and circumstances. Past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

Common Investor Mistakes During Market Corrections

by Andrew Bloom | May 17, 2022 | 401k, Andy Bloom, Investing 101, Psychology of Investing, Risk & Reward, Tech Focus

When it comes to investing, market corrections are inevitable. Since 1950, there have been 37 declines in the S&P 500 of 10% or more—or approximately one every two years. Enduring these corrections is the price we pay as long-term investors striving to meet our financial goals. How we act during these time periods is what separates the rookies from the professionals and can dramatically alter how successful we are in achieving those goals.

We all tend to have a higher risk tolerance when markets are performing well. During a review with our financial advisor in the comforts of a home or office, we can easily imagine a world where stocks might be 10% to 20% cheaper on paper and how that may impact our financial goals. However, when we think about future risks in the markets, we tend to underestimate how we will feel in the moment. We lose sight of what else is happening in the world that is causing the markets to decline and how that might impact us personally. This year is no different, and the laundry list of reasons is long:

The war in Ukraine is costly
Inflation is the highest in 40 years
The Federal Reserve is tightening monetary policy
The supply chain is a mess
Mortgage rates are rising at the same time housing prices are at all-time highs
The pandemic is not over
Market valuations are too expensive, and we are overdue for a reset

The bottom line is, there is always a reason for why we experience market volatility, and how that impacts us personally can create stress, fear, and anxiety. When we let our emotions take over, we naturally have an urge to do something about it. These emotional reactions can lead to mistakes that can reduce the probability of meeting our finance and investment goals. Below are common mistakes investors make during market corrections and steps we can take to help mitigate costly errors.

Mistake #1: Looking at the market daily

When headlines are scary, the daily moves in the stock market are volatile and unpredictable. Checking the market or your portfolio frequently will only heighten any fear and anxiety and may result in poor investing decisions. During difficult markets, it is important to remember that you have an entire team working for you at Merriman. We have designed your portfolio using decades of academic research to weather all types of market environments so you can have peace of mind. We are also here to take on any blame for when things do not go as planned. You should take advantage of the resources at Merriman and schedule a time with your advisor to help refocus on your long-term plan.

Mistake #2: Deviating from an investment plan or not having a plan at all

Another reason you have an advisor at Merriman is to create an investment plan that aligns with your goals, return expectations, and risk profile. The plan is a customized, long-term strategy meant to withstand multiple market cycles. If you have the urge to change your plan during a market correction, then have a conversation with your advisor and ask the following questions: Have my long-term goals changed? Am I still on track to meet those goals? If I deviate from my investment plan, how will that impact the probability of successfully meeting my goals? These questions will help reduce any reactionary emotions and shift your mindset back to the big picture.

Mistake #3: Trading more frequently or trying to time the bottom

Day trading and market timing strategies are automated systems that utilize algorithms and programmed rules designed to execute trades in milliseconds. This places the human day trader at a significant disadvantage. While the data supports that day trading or attempts to time the market are not additive to long-term returns, market corrections can be an excellent time to be a buyer.
However, it is vital to have an investment plan in place so you are prepared to execute in the moment. As an example, a rebalancing strategy is one method that is highly effective for long-term results. This removes emotions from the equation and allows for a disciplined plan of attack during market downturns.

While your feelings play a vital role in determining the right long-term strategy for you, we cannot let emotions dictate our investing decisions, particularly during market corrections. This can lead to short-term mistakes that, left unchecked, can have negative impacts on your retirement goals. A disciplined investing approach based on facts, not emotions, is the winning formula.

Generation 401(k)

by Alan Hensley | Feb 8, 2022 | 401k, Alan Hensley, Psychology of Investing, Tech Focus, Wealth Enhancement

The 401(k) has only been around since the early 1980s. When Indiana Jones was searching for the Lost Ark, employees were just beginning to contribute to their own retirement savings instead of relying on employer-run pension plans. Widespread adoption took a few years, so we’re just now starting to see a generation of hard-working Americans who were in charge of their own retirement throughout their entire career. I call these individuals Generation 401(k).

Bull markets in the ‘80s and ‘90s gave a lot of people confidence that 401(k)s were a much better way to save, but then a couple of recessions in the 2000s made everyone take a closer look at the pros and cons of self-directed retirement savings. In reality, 401(k)s were a way for employers to cut costs and worry less about having to make pension payments in the future. For employees, being in control of one’s own retirement seemed like a great opportunity; but it turns out it was more of a huge responsibility than anything else.

Before 401(k)s, many employees worked hard and didn’t think about how much they needed to save to create an income stream during retirement because their pension would take care of it. The pension wasn’t optional—it was automatic—and the employer was on the hook if anything bad happened in the stock market. Then, all of a sudden, the 401(k) came along, and employees had to choose how much to save, figure out where to save it, and then be able to stomach the ups and downs of the economic roller coaster. As a result, there is a whole generation of soon-to-be-retirees who are just now realizing they don’t have enough saved to enjoy life after work.

Millennials aren’t Generation 401(k). For the most part, it’s the parents of millennials who got stuck making self-directed investment decisions but lacked guidance and education on how to do it. It’s not their fault. The parents of Generation 401(k) weren’t able to teach their children how to invest wisely because it was never something they had to worry about. The result was inevitable: When it comes to preparing for retirement, trying to figure it out along the way isn’t the best path to achieve a stress-free life after work.

Where does this leave us today? For many in Generation 401(k), it’s catch-up time. Quite literally. In 2001, laws changed that allowed individuals to put more into their 401(k), including a new rule that allowed employees 50 or older to save more than their younger colleagues. These extra contributions for those over 50 are called “catch-up” contributions. This means that the final 10–15 years before retirement is a crucial time for saving as much as possible. In other words: It’s pedal to the metal time for saving.

For the younger generations, millennials and Gen Z, financial resources and education have caught up to the times. Young adults in their 20s and 30s know that achieving financial independence is their responsibility. The internet has made finding planning tools and investment knowledge available at the touch of a button or a voice command (“Hey Siri, how do I save for retirement?”). Preparing for early retirement has even sparked a revolution in how we perceive life after work. The “Financial Independence, Retire Early” (F.I.R.E.) movement has an almost cult-like following. The principles at the core of F.I.R.E. are nothing new, but the delivery has entered the 21^st century by embracing technology and social media.

There is one common thread between Generation 401(k) and the younger generations. Whether retirement is 5 years away or 30 years away, it’s not going to happen the way you want it to happen without a plan. People who are planning to retire can do it alone, or they can choose to work with a professional. In these times of information overload, the allure of the do-it-yourself method has created paralysis-by-analysis for many. There are so many different moving parts to putting together a well-thought-out retirement plan that many people start down the path only to end up frustrated and rudderless before actually doing anything.

If you find yourself worried about having enough when you retire and you don’t have time or energy to dedicate to creating a financial plan, then you should hire a professional who can help you. Also, it’s not enough just to create a plan. You need to work with someone who will ensure that you implement your plan. Hoping you’ll be able to enjoy life after work is a stressful way to go through life. Knowing you have a solid plan in place to achieve your financial goals can give you peace of mind. How do you want to retire? Hoping it’ll all work out? Or knowing you can be financially independent?

DISCLOSURE: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax or legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

Overcoming Financial Fears

by Aimee Butler | Nov 30, 2021 | Advisors, Aimee Butler, Goal Planning, Psychology of Investing, Wealth Enhancement

Early in my career, I had several instances of folks canceling their appointments with me last minute. Some were for emergencies with work or family, and some were for reasons such as “not being prepared to meet” or “not sure this is the avenue I want to take” or, in rare cases, saying nothing at all. It was easy to take that personally, but over the years I have come to realize that such cancelations or procrastination in general when meeting with a professional financial planner is often driven by fear.

Let me give you some context. When someone has a financial problem today, they often will hit the internet—Google, YouTube, a blogger whom they follow for answers. When answers are harder to come by, they might call a trusted friend or family member and ask for help. Getting even to this point takes time; the question may be put back on the shelf for another day. But let’s assume it is a big issue, like buying a new home and figuring out how to finance two homes for a time. This person will need answers, soon, and a professional advisor to help. From here, they may ask for a referral or hit up Google again for folks to call—but then it comes the call, scheduling, and SHOWING UP to the appointment. They have gone through five or more steps just to get to appointment day, and now they are ready to cancel.

Why? We live in a world where finances are not often discussed, even amongst our closest family. We have been taught that you don’t discuss it, and then we are bombarded for years with the Joneses’ owning the next big, expensive item. Facebook and Instagram have shown us the best of other people’s lives; and by comparison, we feel inadequate, even if our financial road has been relatively free of detours. This feeling can make it difficult to approach a professional and lay out our financial truth. But I am here to say that it doesn’t have to be.

As an advisor, I pride myself on being neutral. Your financial life up to today is what it is, and we cannot change those facts. If you have debt, feel like you should have saved more, are late to the game, or have gotten this far by sheer luck, it does not matter. In fact, it does not change who you are as a person. If you are asking for guidance, any great advisor will take the time to educate you on what they feel is best for your situation and will strive to make you feel at ease.

As you are searching for an advisor, look for someone who you feel you can trust. Meet with several if the first one isn’t right. In fact, check out our blog posts on what to look for in an advisor and the 10 reasons why clients hire us. Everyone has something in their financial past that they are not proud of, and airing that to a stranger can feel scary; but I promise that we are not the “financial confessional” I once had someone mention to me. We are here to help and would love to meet you.

Inflation Is Rising – Should I Be Worried?

by Paresh Kamdar | Nov 2, 2021 | Merriman's Take, Paresh Kamdar, Psychology of Investing, Wealth Preservation

Inflation is rising—should I be worried? What can I do to protect my wealth against inflation if it continues rising?

According to the US Bureau of Labor Statistics, the Consumer Price Index (CPI)—the generally accepted measure of inflation—increased by 5.3% for the 12 months ending in August 2021. Prices for all items less (the more volatile) food and energy rose 4.0% over the last 12 months ending in August. This is a much larger increase in inflation than we’ve seen in over a decade. In the decade earlier, the annual increase in the CPI has remained lower than 2%. In fact, for many of those years, it was even below 1.5%.

With inflation on the rise, many clients are asking what we are doing to protect their assets against this increase in the cost of everything.

A colleague of mine recently shared a chart that I found very telling:

Chart produced by Craig L. Israelsen, Ph.D.

www.7TwelvePortfolio.com

This data shows that investing in stocks has provided a solid defense against inflation—whether we were in a rising interest rate environment or a declining interest rate environment.

The data suggests that in higher inflation periods, small cap stocks have been particularly valuable.

The economy is a very complex organism with so many different variables that will be affected if indeed inflation continues to grow, yet one foundational reason that stocks are a good defense against inflation is that companies pass on the higher cost of materials and goods to consumers. As consumers, this does mean we pay higher prices for things; and as investors, it means that we grow our portfolios, earning a premium above the inflation rate.

Our research team is monitoring the current trajectory of inflation. Your portfolio at Merriman is already prepared for the potential of continued rising inflation. We “tilt” our portfolios towards small cap stocks. Other ways your portfolio is protected against inflation include using REIT’s and inflation protected bonds (where appropriate), keeping our bonds “short” and “Intermediate” in duration – which also helps in keeping, what we feel, is the right level of defense against stock market drops. We use cash flow modeling to explore what it may look like if inflation was to remain high for each of our clients.

You have worked with your advisor here to determine right mix of stocks for your situation. We believe keeping the right mix of “offense” and “defense” has been and continues to be the best way to balance the constant and changing risks posed to your investment portfolio. If you aren’t sure if you have the right balance for your situation or wish to understand how higher inflation can affect you specifically, please don’t hesitate to reach out to us for assistance.

All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax or legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.