Category : investing behavior

Perception vs. Reality: 2008 to Today

Last month marked the ten year anniversary of the beginning of what ultimately became one of the most significant financial collapses and recessions in our history. Investors closer to retirement saw decades worth of retirement savings seemingly disappear from their 401(k) balances and many young investors were scared out of stocks for good. And yet, just six months following the beginning of the crisis (March 2009), the stock market began what just recently became the longest uninterrupted period of growth EVER.

 

Perception of the stock market since 2008

It turns out that nearly half the country has a negative view of the stock market and how it has performed in the time since the crisis. In fact, a recent study showed that 48% of those surveyed thought that the US Stock market had not gone up at all in the last ten years. 18% actually thought it had gone down. The number of people that own any stock at all has never recovered from prior the the crash either. In 2007, 65% of Americans owned stock in some form or another, but today, that number remains much lower at 55%. So what has actually happened to stocks these last ten years, and what valuable lessons should all investors be reminded of in all of this?

 

The Brutal Truth

It turns out that not only have US stocks increased since the bottom in March of 2009, but the S&P 500, an index representing 500 of the largest publicly-traded American companies, is up over 350%. That is a market that has more than quadrupled it’s value in just 10 years! In other words, looking back, the crash of ‘08-’09 was an historic investment opportunity for those that were able to stay calm and focused on their long-term goals. What many view as the perfect example of why NOT to risk your money in the stock market, has actually become one of the best examples in a lifetime of why it’s so important to invest in stocks when you have a long-term goal like retirement. And for those that don’t have as much time on their side, the crisis proved the importance of including other assets like bonds and cash in their portfolios, in order to help preserve any money they may need for income in the short-term.

 

Today and Beyond…

As we continue to extend what is now the longest period of uninterrupted stock market growth in US history, let’s not forget what happened just ten years ago, and the important lessons we all can learn from all the chaos that became known as the Great Recession. There is absolutely no way to know when we’ll experience another event of that magnitude, but we should expect many many corrections of 10% or more in the coming decades, just as we’ve seen at least once nearly every year over the last century. For those with a long term goal like retirement, remember how important it is to be the one staying calm while the world around you panics. Stay focused. Keep investing. Become the investor most wish they would’ve been a decade ago. We can help you get there. It’s what we’re here for.

 

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Keep Calm and Invest On

Remember when “breaking news” was actually worthy of the term? It’s thrown around so much by networks these days, it feels like everything leading off the news is cause for mass hysteria. Maybe there’s an asteroid heading right for us, or maybe the Sun is supposed to randomly burn out in the next few months.

If that’s the case, your investments aren’t going to do you any good anyway. But in the far-off chance that those things DON’T happen any time soon, it might be good for us to cover something EVERY long-term investor must understand. Just like any set of stairs you encounter, markets go up AND down. It happens ALL the time … so often that at some point investors saving for retirement owe it to themselves to stop paying so much attention to [insert major news network].

We can’t tell you how many times we’ve seen something similar to these following headlines over the years:

“Expert: Crash is Coming, Time to Sell”

“2008 All Over Again?: Analysts Think So”

“Dow Sheds 300: Pros Say Get Out!”

And the very next day…

“Dow Rebounds 350 Points: Bull Market Marches On”

“Analysts: This Year Could Be the Best Year in Decades for Stocks”

“Risk On: Never a Better Time to Buy!”

You get the point. In a world where we now have a 24-hour news cycle, the very existence of any news outlet is highly dependent upon one thing: RATINGS. There is simply nothing better for ratings than fear and panic, which is why those first three headlines will catch more attention than the last three. It’s why negative news will always net more ratings.

Why is this? Well, unfortunately negative events have a greater impact on our psychology than neutral or positive events. This is often referred to as negativity bias and it’s just another annoying and unavoidable part of our human nature. It’s why we tend to pay more attention to a celebrity’s life spiraling out of control than the daily acts of heroism displayed by any of our local fire departments. In the world of finance, it’s why we’re inclined to tune in on the down days and ignore the up days. The media knows this. They thrive on it. It’s also the reason that very simple facts that would likely relieve that fear for the average long-term investor are often left out of the story.

For example, how about the fact that, according to data from the Capital Group, in the last 115 years we’ve seen a decline in stocks of 10% or more on average once every single year? Or the fact that in that same span, we’ve averaged three declines of 5% or more every single year? What about the most comforting fact of all – that there has NEVER been a single time in U.S. history where the stock market has dropped and not recovered. Does that guarantee it will never happen? Absolutely not, but we would have far bigger concerns than our 401k accounts if we saw the first ever permanent crash. When the stock market is falling, viewers are more likely to stay tuned (can you say RATINGS BONANZA?) Do they usually balance it out with historical context and comforting facts? Not so much.

No one knows for sure what the rest of 2018 will bring to investing. Financial news will continue to keep us informed and sometimes on edge, but its role has little to do with the average investor saving for a far-off goal like retirement. Unless you’re a professional trader trying to interpret market data every second of your day, any news related to the day-to-day movements in the stock market should be irrelevant to you. Investing for your retirement is about retirement. If anything, most investors should embrace the volatility, since the market is really just going on sale. It’s not about today, tomorrow, or even five years from now. And if you ARE that close to retirement, you shouldn’t be heavily invested in stocks anyway.

So relax. Be patient. Chill. Sure, it’s a challenge to any investor, but it may also be what ultimately saves you from making enemies with future you.

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Women Investors

3 Reasons Why Women are the Better Investors

A Wells Fargo Investment Institute study found that women perform better than men as investors. We can probably blame testosterone, which makes men quicker to make judgments and less likely to examine facts that might prove them wrong.

So what can you do if you don’t happen to be a woman? Try to emulate the traits that give them the advantage:

1. Women are more patient

Since they tend to trade less frequently than men, they often earn higher returns for the risks they do decide to take. Men on the other hand tend to be overconfident about their investment ability. Additionally, their frequent trading carries both direct and indirect costs, which can eat away at returns. (See also: Leaving your 401k the heck alone)

2. Women are more disciplined

Women tend to stick to their investment plan, which can to lead to better results. However, male investors were six times more likely to make major changes in asset allocation, such as switching from 100 percent stocks to 100 percent bonds, or vice versa.

3. Women are more willing to learn

They are more likely to seek education and advice from investment professionals. Also, twice as many women as men said that what they need most from a financial advisor is education about investing principles and concepts.

 

Room for improvement

The one area where women lag behind is investing confidence. While this might help them make prudent decisions, it also dampens their chances at higher returns in some cases. Become a more confident investor with these tips:

Research

Visit investment websites, take an investment class, or meet with an investment professional. Learn what your employer offers. Explore individual retirement accounts, or, if applicable, your partner’s retirement benefits.

Plan

Create a budget for saving and investing. Set goals with a time horizon and risk level you’re comfortable with.

Act

Choose the asset allocation that works best for your personal financial situation. Regularly monitor and rebalance your portfolio as necessary.

 

A great place for financial advice is blooom, where members have free access to registered Financial Advisors. Send them your questions and you’re on your way to becoming the best investor you can be!

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The Stock Market Sell-Off

Every investor needs to know that market sell-offs are both inevitable and, in fact, business as usual.

This is not our first rodeo… more like 350th

Since 1900, the market has averaged three declines of at least 5% per calendar year (source: Capital Research and Management Company). In other words: The market has dropped by at least 5% about 350 times since 1900! The mistake so many investors make is that they see their account value declining, and hear doom and gloom from the media and friends. They then assume they should sell and “wait for things to get better.” This is not an advisable course of action: The market has recovered and reached new all-time highs not 90% of the time… but 100% of the time.

 

Hindsight is always 20/20

Sometimes, we know why the market is selling off. Other times, it is a complete surprise. History has also shown that the reasons for market sell-offs are rarely what the talking heads were predicting. What we know or fear today will rarely be the actual reason for a future market decline.

 

What should investors do after a big market sell-off?

Know that the recent market decline has nothing to do with what the market will do today, tomorrow, or next month. Many times after steep sell-offs in the market, it goes on to rebound even higher than where it was before.

 

Your not-to-do-list

If you are investing for the long term (like inside your 401k for retirement), the best course of action when you feel scared about the markets is do nothing. Do not panic, do not do something radical like selling out of your investments.

 

Learn to love a good sale

If your budget allows, a market decline is the best time to INCREASE your contributions to your 401k. Think about it: The market has effectively gone on sale. We know as consumers to look for sales and bargains when we are shopping. Americans would be wealthier if they learned to treat market declines as sales and, if possible, bought a bit more.

 

Avoid FOMO

Considering that today, the Dow Jones is around 25,000, wouldn’t you want to travel back in time to 2008/2009 and buy a ton of stocks? During the financial crisis, the Dow went below 7,000! Sadly, very few investors were buying when it was at those low levels. Many were even doing exactly the opposite–the worst possible thing: They were selling at those insanely low levels. Doing this likely locked in losses that many investors may have never recovered from. Most other long-term investors who stayed put and ignored the panic were rewarded by their portfolio values, if they were well-diversified. They climbed up to new all-time highs within just a few years.

 

When in doubt, ask blooom

At blooom, we do our best to communicate these kinds of messages. We worry that there is an entire generation of investors (roughly age 32 and younger) that were likely not investing during the last significant market decline. They have thus only seen the market since 2009 on a fairly robust growth trajectory. We remind our clients that markets never go straight up and that periodic declines are not only inevitable, but actually needed from a risk/reward standpoint.

 

Since blooom specializes in 401k accounts, it is easy for us to help our clients maintain a long term focus, since their investments are generally for long term goals like retirement. We also remind our clients that included in their monthly subscription fee, they always have access to a blooom advisor if they are feeling scared or considering selling out of their investment portfolio.

 

Help us help you

Blooom will put together a beautiful, well-diversified portfolio for all clients using the lowest cost funds available within their 401k plan. However, if a client does something rash and sells out when the markets declines, all of the work that blooom has done goes right out the window – and might never return. We suspect that a lot of wealth is squandered by individual investors not from poor investment selection, or high fee funds, but squarely due to bad decisions and bad investor behavior in moments of emotional exuberance or fear. Be careful not to chase over-priced “hot” funds in good markets, and be sure not to bail out of so-called poorly performing funds in bad markets. The old “buy high, sell low” problem – don’t fall for it!

 

If you would like more information or perspective on this topic – visit blooom’s FAQs regarding market declines.

 

 

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What Kind of 401k Lover Are You?

Valentine’s Day puts a lot of focus on being in a relationship. If you’re reading this blog it probably means that you ARE in a relationship with your 401k, which is great! But just because you’re in a relationship doesn’t mean everything is perfect.

Odds are you fall into one of these six kinds of relationships with your 401k. Let’s put them under the microscope and see what’s going well and what flaws might exist.


The Giver

You are constantly contributing to your 401k. 10%, 15%, or 20%―it doesn’t matter. Anything to keep your 401k by your side all the way to retirement. You don’t care what funds you’re in or whether you get an employer match.

Pros: Contributing is numero uno when it comes to a happy relationship with your 401k, and giving all you’ve got to your 401k can cure a lot of ills.

Cons: The $$$ you put in your 401k should be working for you and not the other way around. Throwing your hard earned cash into a money market account or a high fee investment that doesn’t do anything for you can lead to heartbreak.

Things you might say to your 401k: Oh, you only had a 2% rate of return this year? It’s not your fault. Let me just up my contribution level to make you feel better.


The Taker

You set up your 401k… isn’t that enough? Why do you need to check in on it? It should just be grateful that you contribute a few bucks every paycheck.

Pros: Not looking at your 401k and over thinking it can be a virtue.

Cons: If the foundation of the relationship isn’t there, or if you’re not properly invested, this relationship could be going nowhere.

Things you might say to your 401k: Stop complaining, I could be spending my money elsewhere.


The Controller

One look at you and anyone can tell you care about your 401k. You are very attentive, but somewhere in all that effort you’re putting towards your 401k, you may start to suffocate it with your demands and restrictions.

Pros: You care, you really REALLY do. Attention is important after all, it’s your retirement we’re talking about.

Cons: Too much attention can lead to irrational reactions.

Things you might say to your 401k: What do you mean, your balance is less this statement than last statement? This relationship is OVER!


The Enthusiast/Thrill Seeker

You are always looking for something new. Investing in the same funds just doesn’t do it for you. You’re willing to be a little reckless if it means your portfolio is different from others.

Pros: You live on the edge and are likely to take on more risk in your investments, which can net out.

Cons: 401ks are a long term deal, so changing it up constantly and seeking out the new can lead to betting it all on a potentially bad choice – see bitcoin.

Things you might say to your 401k: Bonds? What are those? Hey baby, let’s time the market.


The Overlooker

You know your relationship with your 401k has problems. Maybe you’re under-diversified or have a high expense ratio, but it’s not “that bad”.

Pros: You’re aware. As they say: knowledge is half the battle.

Cons: Close only counts in hand grenades and horseshoes. This is your retirement and every dollar counts. Every opportunity you miss to fix what you know is wrong is money left on the table.

Things you might say to your 401k: I’ve been with my financial advisor for years. Who cares if he charges me too much to rebalance you?


The Jealous One

You are constantly looking at other people’s 401ks and seeing what they have that you don’t – better funds line ups, more money, rate of return, etc.

Pros: You want your 401k to be the best. That’s why you’re always looking around.

Cons: Not all 401ks are the same and neither are individual financial situations. Measuring your 401k against someone else’s is a fool’s errand and can get you off track or distracted.

Things you might say to your 401k: Bob’s 401k grew 15% this year. Why did you only grow 12%?


Want to take your 401k relationship to the next level? Start with a free analysis with the experts at blooom.

 

Start Your 401k Analysis

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