Charleston Financial Advisor

Stock Market News

December 7, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

Why don’t the media run more good stock market news? One view is bad news sells. If people preferred good news, the media would supply it. But stock markets don’t see news as necessarily good or bad, rather in terms of what is already built into prices.

One academic study appears to confirm the view that the apparent preponderance of bad stock market news is as much due to demand as to supply, with participants more likely to select negative content regardless of their stated preferences for upbeat stock market news.¹

“This preference for negative and/or strategic information may be subconscious,” the authors conclude. “That is, we may find ourselves selecting negative and/or strategic stories even as we state that we would like other types of information.”

So an innate and unrecognized demand among consumers for bad stock market news tends to encourage attention-seeking commercial media to supply more of what the public appears to want, thus fueling a self-generating cycle.

Insofar as consumers of stock market news are investors, though, the danger can come when the emotions generated by bad stock market news prompt them to make changes to their portfolios, unaware that the stock market news is likely already built into market prices.

This is especially the case when the notions of “good or bad” are turned upside down on financial markets. For example, stocks and Treasuries rallied and the US dollar weakened in early October after a weaker-than-expected US jobs report. Some observers said the “bad news” on jobs was “good news” for interest rates.²

Conversely, a month later, stocks ended mixed, bonds weakened, and the US dollar rallied after a stronger-than-expected payrolls number. While an improving job market is good news, it was also seen by some as cementing the case for the Federal Reserve to begin raising interest rates. In both cases, the important thing for markets was not whether the report was good or bad but how it compared to the expectations already reflected in prices. As news is always breaking somewhere, expectations are always changing.

For the individual investor seeking to make portfolio decisions based on stock market news, this presents a real challenge. First, to profit from news you need to be ahead of the market. Second, you have to anticipate how the market will react. This does not sound like a particularly reliable investment strategy.

Luckily, there is another less scattergun approach. It involves working with the market and accepting that stock market news is quickly built into prices. Those prices, which are forever changing, reflect the collective views of all market participants and reveal information about expected returns. So instead of trying to second-guess the market by predicting news, investors can use the information already reflected in prices to build diverse portfolios based on the dimensions that drive higher expected returns.

As citizens and media consumers we are all entitled to our individual opinions on whether stock market news is good or bad. As investors, though, we can trust market prices to assimilate news instantaneously and work from there.

In a sense, the work and the worrying are already done for us. This leaves us to work alongside a Johns Island Investment Advisor to build globally diverse portfolios designed around our own circumstances, risk appetites, and long-term goals.

There’s no need to respond to stock market news, good or bad.

1. Marc Trussler and Stuart Soroka, “Consumer Demand for Cynical and Negative News Frames,” International Journal of Press/Politics (2014).
2. Mark Hulbert, “How Bad News on Wall Street Can Be Good News,” WSJ MarketWatch (October 5, 2015).
3. Author: Jim Parker, Vice President, Dimensional Fund Advisors with some edits by Coastal Wealth Advisors, LLC. Original article here.

7 Simple Rules for Investing

October 9, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

Today’s blog topic is focused on 7 Simple Rules for Investing, but first, I wanted to take a moment and talk about what we’ve been doing during this recent market correction.

We’ve been rather absent from blogging lately because we’ve been spending all of our time speaking with our clients to ensure their investment portfolio matches their risk tolerance and reinforcing these 7 Simple Rules for Investing. And I know what you’re thinking…shouldn’t that be determined at the onset of the investment process? Absolutely. And it was. But the quirky thing about risk and behavioral finance is that our opinions of our own money change as the markets change. It’s really easy to become more optimistic about the stock market when markets are on the rise; thus causing us to want to become more aggressive when times are good. The same is true when times are bad; convincing us to become more conservative when the markets take a hit. This mental behavior has been studied for decades and a Nobel Prize in Economics was won as a result of a 1979 study in which two psychologists, Kahneman and Tversky, concluded that we feel the “pain” of the losses much more than the “joy” of the gains.¹ Two authors, Thomas Gilovich and Gary Belsky, took this study a step further in their 1999 book (referenced below) to conclude “the sting of losing money, for example, often leads investors to pull money out of the stock market unwisely when prices dip.”²

In our role as an investment advisor, we have to constantly be available to manage the reins on the emotions of behavioral finance. And we do all that we can to address these topics head on. We believe that having a constant finger on the pulse of clients’ risk tolerance is far superior to setting a risk tolerance target in the beginning and never revisiting it. We use a mathematical and statistical approach, combined with group discussion to determine our clients’ risk scores.

Proper portfolio design, in our opinion, is built upon the notion that markets are going to rise and fall, have really bad times and really good times, and over the long-term, provide adequate returns to offset the risks taken. By this, we mean, markets work. We believe the markets are efficient to price in all of the known information out there about a particular security, sector, etc. And this is why we consistently avoid trying to time the markets and buy or sell on “news.” But the markets change and what looked like a promising investment, may turn out to be not-so-promising. In our business, we call these investments, losers. And even portfolios managed by professionals will have losers.

It’s important to understand and constantly refer to the basics of investment philosophy. We’re going to let Jim Parker, Vice President of Dimensional Fund Advisors, outline below 7 Simple Rules for Investing:³

Accept that not every investment will be a winner. Stocks rise and fall based on news and on the markets’ collective view of their prospects. That there is risk around outcomes is why there is the prospect of a return.
While risk and return are related, not every risk is worth taking. Taking big bets on individual stocks or industries leaves you open to idiosyncratic influences like changing technology.
Diversification can help wash away these individual influences. Over time, we know there is a capital market rate of return. But it is not divided equally among stocks or uniformly across time. So spread your risk.
Understand how markets work. If you hear on the news about the great prospects for a particular company or sector, the chances are the market already knows that and has priced the security accordingly.
Look to the future, not to the past. The financial news is interesting, but it is about what has already happened and there is nothing much you can do about that. Investment is about what happens next.
Don’t fall in love with your investments. People often go wrong by sinking emotional capital into a losing stock that they just can’t let go. It’s easier to maintain discipline if you maintain a little distance from your portfolio.
Rebalance regularly. This is another way of staying disciplined. If the equity part of your portfolio has risen in value, you might sell down the winners and put the money into bonds to maintain your desired allocation.

We couldn’t have said it better ourselves. You may have a similar risk tolerance to thousands of other people, yet your portfolio could be drastically different. There are numerous, if not, infinite, ways to construct a portfolio that matches your tolerance for the risks of the stock market. When constructing a portfolio, it should be done in a way that allows you to remain invested even during really bad times. There’s a reason “don’t panic” is the mantra of most investment advisors out there…you should have built a portfolio that takes into consideration your internal panic button, or better said, “the amount of money you’re willing to lose before you make the decision to sell everything.” If you find yourself increasingly worried that your portfolio is not structured according to your risk tolerance and financial goals, give us a call. We’re a Johns Island Investment Advisor who helps clients define their risk tolerance and build a portfolio to match it.

Dimensional Fund Advisors LP (“Dimensional”) is an investment advisor registered with the Securities and Exchange Commission. Dimensional and Coastal Wealth Advisors, LLC are not affiliated companies. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This content is provided for informational purposes, and it is not to be construed as specific investment advice or recommendation.

¹ http://prospect-theory.behaviouralfinance.net/
² http://books.simonandschuster.com/Why-Smart-People-Make-Big-Money-Mistakes-and-How/Gary-Belsky/9781439163368
³ 7 Simple Rules for Investing, Jim Parker, Unhealthy Attachments

Image: Angel Oak in Johns Island, SC

Financial Knowledge

August 19, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

Not everyone is knowledgeable about money and finances, however, it’s a learning process. Keep in mind you don’t know what you don’t know until you know it and we’re here to help. Gaining financial knowledge comes with time and some help. Let us help educate you on a wide range of topics from financial planning, 401k rollovers, and even investing. Let’s get started today to work towards expanding your financial knowledge. We’ll work with you through every step of the way. Give us a call to set up an appointment.

Financial Tips for Graduates

August 17, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

We thought it appropriate to give you 5 Financial Tips for Graduates because we know when you’re just beginning to gain your independence in the world, the thought of managing your finances is a terrifying. For most of us, our parents were there to help us along the way with paying bills, rent, and college tuition. But when graduation rolls around, the reality and panic begins to set in that you’re officially an adult. Although this is an especially difficult time for young adults, it also can be stressful on parents as you completely let go and allow your child to enter the real world. For these reasons, we thought it would be helpful to discuss 5 financial tips for graduates and their parents to feel comfortable during this life transition.

5 Financial Tips for Graduates:

Create a Budget

Although this may seem obvious, it is extremely important, and RARELY done! This is probably the first time in your life that a large, steady paycheck is being deposited into your bank account. For this reason it can be very tempting to impulsively spend, but this is when a well-organized budget comes into play. It’s okay to treat yourself occasionally, but just remember to budget for those guilty pleasures. Even though, creating a budget may seem like a burden, there are countless resources, such as financial smart apps, to help you easily manage your budget. Using a budget now will create healthy financial habits down the road making life much easier for you.

Start Saving for an Emergency Fund

Saving is the key to financial success, so why not get a jump-start on this at a young age? Saving is a habit and the earlier you develop this habit the better, especially due to the volatile state of our current economy. Life throws you curve balls, so it’s important to have an emergency fund. You never know when you may be laid off, are involved in a car accident, or have costly medical expenses. We suggest saving six to nine months worth of expenses into your emergency fund, so you can be prepared in the event of one of these worst-case scenarios.

Begin Funding a Retirement Plan

You just graduated college and retirement is probably the last thing on your mind. Numerous studies show that it’s crucial to start contributing to your retirement fund as early as possible. This is definitely not the most glamorous way to use your paycheck, but it will be beneficial for you in the long run. Many employers match a portion of what you contribute to your 401k. This is an exceptional perk that employer’s offer and if yours does then take advantage of it! If you can swing it, contribute the maximum amount that they match. It’s pretty much like getting free money. You’ll be thankful you did many years down the road. If your company does not have a retirement plan, then don’t worry, you’ll just have to start an IRA.

Start Paying off Student Loans

After four years of college, most of us will likely accrue some student loan debt. While we are of the belief that this would be considered “good” debt, if there is arguably such a thing, it’s important to understand how paying this down consistently benefits you in the long-run. We know you’ve seen them…the countless ads on your Facebook feed about student loan consolidation help and other various debt programs out there. We’ll get to the bottom of these in future posts but know that a simple phone call to your loan servicer (the company that mails you the statement) is all you’ll likely need to consolidate all of your student loans. No need to pay another company to consolidate your federal loans into private loans. There are countless options to consolidate with various terms – all designed to fit your lifestyle. How awesome is that?! Keep in mind that different loan types have varying consolidation opportunities and rules. We suggest you do whatever you can to choose a fixed rate repayment plan and make it a line-item in your budget. Try to automate the payment each month too that way you’ll help your credit score by showing consistently on-time payments. The other benefit to federal student loan debt is the debt forgiveness in the event of your death – your spouse or family won’t be liable; basically the debt will die with you.

Protect your Credit Score

It can be tempting to swipe the credit card whenever you get the desire to make a purchase, but take caution! Be sure to pay all bills on time because even if you miss one payment your credit score could take a plunge. There are many dangers associated with poor credit that can make it difficult to get a good job or approval for an apartment lease, not to mention paying higher interest rates for years to come just because you missed a payment. To avoid these problems and to ensure a high credit score, set up automatic payments for your regular expenses, such as rent and insurance. If you can swing it, choose to use a software solution like Credit Karma to help you monitor your score and to ensure items reported to your report are accurate.

During this monumental time of your life, we want to help guide you towards financial independence. We’re a Johns Island Financial Advisor that specializes in financial planning and investment advice. We’re also pretty laid back and genuinely fun to be around, ha! Let us help you get off to the right start as you begin the next chapter of your life. Contact us today to set up a complimentary appointment.

Image Credit: Ian Norman

401k Rollover Rules

July 29, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

It’s often a common misconception that when switching employers your best and only option is to do a 401k rollover, but did you know you don’t have to? In reality, you have multiple options when managing your 401k account so be sure to know the 401k rollover rules. Your situation is unique from anyone else and so should your money management plan. Let us be your financial partner to help you determine if a 401k rollover is the best option for you. Get in touch with us today so we can begin successfully planning for your future!

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