As many of know, I have transitioned my firm over the past year.  I am now a Partner with Callahan Financial Planning.  One of my goals for this year was to increase my activity on this blog to provide better content.  Look for more content as the year goes on.  Make 2014 a great year!

Matt

As investors we oftentimes find ourselves using the Dow Jones or S& P 500 as the comparative index in order to determine if our portfolio is sufficient. This is just fine if you are someone who has a substantial time horizon or is purely focused on growth. However, most people I work with (baby boomer and older) are typically not in this scenario. Most investors that are nearing or in retirement should be more focused on what return they need to make in order to maintain the retirement goals or lifestyle they desire. More importantly, stay focused on protecting your capital.

Let me give you all an example. Let’s say you have done some income planning and determine that you need 6% annually in order to have enough money to live off of until age 95. Knowing that, why would this type of investor want to be fully invested in a S & P 500 like portfolio in the uncertain economic times we are in today? The answer is that they would not. As investors we always have to ask ourselves, “Am I taking the appropriate amount of risk for the return I need?”

In doing many reviews and meeting with clients and potential clients recently, I have noticed that many people feel they are missing the bus or are concerned that they are not maximizing their return in the markets. This is the same type of behavior that got people in trouble in 2008. Looking back, many investors have admitted that they we probably were taking too much risk then. Yes, 2012 has produced great returns, however, look at the amount of economic and political risk that has been occurring during this time period.

At the end of the day, we all have to remember to keep our emotions in check. Fear and greed is the root of evil when it comes to investing. It is my beliefs that if you focus more on what return you need in order to achieve your goals it will be much easier to manage risk, but more importantly manage your emotions when the markets make you start to get greedy or fearful.

Creating your own family or personal index may be the best solution to keep you on track.

Hope this helps. Enjoy your day.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.  You can not invest directly in an index.

Over the past few years, the markets have reacted very strong after the Federal Reserve has announced or implemented additional strategies to help the American economy.  What you see and read is oftentimes difficult to understand.  I want to clear this up and hopefully give you a better understanding of what the Fed is up too.

Below you see a chart of the S & P 500, 10-year U.S. Treasury yields and Fed Funds rate going back to 2007.  The green shaded areas represent action taken by the Federal Reserve.  In these examples we had Quantitative easing, QE2 and Operation Twist.  Let me explain what is trying to be accomplished by this:

Quantitative easing:  Being that interest rates were already low, the Fed needed to take additional measures.  Quantitative easing is where our Central banks go out and buy treasuries or other government securities.  By doing this, they are flooding the financial institutions (banks) with capital.  This now makes them more willing to lend money.  Remember all those bad investments banks made… they needed capital.  The risk with this is that more money needed to be printed in order to do this.  When there is more money that means future inflation.  This is a major headwind.

QE2:  This is basically the same story.  The Fed created $600 billion out of thin air in order to go out and buy securities.  Another way to look at this is the Fed buys securities in the open market, paying with a government “check.” (That’s how the money is created.) The sellers deposit those checks into their banks. The banks redeploy those deposits as loans to consumers and business. The supply of money is increased, hopefully the economy follows.

Operation Twist:  This may sound like a children’s game, but what the Fed is trying to accomplish here is keeping interest rates low.  By keeping rates low, this will encourage people to buy homes, borrow money for their business or go out and borrow money for personal items.  The Federal Reserve is selling short term government securities ( less than 2 years maturity) and then buying 10-year Treasuries.  Many interest rate products like mortgages are tied to the 10-year Treasury.

I hope this shed some light on what is going.  Based on the chart below, it has thus far.  As I stated, the major problem is when the Fed will start to try and unwind all the debt they have purchased.  There is no defined date of this, but we will know for sure when this starts to happen. 

Hope this was helpful!

Sources: www.ritholtz.com and www.dshort.com

Disclosure: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which invest(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.

Some of you have attended presentations I have done entitled, Smarter than Wall Street. In this presentation, I talk about 4 myths of investing and 5 steps to manage your money like endowments. I will do a few posts on what to take away from this presentation, but today I am going to talk about emotions and investing. Everyone has heard or been told not to get emotionally attached to investing because then you do not make rational decisions… Easier said than done.

Media realizes this. They know that people make decisions based on fear and greed, and that is what sells advertising for them. When the markets are going up you will hear them talking about what is the hottest investment or how people should continue to buy. When the markets are going down, you will hear media talk about how the markets will continue to go down and give off a fearful message.

It is important to keep in mind that there is no one out there who holds financial media accountable to what they predict. If you tune in to CNBC, you will see guests make a variety of predictions. If you make enough predictions, someone will eventually be right.

As investors, we need to tune out this noise and have a plan in place to manage our investment objectively. I stress having a plan to clients. By having a plan, when your emotions get the best of you and you want to make an investment that may not be in your best interest you can refer back to that plan to keep you on track.

I hope that this post helps. As always, please give me your feedback on what you think of my blog. If you know of any friends, family or acquaintances that would benefit from this blog please let me know and I will put them on the distribution list. Cheers!

Disclosure: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which invest(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.