By Richard Oxford

With all of the market history, Internet Stock Guru’s, and other information available, the average investor still underperforms when compared to the market.

They are investing emotionally rather that logically (without emotion).

Let’s address causes and potential solutions.

What is Emotional Intelligence?‍

Emotional intelligence (EI) represents the ability to understand and manage one’s own feelings and emotions. Emotionally intelligent people excel at managing relationships with others and making favorable decisions under pressure. Emotional Intelligence in investment is the ability to make logical decisions while avoiding emotion driven mistakes. These would include decisions driven by fear, greed or jealousy. ‍

In 1990, psychologists John Mayer and Peter Salovey of Yale theorized that a unitary intelligence underlay those other skill sets. They coined the term, emotional intelligence, which they broke down into four “branches”:

• Identifying emotions on a nonverbal level
• Using emotions to guide cognitive thinking
• Understanding the information emotions convey and the actions emotions generate
• Regulating one’s own emotions, for personal benefit and for the common good⁽¹⁾

How Do We Unpack This?

So what does that mean to you as an investor?  I’m sure that you understand the words, but what is the effect on your self-managed portfolio?

1. Self-investors tend to buy too early and for the wrong reason!
2. Private Investors tend to buy because someone else bought and has done well!
3. People investing their own money tend to hold stocks longer than they should and ignore market signals.
4. Investors can be emotionally attached to their decisions.

Let’s address each of these.

Buying Early

In the early 2000’s, after the crash, my own father bought Petsmart stock.  His reasoning to me was that it had been up to $30/share 6 months earlier and it was a sure thing.  My response is that there could be a reason for the drop, but he was adamant.  The stock went to $2 or so and hovered, forever. He bought too early, he bought for the wrong reason.

Follow the Leader

Face it folks, you are playing into large investors hands when you buy because they bought. People like Warren Buffet are successful because they share their purchases well after the fact.  Then followers buy the stock driving the price up.  Besides, do you think Buffet pays retail? No, most of his transactions are private sales at a significant discount.  He beat you twice.

Holding too Long

Investors tend to be extremely greedy. Market moves tend to have signals.  Competent investment managers watch for the signals of a change in direction.  Individuals generally do not!  The thinking is when the market has a direction it will continue forever.  I made 20% last year; I’ll make 20% this year.  They ride the wave to the point it crashes and then they ride it down past where they should have taken their lumps.  The old saying, “Pigs get fed and hogs get slaughtered” applies here.

Emotional Attachment

Let’s face it folks, nobody likes to be wrong.  Whereas many an Investment Advisor will drop a bad decision like a hot rock, individual investors tend to convince themselves that their decisions were correct and hold too long. It’s sort of a fight or flight syndrome in the stay or exit decision.

Equities buying should be a totally clinical analysis of the potential ROI on the purchase based on fundamental or technical.  (Good companies/products are not always good stocks.) Liking the product is not prerequisite to purchasing the stock (i.e. Blackberry).

Possible Solution

“However researchers have recently uncovered some hard numbers. Their findings? Americans reach retirement with approximately 15% more money and report feeling more at ease about their financial lives — all by simply working with a financial advisor. Additionally, 79% of those who consult a financial advisor describe feeling confident in achieving their retirement goals.⁽²⁾”

These truths carry through in your personal accounts and self-managed IRA as well as 402(k) type accounts.  You are better off finding a competent Investment Advisor and you will be wealthier later in life and probably at death. They have no emotional attachments.

“PLAN EARLY AND PLAN OFTEN!”™

Credits

• “Daniel Goleman’s Emotional Intelligence Explained”
• The Numbers Tells All: Financial Advisors are Worth Every Penny

10/09/2018

WiserAdvisor announces that Richard Oxford of Richard Oxford Financial has been awarded admittance as a member of its directory of financial advisors.

Financial advisors are granted admission into WiserAdvisor (www.wiseradvisor.com) based on their credentials and qualifications. All members offer their services to investors with a fee rather than solely with commissions, allowing them to assist investors with a variety of different investment options. All members are also properly registered with the SEC, FINRA or other regulatory organizations.

Since 2003, WiserAdvisor has focused on taking much of the guesswork out of finding a qualified financial advisor or financial planner. This is done both through the stringent admittance guidelines, as well as through the information provided to investors about each member advisor. All members must complete an extensive profile outlining their services, qualifications, and credentials, including their educational background. 

Because of the strict standards that a financial professional must meet in order to become a member, WiserAdvisor only admits a select few high-quality financial advisors and financial planners. More than 600,000 professionals can provide insurance and financial advice. Less than 1% have been granted membership into WiserAdvisor. 

Thousands of investors use WiserAdvisor each year to find local financial advisors and planners and trust that WiserAdvisor will help them find the right professionals to meet their unique needs.

About WiserAdvisor.com

WiserAdvisor is an online service that connects investors to local financial advisors and financial planners. It is an independent and free service provided to investors, allowing them to find local professionals who can help them build their portfolios, plan for retirement, manage their estates, or to help them with other investment issues. More information about WiserAdvisor and its services can be found at www.wiseradvisor.com.

About Richard Oxford Financial

Richard Oxford is a financial advisor located in Scottsdale, AZ.
More information about Richard can be found at http://www.wiseradvisor.com/advisor_profile_state~id~1885741.asp and at www.richardoxfordfinancial.com

Bear Market/Recession

A bear market is considered to be a time when the S&P falls at least 20% before it begins to recover. Because the market is constantly ranging in a several percentage point range, the start of the decline and recovery are difficult to pinpoint at the time. They are very easy to see in hindsight.  On the other hand, recessions are two consecutive quarters of declining GDP.

The Last Two Bear Markets!

As you can see from the last two bear markets, market volatility makes it difficult to pick tops and bottoms in real time.

Since The Great Depression, September 1929-June 1932, we have had 14 bear markets.  The average duration of those was 17.0 months with an average time between of 49 months.  The average decline was 36% and the average time to break even was 43.2 months.  I’m seeing The Great Depression as an outlier that would significantly skew the math.  That bear market lasted 33 months, had an 86.7% decline and took 25 years to recover. In fact, we had 4 other recessions before the market recovered to the 1929 level.  Ouch!

Why should you care? Unless you want to be doomed to repeat the mistakes of your ancestors, you need to change your behavior.  Markets work in cycles. Whatever titles someone chooses to use, the cycle looks like this:

This chart alone shows a strong need for active management.  Passive managers would have you believe that buy and hold works for everyone.  I can tell you why it doesn’t. First, individual investors are emotional about their money.  Who cares more about your money than you?  This drives them to make mistakes.  The second reason is that no single person has an unlimited timeframe until they need the money.  If so, I would say split between the SPX and the QQQ’s and ride the storm.

Investor Psychology

The unfortunate reality is that investors’ fears get the best of them and they sell at the wrong time.  Then as the market recovers, greed takes over and they buy at the wrong time.  They hear the news, see the market and believe it should go on forever.   The classic example is my “former” barber and client who I could not convince to not buy gold when it was at $1900 in 2011.  Try as I might, logic didn’t overcome greed. He believed he would miss out on a fortune. This is typical investor psychology.

Market Cycle Clock

Look at the second chart again and ask yourself where you believe we are in the cycle? We’ve obviously moved out of the “Easy Money” phase and toward “Raising Interest Rates”.  Does that portend a recession? Remember what I said earlier.  It’s nearly impossible to pinpoint the top or bottom while living through them.  Depending upon how you count, we’re about 113 months into this bull market.  Remember the average is 49 months.

Does this put us in Market Correction territory?  I know what I think.  Tell me what you think!

Always remember, there are Advisors who actively manage the cycle!

“Plan Early and Plan Often!”™

Over-servicing a client happens on many occasions. More often than not, we’re talking about a longtime client who’s become friendly with your company and occasionally asks for additional tasks to be completed. Other times it can be about keeping a valuable name brand happy and bending over backward to keep them. Unfortunately, this is a drain on your company’s resources, and it could be forcing you to use far too many labor hours. In fact, several small tasks can turn into a significant amount of time if you’re not careful, and over-servicing costs can easily reach 500K/year.

That’s why it’s important to check to see if your firm is over-servicing any of your clients. After you’ve identified some of the clients with over-servicing problems, you can make the transition easier for your employees. No one wants to tell a friendly client that you can’t complete work for them, and sometimes it’s even harder to raise rates. But in order to keep your costs low, it must be done.

1. Reward Your Team for Not Over-Servicing

This ties into many of the points we’ll talk about in this article, but the end goal is to somehow reward your team for the extra “push-back” they’ll have to give towards the clients. Your teams are bound to build relationships with clients, so it makes sense that favors are done outside of contracts or previously agreed upon terms.

It’s tough to turn to a client of many years and state that there’s no way to complete the same tasks you’ve been giving away for awhile.

However, the idea of an incentive, such as a potential bonus, more vacation time, or even a small prize at the end of the month, reflects that you know how hard this process can be for employees.

2. Clarify to Clients How Over-Servicing May Be Hurting Their Businesses As Well

A great way to break the news about over-servicing to a client is to show information about how backing off on the relationship might benefit their company as well. For instance, you might have a phone tracking system which logs how long employees chat with clients. Consistently long conversations, or repeated calls for extra work, cut into your productivity. With that comes decreased productivity on your client’s end. Therefore, you might show the client that out of all of your clients, they take up most of the phone time, and backing off on so many calls would free up time for them as well.

3. Identify The Outliers

There’s a chance that many, if not all, of your clients are being over-serviced. However, the goal is to go for the big fish. Tap into your time tracking, phone records, analytics, and customer management systems to understand which clients require the most hand-holding. This develops a benchmark for when you check back in and see how well your efforts have been.

4. Negotiate Better Rates

Sometimes it’s tough to tell someone that you’re not going to be providing them as many services as you did before, especially if they’re accustomed to a certain level of support.

In this case, it may be better to raise rates for the same services. Consumers and clients have become used to pricing increases. Many companies do it. Think Amazon and Netflix. So, this gives you a chance to make more money and still provide the best service possible.

5. Or Develop a System for Better Efficiency

On the other hand, select clients will scoff at the idea of paying more money. These clients would rather you cut some of those extra services than cut into their margins. So, you can outline a system that makes your communications and services more efficient on your end, then explain the plan to the client.

6. Propose Trade-offs When Clients Ask for Extra Work

If you have an agreement, contract, or a list of services you offer for certain prices, explain to the client that the additional service or product isn’t included with their current package. Then, give them the option to either pay more money or trade out one of the services included in the contract. For instance, they might decide that they don’t need a logo designed, but would like additional website maintenance.

7. Implement Detailed Time Tracking

Time can be logged for all types of work and communications. The key here is to make the time tracking as detailed as possible. This way, you’re able to look at one (let’s say photography) client and see that your employees are spending an extraordinary amount of time making edits on photos, with not much time being spent on completing the jobs or actually taking new photos for the client. The right time tracker will make this abundantly clear and allow you to move resources in the most efficient way.

8. Raise Awareness at Weekly or Monthly Meetings

With time tracking, customer relationship management tools, and the tactics for backing off on over-servicing clients, your employees must know how to properly go about managing these situations. Therefore, you should hold regular meetings to check-in on which clients are still problems. These meetings also help for when you’re updating the process and your employees need to know.

Visit the original article by Brenda Barron at Clicktime.io.

Like many people, I look hopefully at the New Year and all its potential.  The changes in the tax code are still not out in full detail. This is something the IRS has often done by year-end. Enough is out to safely say that one New Year’s resolution should be to change some old habits around both financial behavior and record keeping.

Structurally, many things remain the same.  There are still seven tax brackets! Where you land in those brackets will dictate how much of your income you will owe the government.  The numbers have changed from 10% to 12% and 15% to 22% but the standard deduction almost doubling for many will mean that although you might think, “I’m going from 10% to 12%, that’s more tax on me”, the end result might actually be less out of pocket.  There are also increases in child tax credits, so families in the lower brackets are likely going to get additional help. But, the personal exemption is gone.

There is no tax planning to be done at that level.  It will just have to play itself out and we will all settle into our new skin.

Table 1. Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year)

Table 2. Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year)

The changes for small business owners with pass-through income are very complicated! A deduction against pass-through income is tied to W-2 wages paid by the business. Since many businesses pay little or no W-2 wage, there may be some big disappointments. Many of us thought that the new pass-through deductions would save a lot in taxes.  To actually measure the real benefit for most will mean careful planning and likely an increase in W-2 wages paid, with the resulting additional payroll taxes being weighed against the lower tax rate to get a small targeted additional benefit at best.
Another potential major change is the loss of the ability to re-characterize, or “unroll” a Roth IRA conversion.  This change will not affect most taxpayers. But for those doing a strategic Roth conversion, the ability to unwind it later in the year was a safety valve against a mid-year income surprise. Now, most Roth conversions are likely to be done only in the last few weeks of each year in order to avoid this potential pitfall.  The weeks between Thanksgiving and Christmas have typically been among the quietest times in a financial advisor’s office, but they are now likely to be among the busiest!
But the bigger changes that are really going to matter are numerous.  Everyone is talking about the state, local and property tax deduction limit. This will affect many people in more expensive areas.  Home equity line loan interest is no longer deductible.  Many Americans have been trained by the tax code to use a HELOC for auto loans or for second homes. These accounts are much more flexible than a standard mortgage.  Many of those people are still above the new $24,000 standard deduction and may need to rethink their borrowing behavior. The risk for home equity loans is that most have a variable interest rate and we are in a rising rate environment.  The rate risk without the tax benefit may no longer be worth it!

You know the old saying:  Change is the only constant in life.  So, we can complain, be blindly excited only to be unpleasantly surprised later, or shrug it off as “Whatever, I’ll find out how I fare in 2019 when I file my 2018 taxes”.

Those who like to keep as much of their money as possible need to add time to a tax planner’s office to their New Year’s resolution list.  The alternative is to just hand that hard earned cash to the IRS.  Planning with a professional will be easier than losing weight. A “WIN” in the resolutions achieved column will feel great!

“Plan Early and Plan Often”™

Soon after the trick-or-treaters are done banging on your doors its time for fall wrap up. Remaining lawn chairs, storm windows, et cetera, are dealt with ahead of winter except for places here in the Southwest.  Here in Scottsdale, winter is just a nice break from the heat.  In 2016 we had 30 days of 110° or higher and average 110 days of 100° weather. Crazy, isn’t it?  But, for a majority of the country that lives in the Snowbelt, November means batten down the hatches. The same is true for finance and tax planning. Many people start looking at holiday shopping budgets and year-end projections to see if they are on target.  Tax 911 calls usually start in early December.

I’m going to talk about the most used tax planning concept in the month of November and December, charitable planning.  If you’re a regular contributor to charities, good for you. There are many ways to do this beyond simply writing a check to a charity and saying goodbye money.  Savvy investors often create “Donor Advised Funds” (DAF) with a financial planner.  It’s a simple subset of a 501c charity that allows you to name your fund. In many cases, you can control the investments inside your funds, or at least have some say, and then finally, make recommendations to the 501c about where to send that money.  The fund normally follows your recommendations. The only caveat is that the charity must qualify by IRS rules.

Here is an Example:  The Smiths give $10,000 a year to their church and several local charities that they care about.  Rather than simply writing those checks, Mr. and Mrs. “Smith” decide to use their own personal philanthropy as a learning experience to make sure their children understand the importance of giving. Perhaps planting the seeds so that their children don’t become too entitled.  They also asked their children what charities they would like to give to and why. Then, instead of giving money directly to their church and charities, the parents create the “Smith Donor-Advised Fund”.  They name themselves as the trustees of the funds, and their children are the successor trustees of the fund.

With a DAF, the family gets to name charities that it wants to donate to today. In addition, they state the purpose of their charitable giving as a guideline for the document and build in flexibility for the future. The trustee can add or subtract churches and charities. Therefore, if a charity stops needing funds because it’s endowed by another greater charity or it merges with another charity or for any other reason, they can instantly change recipients of the Fund.

Most likely, even though it’s been happening for years most children are truly unaware of the gravity of the size of the gifts that their families give. Soon they will be talking about the fact that they’ve started a permanent lifelong charitable foundation that will be in effect their entire lives and their children’s lives, and tell their children that someday they’ll be in charge of this charity and they’ll have to make the decisions that you’re making currently today.  The children can then help decide what types of charities to fund.

Here is the best part; the money put into the DAF will provide a tax deduction even though the actual gifting to the charities might not happen in the same calendar year.  A $10,000 deposit in the family Donor-Advised Fund gets treated as a $10,000 deduction on their schedule A in the year it is made.

Contributions can be many different types of assets:

• Cash
• Highly appreciated stock
• Mutual Funds shares
• Real Estate
• Shares in privately held businesses

You potentially could contribute highly appreciated stock or real estate at its current value and get a deduction of up to 50% of your AGI in the year of donation while avoiding having to pay tax on the accumulated capital gains.  Imagine donating stock in which you originally invested $50,000 with a current value of $250,000.  You could get up to a $250,000 charitable deduction and avoid capital gain tax on $200,000 in accumulated capital gains.  This could be a significant tax windfall.

Much tax planning these next weeks will be charitable in nature. Talk to us about a Donor-Advised Fund that you can name, guide, and control the assets in, and take your family philanthropy to the next step.