“What the imagination can’t conjure, reality delivers with a shrug.”

– Trumbo (movie voice-over)

Whether it’s the recent destruction wrought by Canada’s Fort McMurray oil sands wildfire, a potential June “Brexit” from the European Union, or uncertainty surrounding this year’s US presidential election, there is plenty of risk to go around as we swing into another busy summer.

Is investing riskier than usual these days? In our experience, probably not. If there is such a thing as “normal” in this world of ours, risk is certainly built into the definition. Besides, investors often love and hate risk in a mixed up, messed up relationship. How so? Let us count the ways.

One: We Underestimate Risk.

In investing, underestimating risk can trick you into believing that you can tolerate far more of it than you actually can. As financial columnist Chuck Jaffe has wryly observed: “[A] common mindset is ‘I can accept risks; I just don’t want to lose any money.’”

Unfortunately, we can’t have it both ways. When the risk comes home to roost, if you panic and sell, it’s usually at a substantial loss. If you manage to hold firm despite your doubts, you may be okay in the end, but it might inflict far more emotional distress than is necessary for achieving your financial goals. Who needs that?

Two: We Overestimate Risk.

On the flip side, we also see investors overestimate risk and its sibling, uncertainty. We humans tend to be loss-averse (as first described byNobel Laureate Daniel Kahneman and his colleague Amos Tversky), which means we’ll exaggerate and go well out of our way to avoid financial risk – even when it means sacrificing a greater likelihood for potential reward.

This summer already is destined to deliver plenty of uncertain outcomes. On the political front, there are the especially stark contrasts found among the US presidential candidates. For better or worse, whichever candidate prevails is likely to set the tone for the country if not the world. The “stay or go” uncertainty surrounding the June 23 Brexit vote could also impact financial markets in significant ways. Then there are the usual suspects, such as oil prices, continued Middle Eastern unrest and so on and so forth.

We don’t mean to downplay the real influence world events can have on your personal and financial well-being. But the markets tend to price in the ebbs and flows of unfolding news far more quickly than you can trade on them with consistent profitability. So it’s a problem if you overestimate the lasting impact that this form of risk is expected to have on your individual investments.

Three: We Misunderstand Risk.

Especially when colored by our risk-averse, fight-or-flight instincts, it may seem important to react to current financial challenges by taking some sort of action – and fast.

Instead, once you’ve built a globally diversified, carefully allocated portfolio that reflects your personal goals and risk tolerances, you’re usually best off disregarding both the good and bad news that is unfolding in real time. This makes more sense when you understand the role that investment risks play in helping or hindering your overall investment experience. There are two, broadly different kinds of risks that investors face.

Avoidable Concentrated Risks – Concentrated risks are the kind we’ve been describing so far – the ones that wreak targeted havoc on particular stocks, bonds or sectors. In the science of investing, concentrated risks are considered avoidable. They still happen, but you can dramatically minimize their impact on your investments by diversifying your holdings widely and globally. That way, if some of your holdings are affected by a concentrated risk, you are much better positioned to offset the damage done with other, unaffected holdings.

Unavoidable Market Risks – At their highest level, market risks are those you face by investing in capital markets in any way, shape or form. If you stuff your cash in a safety deposit box, it will still be there the next time you visit it. (Its spending power may be eroded due to inflation, but that’s yet another kind of risk, for discussion on a different day.) Invest in the market and, presto, you’re exposed to market-wide risk that cannot be “diversified away.”

Four: We Mistreat Risk.

It’s a delicate balance – neither overestimating the impact of avoidable, concentrated risks nor underestimating the far-reaching market risks involved. Either miscalculation can cause you to panic and sell out or sit out of the market, thus missing out on its long-term growth.

In contrast, those who stay invested when market risks are on the rise are better positioned to be compensated for their loyalty with higher expected returns.

In many ways, managing your investments is about managing the risks involved. Properly employed, investment risk can be a powerful ally in your quest to build personal wealth. Position it as a foe, and it can become an equally powerful force against you. Friend or foe, don’t be surprised when it routinely challenges your investment resolve.

Respect and manage return-generating market risks. Avoid responding to toxic, concentrated risks. These are the steps toward a healthy relationship with financial risks and rewards.  

Many investors are starting to research the companies that they invest in to find out if they care about their impact on the environment, if they are socially responsible, and if they invest in sustainable programs. This is increasingly important to millennials and will grow in importance as they age. Over the last 10 years, interest in socially responsible investing has exploded. At the time of this writing, there are more than 100 funds managing $6.75 billion for investors who only want to invest in socially responsible companies. So what is socially responsible investing and are there any benefits to investing in companies that adhere to this policy?

Types of Socially Responsible Investing

Environmentally Social Investments: While there are many avenues that can qualify a company as socially responsible, there are a few key points that most investors seem to be looking for. One of the most important concerns for investors in this area is the environmental impact that a company has and how involved they are in actively reducing that impact. Companies that engage in innovation in this area are typically considered for investment portfolios that include socially responsible investments (SRIs). Things like the amount of pollution a plant emits or how a company disposes of its toxic waste would be just a few examples of what is measured here.

Charitable Investments: Another area of concern is poverty. Investors in SRIs want to know that a company is donating some of its excess funds or products to the needy, operating a foundation, or is considering its role in helping to lift people out of poverty. This is especially important with regard to the wages that are paid to workers, their treatment and the site conditions of plants that corporations operate overseas.  

Sustainable Agriculture Investments: Sustainable agriculture is another area that SRI investors look toward in investment opportunities. This area of analysis is key when analyzing food growers, agriculture companies, and food distributors. Investors will want to know that these companies are growing their food in a wholesome manner and also taking measures to see that every last piece of food is consumed and not thrown out or wasted. Another important consideration to SRI investors will be to see if these companies donate any excess food to the hungry.

Health Investments: Lastly, obesity and a company’s role in combating it is also high on the list for socially responsible investors. They want to know that a company is using more natural ingredients, decreasing fat content, and other harmful additives in its food.

Benefits to Investing in Socially Responsible Companies

Although the data is still coming in and only time will tell, it is theorized that investing in companies that follow this model reduces risk for investors. It’s believed that these companies are actively targeting these initiatives on their own without being forced to because of changing laws or being imposed with fines for not meeting certain standards of operation. Because of this, it can be predicted that companies will not need to spend as much on legal fees, fines, or forced plant upgrades as a result of these failures. In addition, by being proactive about reducing carbon footprints, it is assumed that the company will also save on waste disposal fees.

Socially responsible investing is an interesting new and growing area of investing. With over 100 funds already actively managing money for investors interested in this category, it’s no wonder that interest in SRI continues to grow. If you’re thinking about investing in a fund like this, please reach out to us and let us know. We’d be happy to talk to you about how we can help you achieve this investment goal.

If you’re like many Americans, you’re working hard to make a good living and provide all the perks of life to your children and family members. On the surface, this seems to make sense. Obviously, we all want  to take care of the ones we love, but if we really think about it, how much are we really helping them?

One recent study by T. Rowe Price found that 46% of parents have gone into debt to cover children’s expenses and 57% say they spend too much on things their children don’t need. In fact, it’s not uncommon for many wealthy families to have their fortunes entirely squandered by the 3rd generation. That means that your grandchildren will be back in the rat race after all the hard work you put in to secure your family’s estate for generations.

So what goes wrong and how do we learn from the mistakes that these families made?

The Subtle Lie

For many Americans, the goal is to work hard, make and invest money, and provide support and luxuries to their loved ones. To continue providing support to their children even after they are gone, many aim to leave behind a large estate so that their children won’t need to worry about finances in the future.

However, this plan can backfire if their children are never taught how to properly preserve their inherited wealth. Often, children who are raised in the lap of luxury grow up to only be spenders of the wealth that they inherit. These children also pass this bad habit on to their children who replicate it again and again until the family fortune is lost in a fraction of the time it took to earn. Although this may seem shocking, it is common among many wealthy families — so much so that only a few families have gotten it right.

Changing the Way You View Your Estate

Conventional planning has focused on preparing the assets for the heirs when in fact the goal should be to prepare the heirs for the assets. A recent survey of parents showed that only 44 percent take advantage of the opportunity to discuss financial topics with their children most of the time. Another survey showed that 71 percent of parents said they were at least somewhat reluctant to discuss financial matters. So If this sounds like you, you are not alone.

The fact is that kids want to learn about managing money, and they really do listen to their parents when they teach them about it. Over the long run, it’s much more important to teach your child about the value of a dollar, the benefits of hard work, and how to manage budgets than it is to leave them with a large estate. The T. Rowe Price study found that children who discussed finance with their parents at least twice a month were smarter about their own finances than those who did not.

In addition to teaching children about investing and budgeting, it’s a great idea to teach them about debt, banking, and how real estate and loans work. Don’t be afraid to also share your financial mistakes and failures with them as a teaching point. They will listen, learn and hopefully not repeat the same mistakes again.Your financial Advisor may also be a good resource for them.  For example, here at FMB Wealth Management, we have our Generational Planning Program to assist our clients in the area.

As adults looking in the rear view mirror, most of us can only dream of having these skills taught to us by our parents. If you are one of the few parents who commit to doing this, not only will you be building a closer relationship with your kids, but you’ll also increase the odds that all of your hard work and savings isn’t in vain. Families that take time to teach their children these skills, and make sure that these skills continue to be passed down, have a very high success rate with holding on to generational wealth and even continue to grow the family fortune.

As a savvy investor, you probably already know that diversification is key to having a balanced, secure and low-risk financial portfolio. By dividing your assets among a variety of asset classes, industries, geographic regions, and stock types, you are minimizing harmful downside risk that may only affect a single industry or region, thus preserving your hard-earned wealth as a whole.

Too often, however, retail investors and professional advisors alike design portfolios that may look diverse on the surface, but are, in fact, far from it. This false diversification can be rooted in a number of erroneous — or downright manipulative – actions or schools of thought. Some advisors build portfolios that are so complex that it dupes investors into believing that their portfolio is diverse. In other cases, an individual’s portfolio consists of a variety of mutual fund company names; however, the underlying assets behind these names are anything but varied.

Here are a few reasons why your portfolio may not be as diverse as you think:

Name Diversification: An Illusion of Safety

When you take a look at your financial statement, you will likely see a list of fund companies. The more fund companies listed, the more diverse your portfolio, right? Wrong. True diversification depends much more on the allocation of the underlying stocks and bonds in your portfolio, not the managers who purchase them on your behalf. Having your assets invested with a single fund company doesn’t necessarily mean that your portfolio is at risk. Likewise, having your portfolio divided among dozens of different fund companies doesn’t necessarily make it diverse.

Complex Portfolios: More is Not Merrier

Investors, beware of portfolios or investment schemes that seem overly complex. Investing should not be all that complicated. In fact, the more complex your portfolio, the harder your true diversification is to track, which may cause you to unknowingly tip the scale in one direction or another. While diversification does require that you balance some different funds, there is no reason for portfolios to hold 15, 20 or 30 different funds, especially if they are from many different fund families. Not only do you complicate things and lose sight of the overall investment strategy, but you may are also be paying more in fund fees for this increased risk. Owning a multitude of individual stocks or mutual funds is not the answer to a stronger, more diverse portfolio.

To determine if your portfolio suffers from false diversification, work with your investment advisor to document the ideal characteristics of your overall portfolio as they relate to your savings goals, then take a deeper look into the allocation of your asset classes, stock types and geographic variety. Is your vision and reality aligned? If not, perhaps re-allocation or simplification of your portfolio is in order. It is also important to make sure you are paying the lowest prices possible to ensure your earnings aren’t eaten away by high fund management fees.

Investing shouldn’t be overly complicated or contingent on the day-to-day moves of individual fund managers. Not only can this cause more undue stress than necessary, but the added risk you take on by falling for false diversification can put a lifetime of hard-earned savings at risk. To get a second opinion on your portfolio’s diversification, contact FMB Wealth Management and we would be happy to complete a portfolio diversification audit for you.

The ninth annual America Saves Week survey indicates that more Americans doubt their ability to maintain their quality of life during their retirement years.

A slight majority of those surveyed, 52% of respondents, stated that they had a negative view of their retirement prospects. Results showed that women were particularly concerned about saving enough for retirement with only 47% of those surveyed saying they felt confident they are saving enough for their golden years. Among men surveyed, 57% said they had confidence they are saving adequately to meet their retirement goals.

The report, which was published by the Consumer Federation of America (CFA), found that a gender gap exists in 12 key financial well-being indicators measured in the report, including net worth, savings plan, consumer debt, emergency savings, automatic savings outside of work, savings progress, and ability to pay off their mortgage before retirement. Generally speaking, men had a more favorable outlook on retirement, with 74% of those surveyed stating they have made progress in saving toward their goals, while only 67% of women surveyed could say the same.

Stephen Brobeck, executive director of the CFA, cited gender gaps in pay and wealth as the main cause of this difference. Studies conducted in 2014 found that, on average, women earn only 79% of what men earn for the same job with the same qualifications. A 2015 study by Financial Finesse also found that women have lower Social Security benefits, tend to live longer than men, and have less wealth in retirement as a result of lower-paying jobs. To earn the equivalent of a man’s retirement savings, a woman would need to save almost 25% more than her male counterpart.

Those who said they were not saving sufficiently for retirement, indicated high day-to-day living expenses, debt and education expenses to be a few of the main culprits.

Closing the Gap

Closing the gap if you’ve already fallen behind in your retirement savings can seem difficult; however, there are some proactive steps you can take to feel more secure in your financial future. Here are a few:

Come up with a plan: The study indicated that those who had a savings plan containing specific goals were more successful at planning for retirement, as well as felt more secure in their retirement savings. Coming up with a retirement savings plan is as simple as envisioning what your plans in retirement look like, calculating your expenses, and working with a financial advisor to establish a measurable action plan to catch up on lost time. With the help of professionals, those nagging burdens like debt and taxes, will also be factored into the plan.   

Maximize tax savings: Tax diversification is critical to ensure your hard-earned savings aren’t hit hard with taxes in retirement. Consider a Roth IRA or Roth 401(k) to ensure your withdrawals are tax free.

Establish guaranteed income streams: Consider other steady, guaranteed income streams, such as pensions and Social Security, to cover the essentials in retirement.

Whether you are nearing retirement or still have a long way to go, it’s never the wrong time to start gaining traction on your retirement savings. It all starts with a plan. To get started, contact a financial advisor or other wealth management professional you trust to come up with a measurable, accountable action plan to help narrow the savings gap and help you build a more financially secure future.

April 29 is the Last Day to Suspend Retirement Benefits Under Current Rules

The Social Security Administration recently announced a major shift for retirees that is slated to take effect this spring under the Bipartisan Budget Act of 2015. Under current rules, retirees aged 66 and older have the option to defer Social Security retirement benefit payments until the age of 70 without deferring others’ benefit payments, such as those paid to a spouse or child. Starting on April 30, however, those who voluntarily suspend their retirement benefits will no longer be permitted to have other beneficiaries, such as a spouse or child, receive benefits during the same period. Anyone who suspends his or her benefits after the age of 66 will also no longer be eligible to receive benefits on another’s record.

Here are the specific changes that will take effect on April 30:

The Social Security Administration will no longer allow the suspension of retroactive benefits when an individual applies for benefits, but when no determination has been made regarding his or her entitlement. Those who voluntarily defer their retirement benefits will no longer be permitted to have other beneficiaries on their record, such as spouses or children, receive benefits during the same time period. The only exception is for divorced spouses who were married at least 10 years.  Those who voluntarily defer their Social Security benefits will no longer be eligible to receive benefits on someone else’s record. Part B premiums cannot be deducted from suspended benefits. Any requests for voluntary suspension of benefits on or after April 30 will begin the month following the month of the request.

Here’s what will not change:

The new rules also have no impact on survivor benefits which are separate.  Divorced spouses married a minimum of 10 years may still collect benefits on an ex-spouse’s earnings record. This will not change even if the former spouse files to defer payments after the April 29 deadline.

How to File Under Current Law by April 29:

All requests filed by April 29 are subject to current rules, which allows individuals to request a lump sum payment of suspended benefits instead of deferred retirement credits, so those looking to take advantage of the current regulations should act soon.

The simplest way to request a suspension of retirement payments, excepting other benefits such as spousal benefits or those paid to a dependent, is to file online at www.ssa.gov by April 29.

In the past, online forms from the Social Security Administration have not clearly indicated that suspension of payments is possible through online submission. The simplest way to bypass this issue is to request that benefits begin at age 66, then clearly state in the remarks section that you wish to defer retirement benefits until a later date. This may seem a bit paradoxical, but the method accomplishes the desired goal of filing for some benefits while deferring retirement payments.

We also recommend that those seeking to delay retirement benefits but trigger spousal benefits check “yes” beside the question that reads “If you are eligible for both retirement benefits and spouse’s benefit, do you want to delay receipt of retirement benefits?” It should be noted that those who file in this manner will need to apply for individual retirement benefits when they wish to start receiving them.

You may also email the Social Security Administration to voice your thoughts on how the online form can be improved by emailing open.government@ssa.gov.

If you have any questions about how this new rule impacts you, contact FMB Wealth Management, and we would be happy to assist you navigate the new rule changes in the most beneficial way for you and your family.

The Short-Lived Success of Active Fund Management

The higher they soar, the harder they fall

or

Why Pay a Premium for Underperformance?

Making a case for low-cost passive management

Many active fund managers measure their worth and justify their high fees based on their ability to beat the market and outperform their peers. Considering the latest data in the S&P Dow Jones Indices’ “Persistence Scorecard”, however, these claims are short lived. As soon as active fund managers are boasting outperformance in the market over the last year or quarter, they are likely already tumbling fast in terms of performance.

The Persistence Scorecard report shows that very few fund managers can consistently deliver above-average returns over multiple periods. In fact, the data showed that the highest performing funds are actually more likely to become some of the worst performing funds than to stay at the top year after year.

Here are a few key findings in the report, which studied top performing funds over a three-year and five-year period ending in Sept. 2015:

• Of 678 domestic equity funds that were in the top quartile in Sept. 2013, only 29 remained in the top quartile over a two-year period.

• Over a three-year period, fewer than a quarter of the funds in the top quartile were even in the top half.

• Over a five-year period, no large-cap or mid-cap funds remained in the top quartile, and fewer than 6% remained in the top half.

The data clearly indicates that there is a severe lack of persistence in actively managed funds generating high returns over a long period of time. Of 715 funds tracked by the S&P Dow Jones Indices since 2010, only two – AMG SouthernSun Small Cap Fund and the Hodges Small Cap Fund — remained in the top quartile over the next five consecutive years.

Even Michael W. Cook, the lead manager of the AMG SouthernSun Small Cap Fund — which is now closed to new investors – advised investors to lean heavily on passive investments.

“Index funds deserve to be core holdings for many investors,” he said. “One thing you don’t want to do is just read about performance numbers — ours or anybody else’s — and put money into an investment. Chasing past returns doesn’t make sense.”

Active funds charge internal management fees ranging anywhere from 0.6% to 1% in exchange for their “expertise” in selecting funds for clients. Passive investments, such as index funds or ETFs (which typically track indices), on the other hand, skim much less off the top, offering internal management fees as low as 0.1% to 0.2%.

The numbers tell it all. Outperformance among active funds is rarely sustainable. So why do so many investors rely so heavily on high-priced active fund managers instead of letting the markets deliver better returns at a lower rate, as they historically do? Perhaps its the thrill of the chase, conviction in some “get rich quick” scheme, or force of habit. In any case, this report reveals that reliance on actively managed funds over a long period of time is much like one’s chances of winning the lottery – few and far between.

If you are a long-term investor saving for retirement or a child’s college education, this data is an important reminder not to get wrapped up in the hype of active fund management no matter how enticing it may seem at the moment. For steady, long-term gains with low fees, stick with a proven passive investment strategy and rest easy knowing your nest egg or savings are secure.

As your parents age, it may become more difficult for them to handle financial responsibilities on their own. Relinquishing independence, especially on financial matters, is often a sensitive topic and should be broached carefully, but it is also important not to delay this important conversation until it’s too late. Ensuring your loved ones are financially secure grants peace of mind to all parties involved.

Here are a few topics to consider in your conversation:

1. Legal Matters: Discussing legal matters, such as whether or not your parents have an estate plan and power of attorney, knowing your parents’ attorney, and understanding the legal documents in your parent’s possession are vital to prevent any undue stress if your parent is incapacitated or passes away.  
2. Healthcare: Health problems are a fact of life that comes with age. Understanding your parent’s medical insurance plan, long-term care plan, and all coverages involved are key to ensuring your parents have the finances they need for any possible health problems that may arise.
3. Financial Accounts: With the help of a financial professional, go over income and expenses with your parent and help make adjustments to financial portfolios or living expenses as needed to ensure your loved one can live comfortably and securely. Make sure you also know where they store essential financial information, such as bank account information and tax returns, to protect them from identity theft.

Here a few tips to approach assisting an aging family member with financial responsibilities:

1. Be Alert: If you notice your parent is missing appointments, forgetting dates, or losing things with increasing frequency, these may be signs of declining memory, dementia or depression. Ask about attending doctors’ appointments with your parent. Also look for signs of neglect around the home such as unpaid bills or untended rooms.
2. Be Sensitive: Finances and independence are personal, often delicate subjects. Rather than assume full control, offer guidance to your parent by offering to assist them with online banking or bill pay. This gives you inside knowledge about your parent’s financial situation, but grants a certain level of independence to your parent as well.
3. Share the Burden: Reach out to other important people in your parent’s life such as your siblings, family friends, church members, or trusted neighbors. Caregivers and others close to your parent can provide important information about changes in behavior and can help everyone keep track of your parent’s wellbeing.  Sharing responsibilities with other family members and trusted individuals requires clear and constant communication to ensure all of your parent’s needs are met, but sharing the burden with others can greatly assist in maintaining your own mental, physical, and emotional health at the same time.
4. Have a Power of Attorney: In case important legal decisions must be made, it is critical that you have power of attorney or know who does. Particularly if a parent’s decision-making ability declines, you should know who has access and control over important decisions that affect your parent’s wellbeing according to his or her wishes. Keep lines of communication with other family members open so there is as little conflict or confusion as possible. Be clear about who has power of attorney and how certain issues ought to be approached.

Aging comes with many challenges, whether it is dealing with dementia or suddenly realizing your parent cannot pay his or her bills. Waiting until it is too late often has unfortunate consequences that cause undue stress on the entire family and exacerbates the situation, so the most important thing to do is start discussions with your parent as soon as possible should the worst come to pass and offer peace of mind to the entire family.