4-Minute Money Ideas

Does Investor Bias Make You Underperform the Market? By Douglas Goldstein CFP® - helping olim handle their U.S. investments from Israel

A friend recently had a losing streak at the casino. Instead of walking away, he played more hands of blackjack. "I was determined to win," he lamented. In fact, he was playing to recoup his losses.

He was a victim of investment biases subconsciously affecting his decision-making. Gambler's Fallacy – the belief that after a streak of losses his luck would turn – duped him into doubling his losses. A recent study of Major League Baseball umpires showed how biases are at work in all forms of decision-making. In 1.5 million pitches, umpires were less likely to call a strike if the previous pitch was a strike.

Investor bias can lead you to make bad investing decisions. Biases are shortcuts in decision-making; you may, for example, increase your position in gold stocks because you have recently made a lot of money in gold, ignoring economic news that suggests gold prices are likely to drop. If you make a bet based on what just happened, you suffer from "Recency Bias," like the umpire, who is more likely to call a ball after two strikes than one.

Passive and automated investment systems (such as dollar cost averaging) outperform active traders because they eliminate such human biases and judgements. Dollar cost averaging – making fixed investments on a regular schedule – improves returns by reducing volatility and human error.

Why do investors actively trade stocks?

The answer is overconfidence bias. Overconfident investors believe they have an edge over others; they are better stock pickers and market timers. The more humbling reality is that overconfident investors underperform the market. They are more likely to act on gut instinct than on research and analysis.

The major obstacle between you and better investment returns is often yourself. By making rational decisions and not letting your emotions dictate your trade orders, you may improve your investment results. To learn more about investor bias, read my blog, ProfilePerspectives.com/investor-bias

Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.

Should You Follow Investment Trends or Bet against the Masses?

By Douglas Goldstein CFP® - helping olim handle their U.S. investments from Israel

Today, many "investment trend" websites are enticing online traders to join. Investors who follow the trend – also known as "momentum trading" – invest in stocks based on rising market prices rather than company fundamentals.

The strategy of following the investment trend performs best in a bull market. However, selling before the trend reverses is a skill that eludes most investors. When many investors buy the same stock, the market price can rise above the underlying value of the company. Eventually, as investors' emotions stabilize, rationality may return, and prices fall into line with the fundamental value of the company (based on measures of revenues, earnings, etc.). Short-term momentum players who try to time market fluctuations seldom outperform buy-and-hold investors in the long term.

The trend can be a false friend

Herding behavior, whereby investors irrationally pile into a stock or sector, is behind most stock market bubbles. Two conditions for stock market bubbles are: new money inflows (which sustain the inflated price), and credit expansion (to generate the capital to invest). When credit conditions tighten, capital flows into the investment market slows and stocks start to decline.

When to bet against the masses

If a company's fundamentals don't support the stock price, it may be prudent to bet against the masses. Contrarians are often viewed as the mavericks of the markets. More often than not, their decision to go against the trend is based on thorough fundamental analysis.

If you base your investment decisions on sound fundamental security analysis, you may not always be a part of investment trends, but you will hopefully enjoy steadier and better long-term investment performance.

For more on the risks of following the trend, see my book review of Ben Bernanke's book about the 2008 crash at Profile-Financial.com/bernanke

Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.

Do You Look at the Risk-Reward Ratio of Your Stocks and Bonds?

By Douglas Goldstein CFP® - helping olim handle their U.S. investments from Israel

The risk-reward ratio is an attempt to quantify the amount of risk you need to take in order to get an anticipated return from any investment.

If you were to only consider past returns when deciding whether to invest in stocks or bonds, stocks would appear to be the clear winner. From 2007 to 2016, stocks had an average annual return of 9% versus about 5% for 10-year U.S. Treasury bonds.

If past returns are your only measurement of performance, then perhaps you should consider high-yield corporate bonds. This year, Harvard University's endowment fund made its largest allocation to a high-yield corporate bond exchange traded fund (ETF), which had a one-year return (through March 2017) of 13.4%.

Risk vs return

Prudent investors know that past performance is not a guarantee of future returns, and instead of chasing last year's returns they start by looking at their own risk profile. Indeed, some would say that Harvard marched farther out on the risk spectrum than a conservative education endowment should wander. Fund managers always look at both the return and risk premium – the risk-adjusted return – of a stock or bond. The risk premium is one of the most important metrics in investing because it indicates how much money you may receive (the return) for the level of risk taken.

So, do stocks still make sense?

Stocks make a lot of sense on a risk-return basis. Looking over a long investment horizon, from 1967 to 2016, stocks returned over 11% on average compared to about 7% for 10-year U.S. Treasury bonds. Consider too, that stocks' risk premium was 6.6% and the Treasuries' 4.4%. By comparing the risk-return metrics, it appears as if investors are taking on added risk in exchange for incremental stock returns.

Diversifying an investment portfolio by adding bonds with a lower risk-return ratio may provide a superior risk-adjusted return. Find out why having a diversified portfolio matters at Profile-Financial.com/asset-allocation

Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.

Can Optimism Increase Your Investment Returns?

By Douglas Goldstein CFP® - helping olim handle their U.S. investments from Israel

Are your investment returns determined by your worldview? Are people hardwired to be pessimists?

Millions of years ago, if an optimistic caveman dismissed a rustle in a bush as the wind blowing, our ancestor may have ended up as a tiger's lunch. As a result of this early conditioning, the part of our brain called the amygdala scans everything we see and hear for negative news.

But according to Dr. Peter Diamandis, the founder of the coveted X Prize for Technology Innovation (and guest on The Goldstein On Gelt Show), this bias is more of a short circuit rather than an intelligent system design. He claims that in life and investing, it pays to be an optimist, as humans pay ten times more attention to negative news than positive news.

Why optimism outperforms

Technology is changing our lives for the better. A cursory list of human accomplishments over the past 100 years shows the future is indeed rosy – per capita income has more than tripled, extreme poverty has declined to less than 10% of the world, and human lifespan has doubled.

This is a time of abundance, also the name of Dr. Diamandis' book, Abundance: The Future is Better Than You Think. The book's most powerful message is that technology is "resource liberating," as it makes once inaccessible resources available and abundant.

The future is optimistic investing

But how does all this optimism affect your investment portfolio? Dr. Diamandis does not mention specific companies but he does mention names, including Bill Gates and Ilan Musk – technologists behind inventions that are addressing scarcity and expanding resources, and the most successful companies in the world. If you believe the world is improving to be a better place, your optimism can find expression in choosing areas of the economy, and the corresponding stocks, in which to invest.

For more on optimistic investment opportunities turning science fiction into "science fact," listen to our discussion at GoldsteinOnGelt.com/Diamandis

(The opinions expressed on The Goldstein on Gelt Show are those of the guest, and not necessarily my opinion or the opinion of Portfolio Resources Group, Inc.)

Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.

How to Safely Boost Returns in a Low Interest Rate Environment By Douglas Goldstein CFP®- helping olim handle their U.S. investments from Israel

To the dismay of yield-seeking investors, interest rates remain at historic lows. Although rates on long-term bonds may begin to inch up, analysts generally expect that we may remain in a low-interest-rate environment for a while longer. So, what are income investors to do? It is important to understand the risks of reaching for higher yields and realize there may be less risky ways to increase income.

It's all about the Risk-Reward Relationship When investing for any purpose, returns always boil down to the risk-reward relationship. The laws of investing dictate that it is very difficult to increase your return without also increasing your risk. While you can increase your yield by investing in lower-grade or longer-term bonds, you also increase your risk should interest rates suddenly rise. To learn more about how bonds react to interest rates, watch a short video at: profile-financial.com/bonds.

Income investors, especially retirees, want to generate cash. However, they also need to preserve their capital. By focusing on yield without regard to capital preservation, you increase your overall risk. In a low-interest-rate environment, the better strategy is to broaden your sources of income through total returns.

Forget about yields – look to total returns "Total returns" is a strategy that invests in a combination of income and appreciation investments that, when allocated among different asset classes, can increase income while minimizing portfolio volatility. The goal is to generate sufficient current income while growing enough capital to keep up with inflation. A well-diversified portfolio of high-quality dividend stocks and investment-grade bonds can generate higher risk-adjusted returns more safely than a portfolio of the highest yielding, below investment-grade bonds.

Income investors do not have to suffer through an extended low-interest-rate environment. However, it does require a strategic approach tied directly to your specific risk-return profile. Working with a well-qualified investment advisor, just about any risk-return profile can be matched with a balanced and diversified total return portfolio strategy.

Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.

Secrets to a Financially Strong Marriage By Douglas Goldstein, CFP® - helping you handle your American investments

Displayed prominently in our living room is a list titled, "Abba's Secrets to Success" Now, as my oldest daughter is about to get married, I've compiled "Abba's Secrets to a Financially Secure Marriage" for her and her groom. With their permission, I'd like to share it with you:

1. Be completely honest – Open communication is better than financial infidelity. Hidden spending not only damages your future goals but erodes trust. Discuss money regularly, not just when you have a big bill to pay. 2. Work on joint financial goals – Don't fall into roles of good cop/bad cop where one of you wants to spend and the other wants to save. You're merging your lives; now merge your money. There is no such thing as "my" money – no matter who brings home the paycheck, consider it "ours." 3. Live below your means – Accumulating "stuff" is expensive. Create a budget and stick to it. Review your spending/saving goals regularly. And most importantly, ignore financial peer pressure to spend. 4. Make charity a priority –Get involved in tzedaka and make the world a better place. 5. Pay yourself first – You'll grow old together; begin planning for it now. Compound interest and time are your new best friends. Make sure your savings is divided into three pots: an emergency fund, short-term, and long-term savings. Having an emergency fund is the best way to ensure that an unexpected problem won't turn into a crisis. 6. Avoid debt – Make sure you have enough money saved before you buy. Avoid tashlumim! The only exception is taking on a mortgage (and then be careful not to buy a house that is too expensive.) 7. Find a financial advisor that you trust – Though I would be honored if you choose me, read the article at Profile-Financial.com/pick-advisor to make sure you select wisely. 8. Be detail-oriented - Pay your bills on time, file taxes, make sure you have insurance and healthcare directives. Remember money is a tool to help you achieve great things, not an end in and of itself. Use it carefully and build well. And Mazel Tov!

Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.

Do You Have to Stop Working When You Reach Retirement Age?

By Douglas Goldstein CFP® - helping olim handle their U.S. investments from Israel

Does reaching retirement age mean you have to stop working?

In Israel, the official retirement age for a man is 67. For women, it fluctuates between 60 and 62, depending on date of birth. Retirees until the age of 70 (or 69 for a woman born before 1950), are eligible for a state pension, but entitlement is affected by additional sources of income. From 70 onwards, a state pension is given regardless of other income.

So what is the best age to retire? Before making a decision, ask yourself the following questions:

Are you physically able?

As you age, your regular routine may become tiring. You may also develop health issues that make working full time difficult. So before you decide to keep on working, make sure that it's realistic. In your retirement plan, make provisions for the possibility that future health problems may affect how long you can work.

Why do you want to keep working?

Do you want to keep working because you fear outliving your savings? If so, working as long as possible lets you amass more savings, and have fewer years of withdrawals.

But what if you don't have to keep working for income? If your desire to keep working is based on factors such as wanting to maintain routine or enjoying the contact with your colleagues, there are other solutions. Perhaps you could work part-time or find a hobby that will provide a social life.

It's not only about money

Before making your decision, meet with your financial planner, tax advisor, and pension planner to discuss your estimated streams of retirement income. At the same time take all relevant issues into account, and make your final decision after considering both the financial and emotional factors.

For more information about how to decide when to retire, read chapter 5 of The Retirement Planning Book. Click here for a free download.

Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.

How to Prepare for the Next Stock Market Crash

By Douglas Goldstein CFP®- helping olim handle their U.S. investments from Israel

Over the past several years, the market has climbed to historic highs, prompting analysts to sound the alarm over the next stock market crash. While I can't say when the next crash will occur, I can say it's reasonable to assume that there will be another stock market drop at some point. How can you prepare for it?

Market crashes are inevitable Crashes are more about the speed of decline than its depth or duration. The Flash Crash of 2010 saw the market plunge 1,000 points in minutes. In the 2008 crash, the market fell more than 20% within days. The good news is that each time the market crashed, it fully recovered and went on to greater gains. In 2010, it took a couple of days to recover, while in 2008 it took about 17 months. Past performance is no guarantee of future returns.

Every bull market (market rally) leads to some sort of correction. Corrections are defined as declines of 10% to 20%, and they are very common during extended stock market rallies. They may last from a few weeks to a few months. A bear market is when stocks decline more than 20%, with a duration of more than 15 months.

Patience and discipline beat fear and panic The key takeaway is that crashes, corrections, and bear markets are all parts of market cycles. These events are even healthy for the long-term trajectory of the market. So while it's scary to watch your portfolio lose a significant portion of its value, keep in mind that these are only paper losses. These losses don't become real until you sell. (That's why it is important to move out of the market if you need your money in the short term, and don't have time to recoup potential paper losses.)

If you have a solid, long-term investment strategy, your patience and discipline should pay off over the long-term. A properly diversified portfolio should be able to weather most storms, given enough time. For more on how to prepare your portfolio for a market crash, see: Profile-Financial.com/stocks

Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.

Debunking 3 Myths About Not Needing an Emergency Fund By Douglas Goldstein CFP®- helping olim handle their U.S. investments from Israel

One of the most fundamental principles of financial planning is to prepare for the unexpected by keeping three to six months' worth of living expenses in an emergency fund. The trouble is many people succumb to the myth that emergency funds aren't necessary because you can always withdraw from savings. Here are 3 myths about emergency funds and why they are wrong:

The best place to keep an emergency fund is in your investment portfolio Yes, an investment account is technically marketable; and it can provide you with access to cash should you need it. However, you can lose real money if you are forced to sell assets at the wrong time. Imagine selling off $5,000 of your equities to cover an emergency expense after the market has declined 25%. It could take you years to gain that back. Better to have that money sitting in a low-yielding money market fund. Read this blog post to learn more about why investing your emergency fund is a bad idea: www.profileperspectives.com/emergencyfund.

Once I turn 59½ I can use my retirement plan Yes, once you reach age 59½, the 10% penalty in your Individual Retirement Account (IRA) goes away. However, when you access your retirement account, the withdrawal is taxed as ordinary income. But the real issue is that it could put you into a higher tax bracket, which would be even more costly. Covering a $10,000 expense could require you to withdraw as much as $15,000 to cover taxes. While I do not give tax advice, it is important to keep tax considerations in mind when withdrawing funds.

It's better to pay down debt than to save for an emergency fund

While paying down debt may be the best use of your excess cash flow in most situations, few would argue that it should be done at the expense of building an emergency fund. Without an emergency fund, you could end up taking on even more debt, which just compounds the problem. The better approach is to apply a portion of your cash flow to both eliminating debt and building an emergency fund.

Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.

Short on Retirement Savings? Here's What You Need to Do

By Douglas Goldstein CFP®- helping olim handle their U.S. investments from Israel

More than 10,000 baby boomers cross the retirement threshold every day, and nearly one in four of them of haven't saved enough to retire comfortably. If you've reached that point and realize your retirement savings won't last your lifetime, it's time to have an uncomfortable conversation with a financial advisor because there are several things that need to be done. But it all starts with having a plan.

Create a realistic plan Establish realistic goals based on what you expect to happen. That should include a new time line for critical milestones, such as when you expect to stop working, when to start Social Security and Bituach Leumi, and when (or if) you will need to begin digging into your capital. Crunch the numbers to come up with a pre- and post-retirement spending plan as well as an investment strategy to maximize your income and capital growth.

Start living like a retiree now By adjusting your lifestyle you can lower spending to make a significant difference in how much you can save. Reducing your budget now can also prepare you for the transition of living with a lower income as you move into retirement. The pre-retirement years may be the ideal time to downsize your home, your car, and your lifestyle.

Delay retirement to the "new 65"

For many people, regardless of where they stand financially, 70 is the "new 65" when it comes to retirement age. There are several advantages to working longer:

• You can maximize your Social Security and Bituach Leumi benefits. • It will reduce the number of years you'll actually live in retirement. • It will give you more time to build your nest egg.

If you delay retirement, reduce your spending, and increase your savings, you gain the huge benefit of time to allow your money to work for you. It may not be the retirement you envisioned, but it doesn't have to be the disaster many are facing today. Learn more about improving your retirement income by watching a short video here.

Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.