Thoughts On Money [TOM]

You know that friend, the one who always has a counterargument, an obscure factoid, or tidbit they throw out; the one who’s always looking for a drop-the-mic type moment – the devil’s advocate in all situations. Their comments always sound something like, “I read this article once…” or “This survey actually showed that…” or “Despite the common assumption…” The friend that has a hand full of these trump cards he or she is always ready to drop.

I hope my friends aren’t reading this because they might tell you that I’m “that guy.” 🙂

Nonetheless, dealing with these folks can be quite exhausting, but you’ll often find their rebuttals are weak. They rely on a single data point that can typically be questionable or skewed. Often using a statistic in isolation without context or interpretation.

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STOP!!

DON’T DO IT!!

You just had a conversation with your second cousin's husband over Thanksgiving dinner, and he gave you this “great” investment idea or financial advice.  His pitch was persuasive, and that finance class he took in college, along with his morning habit of reading the Wall Street Journal, makes him seem credible.  In all reality, that extra dose of tryptophan from your second helping of turkey doesn’t only make you sleepy, it also makes you susceptible to bad financial decisions.

This is what happens around the Thanksgiving table.  We connect with friends and family we haven’t seen in ages, and we talk football and finances.  Some of us will be more vulnerable this year as maybe our portfolio (or football team) has been underperforming our expectations.  To combat these temptations to ready-fire-aim on a modification to your portfolio or plan, I wanted to walk you through the appropriate process.

Some of you may be laughing about the manner I’ve set up today's discussion, but I’m telling you that these Turkey Time Temptations are real.  I’ve had a front-row seat to a lot of foolish financial activity, and in my postmortem, I come to find that it all started at the Thanksgiving dinner table.

With that said, here’s the appropriate step-by-step process for introducing changes to your portfolio/plan:

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End-of-year planning has officially begun. My days are filled with questions about tax loss harvesting, end-of-year retirement contributions, and a plethora of inquiries about Roth conversions.

It’s always been my preference here on Thoughts On Money to tackle the “softer side” of financial planning, and I typically veer away from the more technical or nuanced topics. Primarily because these topics can be a bit of a snooze for the average reader, and my hope is that you would collaborate with your advisor/CPA/attorney for that type of personalized technical planning. My real aspiration as a personal finance writer is to teach you how to think.

With that said, I’d like to talk about a more technical topic today – Roth conversions. I will keep us more focused on the why as opposed to the how, and we will dive into some of the considerations that I think are often forgotten or glazed over.

Let’s start simple – what is a Roth conversion? Under the current tax code, an investor can elect to convert a portion or all of their traditional IRA (pre-tax monies) to a Roth IRA. Each dollar converted is considered taxable income, and the benefit is that the Roth account will then grow tax-free.

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In the last few weeks, I have had more conversations about a recession – and what that would mean to markets – than I’ve ever had in my entire career. As I’ve mentioned before, I heard one pundit cleverly ascribe this as the most anticipated recession of all time.

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This week on Thoughts On Money I would like to dive into a question a client recently asked me.  The question was focused around how an investor stays engaged in the daily happenings of markets without negatively impacting their posture as a long term investor.  Often the news of the day can be troubling, and sometimes the barrage of content can cause us to take our eyes off the prize – our long term goals. 

So, please join me as I explain how parenting, surgery, and investing all have a lot in common, and I discuss the importance of informed precision.      

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In 2004, Matthew Emmons would make one of the most memorable Olympic blunders in history. 

I encourage you to join us for our discussion today on the importance of aiming at the right financial targets. 

Come learn about Emmons's big miss and how you can avoid making the same mistake with your personal finances. 

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September.

Was.

Ugly.

The S&P 500 was down more than 9% in the month of September alone.

As you might imagine, these markets have led to skyrocketing levels of stress for investors. Anxiety is peaking, as uncertainty seems to be at an all-time high. Yet, let me remind you that return-on-stress is always zero. Our anxiousness, our fears, and our stress do not add an ounce to our investment returns. It’s these very emotions that typically get us in trouble – I can’t begin to describe how much financial damage has been caused by poor investor behavior.

Well, I was blessed with the opportunity to deliver the message at my church this last Sunday, and I think there were a few tidbits from this sermon that are applicable to investors and our discussion today. In my intro, I spoke about what fear and faith have in common, as they both deal with an undetermined future (h/t John Gordon). We either choose to fear what the future has in store for us (negative anticipation), or we choose hope/faith, believing that goodness lies ahead (positive anticipation). I went on to explain how faith is often misunderstood, and how our experiences can sometimes derail our faith. I explained that faith is not having clarity in the process, but rather having clarity in the outcome.

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Kids are the best.

They say the funniest things, and they don’t mind telling you exactly how they feel. They’ll give you the unvarnished truth, whether you want it or not.

My four-year-old can get grumpy sometimes, as many four years olds can. It’s hard not to laugh when he gets upset, as he crosses his arms, puffs up his bottom lip, and gives a stomp and a humph. This sequence is usually followed by the declaration, “Daddy, I’m going to be upset forever.” He emphasizes the “forever” part, and with his toddler accent, he pronounces it “fo-evah!”

In your head, you can recite that “fo-evah!” comment, along with the look you might imagine, and understand why I find this to be both adorable and humorous.

What exactly is he doing? He’s doing what every preschooler does – he’s taking his current feeling and projecting it into perpetuity (for-lev-uh!). He’s doing what most investors do. Investors study and digest the environment around them and assume that whatever trends are in place now will continue into the future.

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Here at The Bahnsen Group, our Founder and namesake for the firm, David Bahnsen, wrote a book outlining our primary investment strategy, The Case for Dividend Growth: Investing in a Post-Crisis World. This Dividend Growth portfolio, which we refer to as Core Dividend, is made up of approximately 30 individual businesses (stocks). This number of securities was not chosen at random, it is much like that of a golf bag holding 14 clubs. At 30 securities, our investment committee, and our team of analysts, can know each of these businesses intimately, AND we can enjoy most all of the benefits of diversification.

Just like 1,000 clubs in our bag wouldn’t transform us into a golf Hall of Famer, more securities won’t continue to meaningfully reduce risk/volatility. The “why” is the important part here. When investing, we are facing two different types of risk – Business Risk and Market Risk. Business risks are the risks unique to that one particular business and how individual circumstances or events can uniquely impact that one business versus the entire industry or market. Perhaps a CEO is revealed for his or her scandalous activities, or a lawsuit comes forward against that business or financial troubles birthed from overspending and overborrowing. As a hypothetical, if one owns 25 individual stocks equally, this means the greatest concentration in one business is 4%. Sure, one should have other prudent risk management measures to diversify across industries and be aware of interest rates or commodity sensitivities prevalent in the businesses they own, but in general, this maximum concentration – in this example – of 4% is meant to diversify away from that individual business risk. If an unforeseen and unfortunate event occurs to one of those portfolio companies, even a 50% hit to the downside would only surface as a 2% drop to the portfolio – we call this attribution.

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What’s For Dinner?

Your spouse, your significant other, your friend, your sibling, or someone close to you says, “Let’s go out to dinner tonight! Your choice, just say where…”

For the next few minutes, you list off ideas one by one, and your counterpart shuts down each of them. Sometimes with a “Nah,” sometimes just a look of disgust, and sometimes with a “Didn’t we just go there?” Until you finally feel defeated and surrender with the response, “Where do you want to go?”

In these situations – which I am sure some of us are very familiar with – we learn that an introductory promise of “your choice” really isn’t the case.

Oh, I Would Never…

It sounds like this: “I know market timing is a fool’s errand, and I know it’s impossible to know the future, but here’s what I’m thinking… There is so much unknown out there right now, I think I’ll wait until markets settle a bit” or “I’ll invest after markets pull back a bit” or “Until this geopolitical unrest is settled” or “Until this jobs report is published” or “Until this election is over.”

How am I to respond? They know I don’t put any faith in being able to successfully time markets. Think about it, if I was a successful “timer” once, God knows I couldn’t do it again (be consistent), and if I could, I sure wouldn’t let anyone in on my secret. I’d just sail off into the sunset with my billion-dollar timing skills.

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