Why do portfolios fail?

two basic reasons why portfolios fail:

  • You don't have a plan, or . . .
  • You think it's about investment performance.

you don't have a plan!

We have met the enemy and he is us.
— Pogo Possum, 1953

Recent studies show that over one-half of Americans derive at least one-half of their retirement income from Social Security. Unfortunately, the average monthly Social Security benefit of $1,245 leaves many of those same Americans well below the poverty line. Clearly, most Americans do not intend to spend their golden years in such a tarnished financial state. So, why does this happen to so many? Because most Americans do not have a plan which includes definite answers to the Four Financial Questions of Life. Do you have the answers? Click below to take a 60-second assessment of your financial health!

How we can help answer the four questions

Question 1 - How confident are you that you know exactly how much money you need to retire and stay comfortably retired?

Our Answer - This number is important because it is the whole purpose of your financial plan. Investing without this number firmly in mind means you're investing with no definite purpose. We calculate your number and show you how it's calculated so you can better understand and better plan.

Question 2 - How confident are you've taken all the steps necessary to accumulate that amount ?

Our Answer - It's good to have a destination but if you have no plan for getting there, at best you'll be ineffective and at worst you'll stay stuck in your current financial reality. We will make sure that your plan includes not only specific actions you can take but also benchmarks to measure your progress.

Question 3 - Do you know exactly how you will respond if your plan doesn't work as expected because of factors such as poor market performance or unexpected challenges in your life?

Our Answer - Let's face it. Life happens and sometimes delays or completely alters even the most well-crafted plans. When events such as death or disability or poor market performance or pressing family need occur and force a change in financial course, we naturally feel stress that sometimes causes us to take exactly the wrong actions - actions that create further financial harm. That's why we work with you to develop contingency plans that help preserve your future financial choices. Although we employ multiple contingency strategies, here is one of our most innovative and popular.

AssetLock is a tracking software used to monitor the performance of your investment account. We are different because we allow you to choose the amount of downside you are willing to tolerate. You are in control of this number, and may change it as your needs change. But, AssetLock is NOT a stop loss strategy. Should your portfolio reach its AssetLock value, your securities will not be sold automatically by a computer. Rather, we review your account before taking any action. Best of all - as your account increases, so does your floor - automatically. Want to know more? Click on the AssetLock logo for more information.

Question 4 - Do you know exactly how any remaining assets will be distributed at your death and are you positive that the documents required to implement your wishes are complete?

Our Answer - Few people spend their lives working to accumulate assets for the sole purpose of enriching their heirs. However, financial misery occurs when you outlive your portfolio. So, prudence dictates that your portfolio be managed to live at least as long as you do. This means that some residual will likely be left to benefit the people you love or the causes that matter. So who should get that money you've left? Loved ones and important causes or the Internal Revenue Service?

you think it's about investment performance

Isn't this a bad time to invest? Maybe we should wait until . . . We have heard this question thousands of times as investors try to determine whether some world event or market machination makes this moment the wrong time to invest. These investors hope that waiting will reveal a clear path to volatility free investing. Unfortunately, that path is never clear as there is always a reason why this moment poses particular peril to your portfolio. For a sampling of historical reasons why every year and every moment has been a bad time to invest, click the button.

it's Not the investments - It's You!

Since there's always a reason not to invest but the markets have marched forward despite those compelling reasons, investors who don't succeed often cannot blame anyone other than themselves.

The investment research company, Dalbar, performs an annual Quantitative Analysis Of Investor Behavior study. Not surprisingly, the 21st edition of this study shows that investors continue to underperform. The key findings of the study show that:

  • In 2014, the average equity mutual fund investor underperformed the S&P 500 by a wide margin of 8.19%. The broader market return was more than double the average equity mutual fund investor’s return. (13.69% vs. 5.50%).
  • In 2014, the average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 4.81%. The broader bond market returned over five times that of the average fixed income mutual fund investor.(5.97% vs. 1.16%).
  • In 2014, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%.
  • In 8 out of 12 months, investors guessed right about the market direction the following month. Despite “guessing right” 67% of the time in 2014, the average mutual fund investor was not able to come close to beating the market based on the actual volume of buying and selling at the right times.

Although investment costs are important, the biggest reason for underperformance by investors is psychology. Behavioral biases that lead to poor investment decision-making are the single largest contributor to underperformance over time. Dalbar defined nine of the irrational investment behavior biases specifically:

  • Loss Aversion – The fear of loss leads to a withdrawal of capital at the worst possible time. Also known as "panic selling."
  • Narrow Framing – Making decisions about on part of the portfolio without considering the effects on the total.
  • Anchoring – The process of remaining focused on what happened previously and not adapting to a changing market.
  • Mental Accounting – Separating performance of investments mentally to justify success and failure.
  • Lack of Diversification – Believing a portfolio is diversified when in fact it is a highly correlated pool of assets.
  • Herding– Following what everyone else is doing. Leads to "buy high/sell low."
  • Regret – Not performing a necessary action due to the regret of a previous failure.
  • Media Response – The media has a bias to optimism to sell products from advertisers and attract view/readership.
  • Optimism – Overly optimistic assumptions tend to lead to rather dramatic reversions when met with reality.

In the end, we are just human. Despite the best of our intentions, it is nearly impossible for an individual to be devoid of the emotional biases that inevitably lead to poor investment decision-making over time. This is why all great investors have strict investment disciplines that they follow to reduce the impact of human emotions.

More importantly, despite studies that show that "buy and hold," and "passive indexing" strategies, do indeed work over very long periods of time; the reality is that few will ever survive the downturns in order to see the benefits.

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