Investments

By: Chris J. Roe, CPA/PFS

Have you ever heard a financial advisor or money manager tell you their investment portfolio beats the market? How about them forecasting where the markets or economy will be in the next year?

It happens all the time. But here’s the thing. Great financial advisors do not guess or give investment opinions. Nor do they believe they can predict the future .

If you’re working with a financial advisor, or managing your money all on your own, you want to watch out for a few common pitfalls. At Rx Wealth, we call them the 7 “sins” of investing.

Sin #1: Gossip

If you try to time the market based on what you hear on TV, radio, or from your colleague or neighbor, you’re in for it. Remember, what you hear is just an opinion—and not necessarily a fact. Great financial advisors don’t employ opinions. Instead, they rely on financial science to manage wealth. For example, we know, based on years of academic research, stocks have a higher expected return than bonds and that certain characteristics, such stock size, price and earnings, tend to dictate their returns over time. As for bonds, their returns are determined by the credit quality and term (i.e., 1 year till you get paid back or 30 years till you get paid back). By considering how much stocks and bonds to hold and what types, we can more easily build a strategy that supports your investment goals.

Sin #2: Applying misinformation

Some financial advisors purposely obscure financial terms and systems. Why? So, their clients don’t have true control of their wealth. Then they sell them high-cost solutions. It’s just not right. Make sure you truly understand what your financial advisor is telling you. Ask as many questions as possible. For instance, when an advisors says he/she can build a custom portfolio just for you, you should ask them to show you academic proof that their “custom” portfolio will provide better long-term performance than say a “model” portfolio. We fully expect them to show you it will, without academic proof. But remember, they are showing you history and past performance not the future. No one can predict the future. We can easily tell you the past Super Bowl winners, but who will win next year? Would you hire us if we got history wrong? Remember, you are not hiring a financial advisor based on them showing you history, you are hiring them based on who you feel you can easily relate to and who can work with you to develop a strategy based on solid, time-tested academic research and financial principles that places you in the best position to excel in the future.

Sin #3: Envy

Making investments or investment decisions based on what your neighbors or colleagues say isn’t smart. Generally, people only tell you when they’re doing well—not when they’re losing money. Take what people say with a “grain of salt”. A better strategy is to base your investment decisions on years of academic research and solid fundamental investing principles, while keeping in mind that your discipline to saving money and your emotional decision making in good and bad times may ultimately determine your success.

Sin #4: Pride

Be on the lookout for a financial advisor that seems prideful. Don’t believe claims that an advisor can beat the market or build a better portfolio that will achieve a greater return. It’s not always true. A trustworthy financial advisor will use long standing research and time-tested strategies to give you the best chance for success over a long period. Always remember that past performance is no guarantee of future results.

Sin #5: Vanity

If you find yourself chasing past performance because you believe it determines future results, beware. When it comes to investing, returns are predominantly determined by a.) the amounts of stocks versus bonds you own, b.) the types of stocks and bonds you own, c.) your portfolio costs and taxes; and d.) most importantly, your behavior in good and bad markets. Refer to Sin #2.

Sin #6: Sloth

It’s incredibly important to keep reviewing your portfolio for new, hidden opportunities. Make sure you work with a financial advisor who is proactive. The best advisors can reduce overall portfolio costs, rebalance from stronger investment performers to weaker investment performers, all while looking for opportunities to take tax losses and minimizing tax events in an effort to enhance after-tax returns. Remember, you can spend what you make after taxes, not what you make before taxes.

Sin #7: Greed

When the markets are up, a lot of investors lose sight of the risk they are taking. Instead, they get greedy and focus on competing with colleagues or neighbors who say they are making more. Remember, the most important thing is to meet your financial goals—not make more money than other people.

At Rx Wealth, we understand investment markets are efficient and extremely difficult to beat over time. And, they’re almost impossible to beat after factoring in investment costs and taxes. Based on these factors, we developed the Rx Wealth Investment Philosophy.

Money is different from wealth. At Rx Wealth, we believe money is an account balance, but wealth is a way of life. It’s a standard for living, and one that, with the right decisions, can be achieved and maintained. We consistently strive to help our clients avoid the 7 sins to achieve greater wealth.

If you want to chat further about how you avoid these investment sins, please reach out to us for a complimentary consultation.

Disclaimer:

2020 All Rights Reserved. This content is developed from sources believed to be providing accurate information, and provided by Rx Wealth Advisors, LLC for general informational purposes only. It may not be used for the purpose of avoiding any federal tax penalties and in no way is meant to provide specific tax, legal or financial advice. Please consult legal, financial or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any financial advice or investment security.

By: Chris J. Roe, CPA/PFS

In the midst of this roller coaster market, Rx Wealth Advisors is get two questions. “Shall we go to cash?” and “Is now the time to buy stocks?” Have you ask yourself these questions? As a doctor, are your colleagues asking these two questions?

These questions are very common in times like these. However, these two questions are at the exact opposite thinking of each other. The first question passes through our mind as our emotional self invokes our survival mechanism. Once we feel our survival is no longer a concern, we immediately switch into fear of missing out (FOMO) mode.

While our survival mechanism keeps us from dying in dangerous situations, it does not serve us, the long-term investor, well during these time. It can cause us to make irrational decisions that may have profound long term affects on our finances. Here are five things to use as your GPS if you are struggling with these two questions.

Should I Invest Now?

Invest during a market downturn can make a lot of sense. Asset prices have declined and certain stocks, real estate and more are trading at a fraction of what these assets traded hands just a few months back.

Doctors who have years, or even decades, before cash is needed from their portfolio may be the ones who can really benefit from this downturn. This is especially important for young doctors just starting to build and diversify their portfolio. They have the time needed to watch the market recover and their bargain-priced assets slowly regain their value.

Consideration #1: Do I have Sufficient Cash to Weather the Storm?

With the uncertainty this global pandemic has brought to America, many people are preparing for the worst job loss, medical bills, or even the unexpected loss of a loved one. Who would have thought that a significant number of doctors have been placed on reduced schedules or even furloughed during this significant health crisis. And as we continue to weather this bear market, we are already seeing record numbers of Americans (including doctors) filing for unemployment. We are still early into this crisis, but if we look back at the 2007-2009 recession, unemployment rose to five percent at the end of 2007 and up to nine and a half percent in June 2009. Unemployment actually didn’t peak until after the recession ended, at 10 percent in October 2009.²

Even if you are certain your physician specialty is secure and stable, it does not mean you are immune to loss of income during this market downturn. The number of cases of COVID-19 is growing every day, meaning it’s entirely possible that you may need to care for a sick loved one or yourself in the near future. Depending on your job’s policy on leave and your eligibility for the recently passed Families First Coronavirus Response Act, this could mean going for an extended period of time without a paycheck. You should make sure during this time that your personal disability policy is paid up in case you happen to get sick.

While the amount you need in cash is depended upon your personal situation, a general rule is to have three to six months of your monthly spending immediately available. To be safe, we recommend at least six to twelve months depending on a client’s specific situation. As you consider putting your additional income towards investments, first take a look at your savings. You want to feel comfortable with what you have already saved and be ready to live off of your savings if you had to. Once that is taken care of, then, you may be ready to turn your focus toward long-term investing.

Consideration #2: Should I Pay Off My Mortgage or other debts?

In the fourth quarter of 2019, the New York Federal Reserve reported that American household debt rose to $14.15 trillion.³ While the majority of this debt covers things such as housing, auto loans and student loan payments, this still leaves $46 billion in credit card debt.³ If you find yourself in the position of choosing between paying down debt or investing, there are plenty of factors to consider, and this a great reason to consult with your financial advisor. Working together, you may find that paying off debt will serve you better over increasing your investments in stocks.

“Cash is King” !! During these uncertain times, we recommend that cash be conserved, as much as possible, due to the uncertainty that lies ahead. When the uncertainty passes, there is always time to pay off debt if it fits into your long-term financial plan.

Consideration #3: Should I Buy Stocks Now?

It is generally recommended that you invest cash immediately if not need in the short term, but these are uncertain times. While It feels like the market turned overnight, it is important to remember that recessions and downturns tend to last awhile. Our last recession, for example, lasted 18 months.⁴ What does this mean if you are eager to jump in this stock market? It means you have time to make a rational decision.

You should consult with your financial advisor and make sure that investing your cash fits into your long-term financial plan. There is no need to make a hasty, emotionally driven decisions if you have many years to go before you need the cash. While the markets will continue to fluctuate, they are more than likely to not recovering overnight, even if it seems likely.

Consideration #4: Am I Emotionally Prepared to Watch My Account Drop?

If you choose to buy while the market is down, there is always a chance that you will buy when it has yet to reach “rock bottom”. This means that you, as an investor, should be prepared for the roller coaster your investments will likely continue on. While investments are always fluctuating, during an especially volatile period, there is a good chance you will be watching your stocks rise and fall on a downward trend for months.

All of us have a personal attachment to our money, and it is important to consider the emotional toll watching your assets drop in value will have on your mental well-being. If it is unbearable to watch market fluctuations; then, the potential gains from investing now may not out weight the emotional toll you have to endure. It is important to express and discuss your concerns about this to your financial advisor before deciding to invest during a market downturn. Your advisor will help you determine if investing in these markets makes sense based on your goals and financial plan.

Consideration #5: Am I Still Following My Investment Plan?

Do not treat the tempting lower stock prices as a chance to forego your investment strategy or plan. This is a time in which you will want to be precise and logistical about the next investment decisions you make. Remember, the markets are forward looking when they price investments. Sometimes, the companies with large share prices declines, may look cheap, but are not always the best investment opportunities going forward. These companies have declined for a reason (lower expected future earnings). As an investor, we must decipher if the reason is simply temporary or permanent.

In these times, you want to to be sure you are maintaining diversity and not taking on excess risk. You want to be sure that any investments you make in these times are still reflective of your greater long-term financial goals.

In 2020, Americans are facing a future of uncertainty, between the global pandemic of COVID-19 and the economic instability of a recent market downturn. If you are in a position to continue to invest, investing now may prove to be a beneficial move for your portfolio, but it is important to consider your decision carefully and thoroughly. Now more than ever, it makes sense to seek a second opinion on your investment plan and to consider your next financial decisions carefully as you navigate through these upcoming months.

Disclaimer:

2020 All Rights Reserved. This content is developed from sources believed to be providing accurate information, and provided by Rx Wealth Advisors, LLC for general informational purposes only. It may not be used for the purpose of avoiding any federal tax penalties and in no way is meant to provide specific tax, legal or financial advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

¹https://www.economist.com/finance-and-economics/2020/03/14/entering-a-bear-market
²https://www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf
³https://www.newyorkfed.org/microeconomics/hhdc.html
⁴http://www.nber.org/cycles/

By: Chris J. Roe, CPA/PFS

Have you ever wondered if you’re making a big investment mistake (without even knowing it)?

Deep breaths. Hopefully you’re not.

But whether you’re new to investing or you’ve been in the game for a while, I’d like to talk to you about how to avoid some common mistakes I’ve seen in my 22 years as a financial professional.

Mistake #1: Making risky decisions to compensate for not saving enough money

Sometimes, I see doctors invest in everything from private loans and startup businesses to private real estate. While it’s great if these investments are done right (they can add value and provide a significant return), they’re also risky. Generally speaking, a doctor’s portfolio isn’t large enough to achieve the proper diversification with these investment types.

Some doctors make risky decisions with their investments because they’re trying to retire sooner, make more money for the sake of it, or live a larger lifestyle. And of course, if they cash out, they get bragging rights too!

But what happens if they lose money? In most instances, these investments are disastrous, rather than successful. Remember, hoping an investment works out is not an investment strategy. Nor is an investment a solution for not saving enough money to retire with the same lifestyle you had as a doctor.

Mistake #2: Believing their portfolio is better because they own a lot of different types of investments

Keep in mind, a complex investment portfolio does not equal a better portfolio overall. Some doctors, and other investors too, think having many different types of investments, especially exotic investments, like hedge funds and private deals, creates a more sophisticated investment portfolio.

But, in many instances, having too many investments in one’s portfolio causes problems, such as to much of one investment, more risk than you want to take, and increased trading and investment costs . According to Leonardo Da Vinci, “Simplicity is the ultimate sophistication.” At Rx Wealth, we create an investment portfolio that is based on financial science, broadly diversified, low cost, and simple. Value is added through execution, review, and monitoring.

Mistake #3: Trying to beat the market with active management and by ignoring taxes

Perhaps the biggest mistake I’ve seen happens when people believe they can beat the market consistently. And, they overpay to do it. There are countless investment professionals out there who are handsomely paid to beat the market, and most cannot do it even once, let alone with any consistency. It’s generally luck, not skill, that allows an investor to beat the market.

At Rx Wealth, our investment philosophy is simple:

• broadly diversify across stocks and bonds based on financial science
• keep investment costs low
• manage for after-tax returns
• leave luck out of the investment equation

Our strategy is summed in a simple formula: Broadly diversified stocks and bonds + low investment costs + manage taxes + your tailored strategy = Success

If you want to avoid these three common mistakes in investing, we should talk. Please contact us to schedule a time.

Disclaimer:

This content is developed from sources believed to be providing accurate information, and provided by Rx Wealth Advisors, LLC for general informational purposes only.. It may not be used for the purpose of avoiding any federal tax penalties and in no way is meant to provide specific tax, legal or financial advice.. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.