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Five Common Investing Mistakes

Avoid these five common mistakes. (Photo: Kier in Sight Archives | Unsplash)

Investing is one of the best ways to build your wealth and help achieve your long-term financial goals. However, several common and expensive missteps have the potential to derail your investment progress. Recognizing the following mistakes and taking proactive steps to avoid them will likely improve your investment outcomes and, ultimately, give you a better chance of achieving your long-term financial goals.

1. Chasing the trends

A common mistake many investors make is choosing investments based on short-term market forecasts and chasing current trends without first researching and doing their due diligence. Without a full understanding of each investment in your portfolio and its risk and return characteristics, underlying holdings, costs, etc., how can you know your investments align with your objectives?

It’s critical to educate yourself on various investments’ risk characteristics, return potential, underlying holdings, tax treatment, asset class characteristics, expenses, and more. Your wealth manager is a great source for insight into how specific investments may impact your overall portfolio and financial goals.

2. Failing to properly diversify

Regardless of where you live, it’s always wise to maintain a diversified investment portfolio. Investing in different types of asset classes will spread out your risk. When one sector or investment type is performing poorly, another investment type that’s performing better can help smooth out overall portfolio volatility. While diversification won’t prevent losses, it can reduce the risk of being too heavily invested in the worst performing part of the market.

To achieve adequate diversification, consider combining stocks with bonds, large company stocks with small company stocks, U.S. stocks with international stocks, and investments from different sectors, such as technology, financial, energy, real estate, healthcare, etc. It’s also important to be aware of the underlying holdings in your investment funds to ensure you’re not overly weighted in a certain area.

3. Trying to time the market

Knowing that the market is unpredictable, time in the market is more important than trying to time the market by buying low and selling high. This strategy can backfire on even the most seasoned investors. Attempting to predict short-term market movements is risky and can lead to missed opportunities or significant losses.

Instead of timing the market, smart investing involves patience and a long-term investment approach that aligns with your goals and time horizon. Invest regularly and consistently, take advantage of dollar-cost averaging, and maintain a diversified portfolio. Over time, this strategy will help smooth out some market volatility.

4. Not rebalancing

It’s important to regularly review and rebalance your investment portfolio to help ensure it remains aligned with your objectives. Failing to rebalance on a regular basis can result in certain investment types or sectors becoming overweighted. Over time, this can cause your portfolio to drift away from your target risk profile.

By regularly rebalancing to your asset allocation, you can lock in gains from top-performing sectors and ensure your portfolio remains in line with your investment objectives and risk tolerance.

5. Neglecting the power of compounding

Compounding is a powerful force that can significantly increase your investment returns over time. The earlier you begin saving and investing, the more compounding interest works to your advantage. Focus on re-investing your dividends and maintain a long-term approach to your investment portfolio to maximize your compounding potential.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

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What’s Up with Bonds?

Bonds and stocks are uncorrelated, not negatively correlated. (Photo: Mathieu Stern | Unsplash)

What’s going on with bonds right now? Though 2022 has been a challenging year for fixed income, you might be surprised to learn that the death of bonds has been greatly exaggerated.

For context, bonds historically return less than stocks in the long run. From 1926 until the end of 2021, a large cap U.S. stock index returned over 10 percent a year, while a 5-year government bond index returned about 5 percent. Compounded over time, that is a massive difference.

Why would anyone want bonds then? They have two advantages over a 100 percent stock portfolio that you should care about — they are somewhat uncorrelated to stocks, and they tend to have less volatility.

Two things that are uncorrelated don’t automatically move in opposite directions — that would be negative correlation. With completely uncorrelated assets, the movement of one has no impact on the movement of the other one. This is something very desirable, since you don’t want everything in your portfolio going down at the same time.

Less volatility is also very much a good thing, meaning generally that bonds tend not to fluctuate up and down as much as stocks. This year is a great example — the Bloomberg U.S. Aggregate Bond index is down about 10 percent at the time of this writing. That’s one of the worst years on record for bonds, but it would only be a middlingly bad year for stocks. But isn’t this year a bad year for stocks, too? Let’s look at the big picture.

For a retiree, one of the worst things that can happen is a large portfolio drawdown in the years just before and after retirement. A crash just before retirement might force a delay to retirement plans. Worse, a crash just after retirement could dramatically change retirement lifestyle as assets are spent down while their prices are depressed.

We tend to allocate more to bonds around retirement because our best hope for bonds is that in a stock market downturn bonds will likely either go down less or even go up some.

You might be surprised to learn that is working, even this year. Looking at our portfolios and also target date portfolios from several major fund families, allocations with more bonds are performing better than allocations with more stocks. In other words, bonds are mostly down, but stocks are mostly down more. Bonds aren’t experiencing tremendous outperformance — it would be nice if they were actually up this year — but if you had a crystal ball and allocated more to bonds at the beginning of 2022 you would likely be better off than being 100 percent stocks at this moment.

Of course, we have no idea what direction bonds (or stocks) will go from here, at least in the short term. In the long term, we are optimistic to see returns of stocks and bonds in line with historical experience. We are also optimistic that in the event of a more intense stock market correction, bonds will likely perform even better in the likely flight to safety reaction of market participants.

As bond prices have fallen, bond yields have risen to a more attractive level, which is another silver lining in this challenging year. One of the biggest complaints is that bonds have had “no yield” for quite some time. With bond yields higher and inflation on the way down, we could be set up for a period where bonds provide a meaningful source of real return in addition to their ability to dampen stock market declines.

In short, 2022 has been a challenging year for bonds and stocks, but bonds continue to fulfill a very important role in investment portfolios.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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To Jump or Not to Jump?

Photo: Jp Valery | Unsplash

With the recent market downturn, I’ve seen countless questions like this:

I put $1,500 each month into my 401(k) and it has done well. Lately, however, the balance has been dropping very quickly. My friends are all stopping their contributions because they’re tired of adding money and watching it go away. What do you think I should do?

I remember being on the playground as a young child discussing ways to avoid catastrophes like an airplane crash or a falling elevator. The general consensus was to wait until the very last moment and then jump — rendering you immune from any sort of injury due to falling. That logic is similar to the logic above — stopping investment or pulling out of markets now is not going to prevent further losses. In fact, it will probably cause you to miss out on a rare opportunity to buy stocks at a discount.

One of the reasons investing is confusing is that market returns and bank account interest rates seem to be similar. In reality, they are completely different things. A high-yield savings account earning 1 percent a year means that you’ll earn 1 percent going forward, at least until the rate changes again. Returns of an investment account with stock and bond funds up 1 percent or up 20 percent or down 20 percent over the last year provide no reliable indication of what performance will look like tomorrow.

Saying “stocks always go up” sounds flippant and even reckless, but there is some truth to that notion. The price of stocks over time is tied to real businesses. In the long run, as long as GDP grows, productivity gains continue, and companies continue to earn and grow their income, it is very likely that stock market indices will continue to rise over time as well. Positive earnings growth is like a rubber band that pulls up on stock prices over time.

When market valuations get high, the rubber band gets slack and doesn’t pull up as hard, making market downturns more likely. When valuations are low, the rubber band gets taut and the stock market is more likely to rise, sometimes quickly. Earnings don’t tend to change as quickly as stock market prices, so the most common way to see the rubber band get stretched is during a stock market decline. It’s counterintuitive, but the best time to buy into the market is almost always after steep declines in share prices, when instincts tell us to run far away from risky investments.

Looking at recent performance is one of the worst ways to pick investments in a 401(k), second only to basing decisions off the names of the funds! To pick the right investments for the long run, you need a deep understanding of the choices and a plan to invest for the long haul using funds with reasonable fees, a sensible investing approach and as broadly a diversified footprint as possible. It’s very important, as many people have most of their investment assets in company 401(k) plans and the like. Financial advisors like Telarray who can help guide these investment selections can be invaluable in this effort.

Is the market going to go back up from here? The answer is almost certainly yes — eventually — but nobody knows for sure when. One thing that seems certain is that if you like the markets at the beginning of this year, you should like them a lot more now that they’re down 10-30 percent from those levels. There’s no way of knowing if by the end of 2022 markets will be down more from here or mounting a recovery. In our view, continuing to invest at discount prices is the best decision today just as it has been in each market downturn we have studied. Nobody knows the future, but a true long-term approach means you should be excited to put money to work at a discount!

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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Should You Invest in Real Estate or Stocks?

The unconsidered risks of real estate (Photo: Tierra Mallorca | Unsplash)

The choice between stocks and real estate as investments is a bit of a false dichotomy. Obviously, we can include both in our portfolio, but most people tend to choose one or the other. It’s been said that everyone is deep down either an Elvis fan or a Beatles fan (but not both), and in the same way, most people either believe in the value of the stock market or they believe in the value of real estate. There’s not much gray area in between.

Real estate generally has a lower expected return than stocks, for good reason. While there can be spurts of strong real estate performance, Robert Shiller’s data shows that real returns (aka after inflation) in the U.S. housing market have been only about 0.8 percent per year since 1890. Even this return may be an anomaly — the increasing availability of mortgage loans and current low interest rates probably contributed. This makes sense: If real estate outperformed inflation meaningfully over time, as decades turn into centuries housing would become completely unaffordable. According to S&P, the real returns of U.S. stocks since 1872 has been around 6.8 percent — a vastly larger number.

There are many good reasons to own your own house, but an eventual financial windfall is not as attractive as you might think. Many of us know people who owned a house for a short time and sold it just a few years later, ending up with a large lump sum. These things happen, but in the last 40 years (through June 30th) the median home price in the U.S. has only risen from $69,400 to $374,900, which seems like a healthy 5.4x return. However, the S&P 500 has risen from 131.21 to 4327.58, a 32.7x increase (that’s not even including dividends). We all need a place to live, but putting up as little capital as possible for a place to stay and investing the rest has historically been a better financial decision over any reasonably long period than owning (and maintaining!) a house.

Real estate seems to make a lot of money due to leverage, or borrowed money. By putting up, say, 10 percent of the purchase price of a $100,000 house, 1 percent appreciation on $100k turns into 10 percent appreciation on your $10,000 investment. But it works the other way, too — the equity in real estate can vanish quickly in a downturn, as we saw around 2008. You can borrow money to leverage up stocks, but it seems recklessly risky to most investors. Real estate prices are typically less volatile than stocks, but real estate leverage creates a real risk that many buyers don’t seriously consider, probably because the price of your house is not quoted daily on an exchange.

Water heaters, HVAC systems, and roofs require repair and replacement on uncertain timelines. Owners of houses often underestimate these costs, as well as property taxes, eventual remodels, and the countless nitpicky expenses of ownership. As a landlord, the risk of just one bad renter can eclipse years of profits, and the 2020 lockdowns introduced a new risk of months to years of non-paying tenants with no legal or financial recourse.

Fortunes have been made in real estate, but in my opinion, it’s a hard way to make “easy” money. I’m a big fan of diversified stock and bond portfolios that include some real estate exposure through real estate investment trusts, or REITs. That’s the kind of real estate investment that doesn’t call you in the middle of the night about a broken pipe!

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at ggard@telarrayadvisors.com or sign up for the next free online seminars on the Events tab at telarrayadvisors.com.