Author: Dr. Daniel Levine

Learn From Your Mistakes

One of the key differences between successful long-term investors and those who aren’t is that successful investors learn from their mistakes and make a commitment to never making the same mistake again. Even when a mistake results in a large and painful loss, it’s necessary to take a step back and review the actions that led to your loss. Learning what went wrong in your thinking or your planning must be reviewed so you can educate yourself on what to do better next time. Also, never compound the errors you made by taking bigger risks in an effort to recover your money. This is addictive gambler’s behavior, not rational and emotionless investing, which is the best way to make decisions. Determine where you went astray and ensure you avoid the same mistake in the future. Many common investing mistakes can be attributed to emotional decision-making. Whenever you make financial or investment decisions, you will have the challenge of overcoming fear and greed. Fear can cause you to run for the exits when markets decline or your portfolio starts taking losses. Greed can encourage you to chase fads and take on too much risk in the pursuit of a big score. By recognizing your emotional triggers and engaging your rational mind, you can overcome your impulses and cultivate discipline. Taking unnecessary risks can quickly destroy your portfolio. In today’s markets,...

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Portfolio Performance and Measurement Reporting

Do you receive regular portfolio performance reports (not account statements) that clearly measure your performance against the appropriate benchmarks and disclose exactly what you pay for the performance of your investments? In order to make good financial decisions, it’s important to remove emotion from the picture. The only way this can be done is to: Set clear and realistic goals Create meaningful measurement Have defined consequences for failure Most investors do not set clear and realistic goals…so there is no meaningful measurement, and no defined failures or consequences.  This contributes to decisions being emotional in nature, which is often a potentially devastating flaw.     Set Clear and Realistic Goals; Have an Investment Policy Statement An Investment Policy Statement (IPS) should contain at least the following information: The time horizon for your investment strategy The income needs from your investment amount A decision-making policy for how investments will be made An asset allocation (diversification) model your investment will follow A provision for how frequently and how your investments will be monitored and reviewed A realistic rate of return goal which is relative to an appropriate benchmark Without an IPS, there is no clear communication about what is expected and how those expectations will be met. Investing without an IPS is like driving across a foreign country with no map, no directions, and no preferred destination. It could be an...

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How Good Are Your Investments…Really?

Most investments are not very good.  One of the more common investments today is mutual funds. As a whole, mutual funds are a great idea and can work very well…but the very rich generally don’t use them. There is good reason for this. Deferred annuities are also popular. They come in many varieties and most sound too good to be true. In this case, the most successful money managers do not use them. John Bogle, Founder of Vanguard Funds, Explains the Costs of Mutual Funds John Bogle was asked by an interviewer from the TV program Frontline, “What percentage of my net growth is going toward fees in a 401(k) plan?” Bogle replied, “Well, let me give you a little longer-term example. An individual who’s 20 years old today is starting to accumulate for retirement. That person has about 45 years to go before retirement — 20 to 65 — and then, if you believe the actuarial tables, another 20 years to go before death mercifully brings his or her life to a close. So that’s 65 years of investing. If you invest $1,000 at the beginning of that time and earn 8 percent, that $1,000 will grow…to around $140,000.” He continued: “Now the financial system — the mutual fund system in this case — will take about 2.5 percentage points out of that return, so you’ll have a...

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What Is Your Portfolio’s REAL Return?

To maximize investment growth over time, it’s critical to factor in the effects of fees, taxes and inflation on your returns. Many posted investment returns explicitly exclude the effects of fees, which come right off the top of each year’s gains. It’s important to dig deeper and find out how much that performance is costing you each year so you can decide which investments will serve you best. Taxes can also take a serious bite out of your investment gains each year so it’s important to structure your investments to account for taxes on capital gains, dividends, and income. Taxes should not be the primary driver of an investment strategy, but incorporating tax efficiency into your overall plan will help you keep more of what you earn. If taxes are a problem for you, structuring your investments so that taxable investments can grow in a tax-deferred account may be an option. Synergy Financial Advisors can help you with this. Inflation, which is the erosion of your purchasing power over time from increases in the cost of goods, is another insidious force that can eat away at investment growth each year. An investment strategy that fails to account for the effects of fees, taxes and inflation on overall return will severely handicap your ability to increase your wealth over time because if you do not build these factors into your...

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Know the Right Amount of Risk

Wise investors focus on value when evaluating investment options. Too many investors focus on buying market trends and economic outlook, not realizing that trends can be deceiving and markets often perform very differently from the economy. Individual stocks can easily surprise you – rising in a down market, and falling during a rally – making it important for long-term investors to focus on buying quality investments with good fundamentals. While economic trends can exert a powerful effect on market movements, the stock market and the economy do not move with perfect correlation and there are many occasions in which markets rally in spite of poor economic fundamentals or declining corporate earnings. This is not to say that economic outlook is unimportant. A smart investor keeps an eye on the economy and factors economic outlook into investment decisions, but ultimately seeks high-quality individual investments. Investors do best when they take on the right amount of risk for their individual goals and tolerance. Too many investors focus strictly on generating returns while ignoring the importance of managing risk properly. Too much risk can leave your nest egg vulnerable to market swings with too little time to recover before you must start withdrawing money and locking in the losses. Too little risk in your portfolio will reduce your potential for capital appreciation and allow inflation to eat away at the long-term value...

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