How Personal Biases, Past Mistakes Can Block Investment Growth

By: Oxana Saunders

today imageOne of the biggest challenges related to managing our money is figuring out how to preserve and grow our capital. These decisions are often influenced by personal biases and past financial mistakes or bad experiences we might have had. They can lead us to avoid investing in financial markets and only focusing on capital preservation by keeping money in savings accounts or CDs. This type of bias also leads to failure to realize the power of compounding interest and what it means for our investments long-terms.

The article from online magazine The Balance, linked below, elaborates on these issues.

If you are struggling to overcome negative biases associated with investing, please call us for a free consultation. We can walk you through investment strategies that may help you overcome simple obstacles that get in the way of your investments.

the balance
Overcoming a Major Retirement Planning Hurdle: Present Bias

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Oxana Saunders Vice President Path FinancialOxana Saunders is the Vice President of Path Financial, LLC. She may be reached at 941.894.2571 or oxana@pathfinancial.net.

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Falling number of shares a key factor behind the market rally

By: Raul Elizalde
today's photoWhen a stock pays a dividend rate higher than the interest at which the company can borrow money, it makes sense for that company to issue debt and buy back its own stock. This is exactly what happened as interest rates fell to historic lows. We believe that the retirement of equities is a key factor in the stock market rally, making them look “expensive” when compared to traditional measures of value, but not when considering their shrinking supply.

We measured changes in the number of outstanding shares of about 350 stocks with an aggregate market capitalization of $17.4 trillion (the total market is currently around $28 trillion). We found that since the beginning of 2011, the number of shares dropped by about 8%. If those shares had not been retired, this group would have a $1.7 trillion larger market capitalization. This extrapolates to a $2.8 trillion shortfall for the total market of US equities due to corporate buybacks.

image 1This estimation is remarkably similar to the $3.0 trillion retired equities calculated by the Federal Reserve. In addition, the Fed tallies the value of shares retired due to mergers and acquisitions, which adds up to another $2.3 trillion, for a total of $5.3 trillion in that period. This was only partially offset by $2.9 trillion of new issues coming to market. On balance, therefore, corporate America retired $2.4 trillion of equities value, which is on par with the GDP of the United Kingdom.

image 2This has vast implications. Stock prices go up disproportionately to the number of shares retired, meaning that a 1% reduction in supply causes a price appreciation much larger than 1%. More precisely, the marginal change in price due to the marginal change in supply is very high. This effect is not easy to isolate and measure, but it is undoubtedly present, and we believe that it is an important factor behind the market rally.

It also helps explain why equities seem expensive against traditional measures of value, such as P/E ratios. A corporation finds value in buying its own stock if it reduces its cost of capital, regardless of what those indicators show. The fact that top management compensation is often linked to the price of their stock may also play a role in a company’s decision to repurchase stock.

As long as this activity continues, the market will continue to seem “expensive”, and it may become more so if the Trump administration’s attempts to reduce the corporate tax rate eventually succeed.

Many US corporations with profitable global operations have not brought back those funds because they are subject to taxation once they come in. According to Moody’s, non-financial US companies hold close to $2 trillion abroad. If a corporate tax cut persuades companies to bring back their overseas profits, the likelihood is that they will be used to repurchase company stock. It is quite doubtful, as proponents of the tax cut argue, that they will be invested in their respective lines of businesses. Given that businesses have easy access to historically cheap credit, money sitting abroad does not seem to be a hindrance to financing any investments that seem promising.

Most recently, both our numbers and the Fed’s numbers show a slight decline in the pace of equity retirement. It could be “noise”, or it could be due to the modest interest rate rise of late last year.

It is reasonable to assume that if interest rates or equity prices go up much further, the economic benefits of retiring shares will end. The danger of higher rates is small, in our view, because it is difficult for the Fed to justify lifting rates much more when inflation has been falling further and further away from its target. As much as the Fed wants to “normalize” monetary policy, hiking rates when inflation is falling is risky.

On the other hand, earnings-per-share have been climbing, both on a trailing and (especially) on a forward basis. Moreover, Europe looks stronger and global GDP projections have improved. These fundamental factors support higher equity prices everywhere, regardless of the impact of corporate demand for equities.

These fundamental factors could make equities seem less expensive in the medium term when compared to traditional measures of revenue and earnings, and could well spur a new wave of demand from retail investors who, because of low interest rates, have few other places to go for returns. The market rally will end one day, but the combination of corporate demand, improving fundamentals, benign outlook for rates and a potential for growing retail demand are pushing that day further into the future.

What now?
We are a Registered Investment Advisor held to a fiduciary standard of care. We believe that our portfolio management process, focused on measuring and managing risk, can be very effective at creating a sensible balance between risk and return, partly by measuring financial and investment conditions often and adjusting portfolios through a well-defined process. We implement this process for our clients and we tailor it for their specific circumstances, and we always put their interests first. That means we do not profit from transactions or by selling any products. Our only compensation is based on the assets we manage, which goes a long way of aligning our interests with yours. We can also help you evaluate your current goals and establish an investment plan aiming at achieving steady, long-term returns while managing downside risk. You can download our report describing our investment methods and goals, or contact us if you would like to know more about how Path Financial’s investment process can work for you. We’ll be happy to set up a confidential meeting to discuss your path to financial success. Read more.

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Raul cropped for facebookRaul Elizalde is the Founder, President, and Chief Investment Officer of Path Financial, LLC. He may be reached at 941.350.7904 or raul@pathfinancial.net.

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10 Things You Should Know about Social Security

By: Oxana Saunders

coins and plants growingAs we think about retirement planning, the big part of it for most Americans is Social Security. It could be quite difficult to navigate all the rules associated with Social Security especially if you are trying to maximize your monthly payments. It gets even more confusing if you continue to work part time or have other sources of income.

Recent changes to Social Security rules certainly did not make it any easier. Below is a link to Kiplinger’s easy-to-understand Social Security guide that can help you educate yourself on what benefits you are entitled to and when.

kiplinger 10 Things You Must Know About Social Security

If you are in the process of retirement planning and are not clear on how to optimize your Social Security payments within your current financial state, contact us for a free consultation.

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Oxana Saunders Vice President Path FinancialOxana Saunders is the Vice President of Path Financial, LLC. She may be reached at 941.894.2571 or oxana@pathfinancial.net.

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Natural Disasters and Investing Mistakes to Avoid

By: Oxana Saunders

Stock Photo: Hurricane Wilma Satellite Photo

It’s been a few difficult and stressful weeks for many people related to natural disasters like hurricane Harvey and Irma as well as earthquakes in several parts of the globe.

As we begin to return to normalcy and continue to help those in need, naturally, we consider the impact of natural disasters on our investments.

None of these natural disasters bode well for owning too much real estate especially in the affected regions. As some of us may start to reevaluate the viability of our real estate investments, we often come up with the questions such as: “What’s the alternative? Where do I start? What mistakes to avoid?”

The article linked below may help with getting the answers to some of these questions.

If you are starting to think about alternatives to your real estate investments, call us for a free consultation.

6 Investing Mistakes New Investors Should Avoid

6 Investing Mistakes New Investors Should Avoid

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Stock Photo: Hurricane Wilma Satellite Photo

Oxana Saunders is the Vice President of Path Financial, LLC. She may be reached at 941.894.2571 or oxana@pathfinancial.net.

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Financial Professionals: who is the right person for you?

By: Oxana Saunders

image courtesy of Wikipedia

image courtesy of Wikipedia

As I tell people what I do for a living, I’ve come to realize that few understand the difference among various financial professionals. I cannot blame them. Our industry has adopted ambiguous titles such as “financial advisor,” “wealth advisor,” and “financial planner,” none of which are properly defined.

Strictly speaking, there are only two categories requiring a license and regulatory oversight: “Investment Advisor Representatives (IARs),” and “Registered Representatives (RRs).” The main difference is that IARs must put their interests before yours, while RRs do not have to.

IARs work for Registered Investment Advisors such as Path Financial and are widely considered to have few conflicts of interests with the clients they advise. On the other hand, RRs work for Broker-Dealers and recent regulatory initiatives specifically address the fact that their advice is often in conflict with their clients’ interests. (Click here to read Path Financial President Raul Elizalde’s March 2017 editorial in the Sarasota Herald Tribune on this topic.)

Understanding the difference between both is very important when deciding who is best suited to your particular goals. The Forbes article linked below expands on describing the different kinds of financial professionals, and describes how each are compensated.

forbes logo image

Differences Between Stockbrokers, Investment Advisors And Financial Planners

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Oxana Saunders Vice President Path FinancialOxana Saunders is the Vice President of Path Financial, LLC. She may be reached at 941.894.2571 or oxana@pathfinancial.net.

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Changes in the settlements rules and how they may affect you

By: Oxana Saunders

Image courtesy of ThinkAdvisor.com

Image courtesy of ThinkAdvisor.com

Beginning September 5, 2017, the US Securities and Exchange Commission (SEC) will require the financial industry to shorten a standard settlement cycle for most securities to two business days from three. The SEC’s amendment is intended to reduce counterparty risk, systematic risk, and improve capital efficiencies.

If you often purchase stocks because of their dividend, then you should pay particularly close attention to these changes.

Starting September 7th, the ex-dividend date will be set one business day prior to the record date (instead of two originally), and therefore you would need to purchase the stock by September 5th.

Below is the link to a ThinkAdvisor.com article that provides more details on how your investments may be affected.

think advisor logo
Are You Ready for T-2?

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Oxana Saunders Vice President Path FinancialOxana Saunders is the Vice President of Path Financial, LLC. She may be reached at 941.894.2571 or oxana@pathfinancial.net.

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Do you need stocks in your portfolio?

rollercoasterMost financial professionals would tell investors not to focus on matching or beating market indices, but rather on making sure that they stay on track to meet their financial goals.

Some investors push back against this advice, perhaps thinking that it is an excuse advisors have for not being able to beat the market. Yet, the advice is sound. While some investors need full exposure to equities, others do not need to take that much risk and some would be much better off having no exposure to stocks at all.

How much risk one takes depends on personal circumstances. Unfortunately, investors are bombarded with 24/7 stock recommendations, and they become more receptive to them when the market has been strong and steady as it has been in the last few years. While bull markets make people feel more confident taking on risk, relying on your level of confidence to decide how much risk to take is the wrong way to pursue your financial objectives. The risk inherent in the stock market is high, and it should be handled with care.

Consider a 75-yr old widow (i.e. without a significant other, for simplicity) who wants to make sure that her $2.2mm in savings will be enough to pay for $100,000 of yearly expenses for the rest of her life. As that rate, she will spend $2mm by the time she reaches 95, leaving $200,000 to spare. Probably her best bet is to invest those savings in short-term, high-quality fixed income products to protect them against inflation. This ultra-low-risk strategy would be aligned with her goal, which is to minimize the chance of running out of money. It would have the important benefit of being highly predictable and likely devoid of unpleasant surprises.

What about a 75-year old single man who has the same expenditures but $1.5mm in the bank? Spending $100,000 per year will deplete his savings in 15 years, or sooner if he spends more due to inflation. Because there is 100% certainty that he will run out of money way before he reaches 95, he needs the extra return of stocks to make his portfolio last.

How much stock exposure does the less-wealthy investor need?

One way of answering that question is by simulating sequences of stock market returns and examining how his portfolio would fare under each sequence. This can give a sense of how his situation can be improved.

Without stocks, his portfolio will inexorably shrink by $100,000 per year. Because stocks are volatile, adding them to the portfolio will make it less predictable. The higher the proportion of stocks, the more it will depart from that steady declining path. To illustrate this, we ran a few possible ways his portfolio can depart from the no-stock scenario (see first graph).

portfolio paths 50% stocks

Adding stocks clearly makes it possible for this retiree to stretch his portfolio past year 20. But it can also make his portfolio run out of money sooner than 15 years, or subject it to a terrible start such as a 25% decline in the very first year.

How would he react to a bad start? If his tolerance for risk is low, he may close out his positions right away, book a loss, and end up worse off than before. Every investor should consider his or her risk tolerance carefully with the help of a professional.

Things can go very wrong when the volatility of stocks is not properly understood. Imagine that the widow in the first example, even though she has plenty of savings and little need to invest, becomes convinced that she is “leaving money on the table” by not keeping up with a rising stock market. She decides (or is encouraged) to deploy all her portfolio in an S&P 500 index fund.

portfolio paths 100% stocks

While her final portfolio could potentially be much bigger than without any exposure to stocks, she now has a small but very real chance that she could run out of money – a scenario that, before switching to stocks, she was virtually assured not to face (see second graph). In exchange for the chance of having more money at the end of her life (when it is least useful) she introduced the risk of being wiped out sooner, or experiencing distressing early losses that could prompt her to close out positions in a panic and lock her out of her goal.

It is tempting to invest in stocks when they seem to carry little risk. Investors should not rely on forecasts; instead, they should examine their own situations, understand their tolerance for risk, and develop an appreciation for what could go wrong with their investment strategies.

What now?

We are a Registered Investment Advisor held to a fiduciary standard of care. We believe that our portfolio management process, focused on measuring and managing risk, can be very effective at creating a sensible balance between risk and return, partly by measuring financial and investment conditions often and adjusting portfolios through a well-defined process. We implement this process for our clients and we tailor it for their specific circumstances, and we always put their interests first. That means we do not profit from transactions or by selling any products. Our only compensation is based on the assets we manage, which goes a long way of aligning our interests with yours. We can also help you evaluate your current goals and establish an investment plan aiming at achieving steady, long-term returns while managing downside risk. You can download our report describing our investment methods and goals, or contact us if you would like to know more about how Path Financial’s investment process can work for you. We’ll be happy to set up a confidential meeting to discuss your path to financial success. Read more.

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Tax Planning Steps to Take Now to Optimize Your 2017 Tax Returns

By: Oxana Saunders
tax time
An integral part of a comprehensive financial plan is tax planning. In order to maximize and preserve your capital gains, it is important to plan in advance for events that might have significant tax consequences like selling stocks with high capital gains or real estate properties that have been deeply depreciated over the years. There are also a few strategies one should consider for generating tax-efficient income.

In the Forbes.com article linked below, you’ll find ideas that can help you start taking steps towards optimizing tax returns.

forbes logo image6 Tax Planning Tips To Consider For 2017

For questions on most tax efficient financial investments for your particular situations, call us for a free consultation.
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Oxana Saunders Vice President Path FinancialOxana Saunders is the Vice President of Path Financial, LLC. She may be reached at 941.894.2571 or oxana@pathfinancial.net.

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Can Market Rally Continue Another 10 Years? Investopedia Shares Raul Elizalde’s Insights

investopedia smallerInvestopedia recently published “Can the Market Rally Continue Another 10 Years?” — the most recent contribution for Investopedia by Path Financial founder and president Raul Elizalde.

In his latest analysis, Raul Elizalde tackles the question “Can the market fall hard anytime soon?” and discusses possibilities, black swan events and historic crashes. Read the full article at the link below.

Can the Market Rally Continue for Another 10 Years?

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Raul cropped for facebookRaul Elizalde is the founder and President of Path Financial, LLC. He may be reached at 941.350.7904 or raul@pathfinancial.net.

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Seven Things Women Should Do Post-Divorce to Secure their Financial Stability

By: Oxana Saunders
birds on wire
Divorce can be a traumatizing experience for all the parties involved, but women are often more vulnerable to financial difficulties if they had not been actively involved in their family finances during the marriage. The emotional toll of the divorce can make it even more difficult for women to deal with the new reality of being on their own and facing the challenges of becoming a successful head of household.

While all this can be very overwhelming, there are certain steps women can take to secure financial stability. The Forbes.com article linked below has excellent tips on the seven things women should do post-divorce to secure their financial stability — one of which is to find a financial advisor or planner who has experience helping divorced women, whose goals and needs can be very different from those of a married couple.

forbes logo imageSeven Must-Do Steps for Women Who Want Financial Stability Post-Divorce

If you find yourself overwhelmed with managing your finances after a divorce and need professional help, please contact me for a free consultation.
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Oxana Saunders Vice President Path FinancialOxana Saunders is the Vice President of Path Financial, LLC. She may be reached at 941.894.2571 or oxana@pathfinancial.net.

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