The behavior gap


In a recent article, Bloomberg writer and financial blogger Barry Ritholtz was discussing the significant difference between the returns that an investment earns, and the actual returns that investors get.  Here is an example:  As of 12/31/2013, the S&P 500 Index over the past 20 years returned on average 9.22% per year. The average equity investor earned just over half of that.

Financial Planner Carl Richards recognized this phenomenon and labeled it “the Behavior Gap.”  The gap is the return the investor didn’t capture and left on the table.  Carl Richards found that the gap was not due to poor investment choices, but by taking the wrong action at the wrong time.

A fundamental market principal is to buy low and sell high. It seems so basic and simple, but in reality, it is hard to do. People are not always rational when it comes to financial matters.  Think about the recent past.  When did everyone think about buying gold?  When gold was already up 60%.  When do we see the inflows into equity funds?  When equity funds are up significantly in value.  When the market goes down, we see worry and fear take over and people sell their holdings. In these very real scenarios, emotions are propelling investors to take action – action that results in buying high and selling low.  This is absolutely contrary to what is in our best interest.

There is talk of investment bubbles abounds in the media.  While we do not think that the equity market is overvalued, given where we are in the market, it would not be a surprise to see a correction. We are not predicting a correction or saying one is coming soon or very soon.  We simply recognize the market is not summer and sunshine all of the time.  There are those expected rainy days and cold seasons for which we should plan.

CTC tip: make IRA contributions early in the year

Calendar Planner

Waiting until the end of the year to contribute to your IRA limits your potential for growth.

A recent article reported that 70% of IRA contributions in 2013 were made near the contribution deadline. Waiting until then can cost an investor over $15,000 over 30 years: “assuming an investor contributes the maximum $5,500 annually for 30 years ($6,500 for those over age 50), and earns 4% after inflation, procrastinators will wind up with account balances $15,500 lower than someone who contributes as early as possible in a tax year.”

Year-end contributions miss out on months of growth. As such, putting $2,000 dollars into your IRA on January 1st is not the same as putting that same amount of money into your IRA on December 31st. If you contributed $2,000 into your IRA annually and receive a 5% return, here’s an example of how the timing of your contributions would affect growth:*

Years Invested Jan. 1st Contribution Dec. 31st Contribution Difference
5 $11,604.00 $11,051.00 $553.00
10 $26,414.00 $25,156.00 $1,258.00
15 $45,315.00 $43,157.00 $2,158.00
20 $69,439.00 $66,132.00 $3,307.00
25 $100,227.00 $95,454.00 $4,773.00
30 $139,522.00 $132,878.00 $6,644.00
35 $189,673.00 $180,641.00 $9,032.00
40 $253,680.00 $241,600.00 $12,080.00

As the article points out, people can have various reasons to wait until the end of the year to contribute to their IRA: some don’t have the money available to invest earlier in the year while others wait until they receive year-end bonuses. But whatever the reason may be, waiting can hurt their return.

Of course, contributing at the end of the year is better than not contributing at all. So regardless of when you’re contributing, you’re doing a great thing for your future. But if you are able, contribute early in the year — or regularly throughout the year —  instead of waiting until the end of the year to make the most of your investments.

Source: This Simple Move Can Boost Your Savings by Thousands of Dollars —

*Table taken from Kettley Concepts for Professionals (Kettley, 1999)

What effect do you want your legacy to have?

Legal-Will and Glasses

John Ruskin, a 19th century critic and architect, once wrote: “When we build, let us think that we build forever. Let it not be for present delight nor for present use alone. Let it be such work, as our descendants will thank us for and let us think, as we lay stone on stone, that a time is to come when…they will say, as they look upon the labor and the rock substance of them: ‘See that is what our father and mother did for us.’”

Ruskin understands that when we build, we don’t just build for the present and we don’t just build for ourselves. We build for the future; we build for those who come after us. We can look at estate planning in a similar way.

We work to make money, and we make money to save and invest so we can accumulate assets and provide the things we want and need. But what do we want our money, investments, and assets to achieve after we pass?

This is a much different question than “what do I want to leave for my family?” or “how much do I want to donate to a charity?” It’s the difference between wanting to leave $10,000 to a grandchild and wanting to help pay for that grandchild’s college tuition. The question gets to the heart of legacy planning and asks: “what effect do you want your legacy to have?”

Asking yourself this question can help you set estate planning goals and make decisions for your will or Revocable Living Trust. Viewing your estate as a tool to accomplish goals instead of something to divvy up can give you a better idea of how to use, grow, and pass along your investments and assets.

We believe estate planning isn’t about the things you own: it’s about supporting the people in your life and the causes you believe in. It’s about building for the future and leaving a lasting legacy.

So let us know: what do you want your legacy to be? What effect do you want it to have?

Your personal finances after graduation — part two

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Earlier this week, we shared a few basic ideas that you can use to build a healthy foundation for your personal finances after college. Today, let’s look at some specific things you can do and goals to work towards to get your finances off on the right foot.

Create a budget

On the surface, a budget is simply a system that you create to manage your money. However, it also encourages healthy financial habits. By keeping a budget, you regularly track your cash flow, monitor your spending, and set limits and rules for your money. These are all important skills to learn and exercise.

There isn’t one correct way to budget. The right budget for you is the one that you’ll stick to and one that moves you closer to your financial goals as efficiently as possible. For ideas and tips, check out our previous articles on creating a budgetContinue reading

Your personal finances after graduation — part one

Grad Caps 3

The transition period between college life to the professional world can be a formative time. It’s an opportunity to build a foundation for a healthy lifestyle during the next phase of your life. This includes your personal finances.

Some people realize years after they start their careers that they need to get the financial part of their lives in order: they realize the need for smarter spending, paying down debt, and saving for retirement. Unfortunately, this realization often comes after experiencing the consequences of poor financial habits. Committing to improving your financial situation at any point in your life is a good thing but it’s much easier to accomplish when you start earlier in life: before you take on more debt, increase your necessary expenses, or make any financial mistakes. Continue reading