SPEAKING: On Personal Finance

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Personal finance is more personal than it is finance. This is a message, grounded in science, that I’m privileged to share in various forms speaking for various audiences. Whether for an association of financial planners, a Fortune 500 company, an academic institution or a non-profit, my strategy is to ENGAGE, ENTERTAIN and EDUCATE your audience, giving attendees tangible takeaways to improve their lives and work.

How To Know When To Get Out Of The Market

Originally published CNBCHas the market’s recent volatility worried you? Me too. It’s inevitable. Apparently, it’s how we’re wired. But better understanding that wiring can give us a clear decision-making framework to help us know if and when to get out of the market.

The field of behavioral finance has demonstrated that the pain we derive from market losses impacts us twice as much as the pleasure we feel from market gains. For this reason, investors are well served to name and address these emotions instead of setting them aside as they (unfortunately) have been taught.

We’ve all heard of the cost/benefit decision-making model, but “cost” and “benefit” are intellectual constructs too distant from the actual emotions that drive our decision-making. We need to address the gut—the “pain” and the “pleasure” associated with a tough decision. The following four-step model seeks to merge the head and the gut. And while it’s applicable in virtually any either/or scenario, let’s specifically address the decision to stay invested in the market or to move to cash:

Market Decision Image Cropped

1) The pain of staying invested is that I could lose even more. This is an entirely realistic possibility. What’s more, the pain is compounded when subsequent headlines—or your investment account statements—goad you into thinking that you could’ve—should’ve—avoided this pain if only you’d gotten out sooner. When this realization strikes the broader investing collective, it’s called capitulation—the moment investors give up en masse—and it typically signals the beginning of the forthcoming recovery, even the next bull market.

2) The pleasure of moving to cash is that my worry is eliminated and I’m guaranteed not to lose any more. Undeniably, you’ll sleep better tonight. But.

3) The pain involved in moving to cash is that I may miss the upside, thereby eliminating my opportunity to recoup recent losses in the next market up move. We know this, but the recent pain of loss is a far more powerful emotion than the projected pleasure, however probable, of gains in the future. The pain in box number three is often dampened by the hope that you’ll be able to get back into the market on the way up, a gamble statistically proven to be in the neighborhood of hopeless.

4) The pleasure in staying invested is that I’m giving myself a better chance to achieve my financial goals in the long term—the whole reason I invested in market in the first place. The market historically has paid investors a premium over cash and bonds precisely because it requires you to endure times of volatility. Without volatility, we’d have no reason to expect higher long-term gains. And for most of us, without the higher long-term gains we expect from equities, we simply wouldn’t meet our financial goals.

Does this imply there is never a reason to sell your market positions following a decline? No. The above framework assumes that your portfolio is diversified. It also assumes your portfolio is appropriately balanced with the stabilizing force of conservative fixed income allocated according to your ability (time horizon) and willingness (intestinal fortitude) to take risk. If this is not the case, there may, indeed, be grounds for change.

For the sake of creating a clear illustration, this framework only address the two extreme options of “sticking with the plan” or bailing out. Of course, there is a vast middle, and if you find that a typical correction or frightening headline has provided real-time evidence that your risk tolerance is not as high as you previously thought, recalibrating your portfolio may be entirely appropriate. It is imperative, however, to remember that the degree to which you shift out of riskier assets and into more secure assets will send you back to box number three. You’ll have to consider how much lost ground you’ll be able to reclaim in the likely subsequent market advance.

Please don’t paint me as an unrepentant stock market cheerleader. I believe that most investors—and even, perhaps especially, financial advisors—don’t fully appreciate and consider the serious emotions associated with volatility in investing. For this reason, I believe most people default to portfolios that are likely too heavily tilted toward stocks. Furthermore, if you don’t need the expected higher returns of the stock market in order to reach your financial goals, I’m inclined to recommend surprisingly low allocations to market exposure. On more than one occasion, I’ve recommended portfolios with absolutely no equities [gasp] for clients who didn’t need the excess returns and clearly didn’t have the stomach for volatility.

But if you’re already in the market, and in a well-conceived portfolio, the decision to get out is one deserving careful consideration, employing both the heart and the mind.

I’m a speaker, author, wealth advisor and director of personal finance for Buckingham and the BAM Alliance. Connect with me on Twitter, Google+, and click HERE to receive my weekly post via email.

Why The Stock Market Is Volatile, Why Volatility Hurts, And What To Do About It

Originally in ForbesUnless you made a resolution not to read, listen to or watch the news in 2016, you’ve likely noticed that “the market” is off to a stumbling start. Indeed, one glance at the headlines, at least the ones that don’t involve the presidential election, quickly reveals that the market is having one of its worst starts to any new year. This is a dubious distinction, to be sure.

The factors involved appear similar to those credited for causing the extreme volatility we saw in the fall of 2015—slower growth in China, falling oil prices, geopolitical instability and the threat of bankruptcies in junk bonds. But the optimist’s case seems equally compelling—high-quality bonds (the only kind I recommend) are performing very well, falling oil prices are good for consumers, the Fed’s interest rate rise signals a strengthening U.S. economy and the most recent jobs report was positive.

An objective view of the market reminds us that on every trading day in history, there have been compelling cases to be made for both optimism and pessimism—for purchases or sales. (Remember that every single security transaction involves a buyer and a seller, each of whom believes he or she is getting the better end of the deal.)

Ultimately, there is only one sufficient answer to the question, “Why is the market so volatile?” The market exhibits volatility because that is its nature.

We expect to make more investing in bonds than in cash because bonds are more risky. We expect to make more investing in stocks than in bonds precisely because they force us to endure even more uncertainty, and this logic continues to extend through the various slices of the market we isolate for the purposes of diversification (like small and undervalued companies).

But most importantly, the willingness to endure volatility has tended to reward the disciplined investor, and often the greatest reward immediately follows the most significant times of market turmoil. The greatest folly, then, is in attempting to divine precisely when these times of volatility will begin and end. Whether motivated by fear or pride, it is the business of prognostication that hurts investors most.

Does this mean that inaction is the only course of action in these times? Certainly not. Losses can be harvested in taxable accounts and replaced with similar securities, an activity that may benefit you at tax time. And in all your accounts, you have the opportunity to follow Warren Buffett’s chief investment advice—to buy when other investors are fearful—through strategic rebalancing. Doing so positions you to make the very most of the next market move upward.

I recently saw Jim Cramer, perhaps the face of market prognostication, confess, “I need a little perspective. We’re a little caught up here in the short term.” There is a reason that Mr. Cramer—and at times, you and I—get stuck in the short term. And it can be explained by behavioral science. We innately over-value losses and pain while under-weighting gains and joy, in money and life (explained in part by the “endowment effect”). And at the same time, we also over-weight what has happened most recently while under-valuing the more likely, long-term outcome (known as “recency bias”). Therefore, as you can imagine, recent losses are a powerful psychological duo that can even lead to clinical depression (a topic that my colleague, Larry Swedroe, recently wrote on).

The fundamental truth, and what I believe to be the antidote for this downward spiraling, is that we don’t invest in our portfolios for today, this month or even this year—but for decades in the future. Therefore, the unavoidable intermittent downside, like that which we’ve experienced in the first weeks of 2016, does not result in losses, per se, but merely declines.

This does not suggest, of course, that you must have a portfolio invested solely in large U.S. companies and then hold on with a white-knuckle grip while the market joyrides. Virtually every portfolio should include conservative fixed income and any equity exposure should be well diversified. And because human nature causes us to suffer market losses more deeply than we enjoy market gains, it’s prudent to err on the side of conservatism in portfolio construction. Furthermore, we should not be blinded by recency bias, either through over-optimism in good times or unfounded pessimism in bad times.

But once we have completed the process of portfolio construction, appropriately balanced in accordance with our ability and willingness to endure risk, it is imperative that we maintain discipline in volatile times. Indeed, the only way the market rewards us is if we’re willing to tolerate its eccentricities.

10 Things You Absolutely Need To Know About Life Insurance

Originally in ForbesLife insurance is one of the pillars of personal finance, deserving of consideration by every household. I’d even go so far as to say it’s vital for most. Yet, despite its nearly universal applicability, there remains a great deal of confusion, and even skepticism, regarding life insurance.

Life insurance

Perhaps this is due to life insurance’s complexity, the posture of those who sell it or merely our preference for avoiding the topic of our own demise. But armed with the proper information, you can simplify the decision-making process and arrive at the right choice for you and your family.

To help, here are 10 things you absolutely need to know about life insurance:

  1. If anyone relies on you financially, you need life insurance. It’s virtually obligatory if you are a spouse or the parent of dependent children. But you may also require life insurance if you are someone’s ex-spouse, life partner, a child of dependent parents, the sibling of a dependent adult, an employee, an employer or a business partner. If you are stably retired or financially independent, and no one would suffer financially if you were to be no more, then you don’t need life insurance. You may, however, consider using life insurance as a strategic financial tool.

Save Social Security For When You Need It Most–Later

Originally published CNBCI think we’ve been looking at Social Security retirement benefits all wrong. In the long-running debate about when to take Social Security — as early as age 62 or as late as age 70 — the focus has been on timing your claim to get the most money, in total, out of the social safety net.

Social Security Word Cloud

This is a circular argument that will never be fully decided until the Social Security recipient in question dies. So let’s shift the focus from the question “How do we get the most out of Social Security?” to “How do we get Social Security when we need it most?”

Simply put, you’re more likely to run out of money at the end of retirement than at the beginning.

If You Don’t Like The Market Today, Just Wait Until Tomorrow

Originally in ForbesIn my hometown of Baltimore, there’s an oft-heard saying that seems especially applicable when, like now, the seasons are changing: “If you don’t like the weather today, just wait until tomorrow.” For whatever meteorological reason, it’s not uncommon for an absolutely miserable Monday to turn into a gorgeous Tuesday. Temperatures have been known to swing as much as 20 degrees inside of an afternoon.

A scientific view of stock market history, unfortunately, shows us an even greater propensity for unpredictability and volatility.

Even the years that we refer to as the “good” ones, in retrospect, test our mettle. For example, between 1950 and 2014, a span of 65 years, the S&P 500 ended the year with a gain 51 times (or in almost 80% of them). Not bad. But in how many of those up years do you think investors would’ve found themselves in a “losing” position at some point in the year?

Every. Single. One. 

Congress Eliminates Two Popular (and Profitable) Social Security Claiming Strategies

The Bad News & The Good News

Originally published CNBCLast week, the world of retirement planning experienced the financial equivalent of a deafening record scratch, courtesy of a Congressional move to end two well-used Social Security claiming strategies. In a matter of months, “File-and-Suspend” and “Restricted Application,” which were on the verge of retirement planning rock-star status, will only be referred to in the past tense.

Social Security Claim Denied Stamp Shows Social Unemployment Benefit Refused

“File-and-Suspend” and “Restricted Application” — let’s just call them “FASRA,” because it’s not like there aren’t already enough government-related acronyms — were, Congress argues, unintended consequences of the Senior Citizens Freedom to Work Act.

Behavioral Economist Richard Thaler’s Message to Advisors: ‘Nudge For Good’

Originally in MoneyDaniel Kahneman and Amos Tversky legitimized behavioral economics—the study of how people really behave around money, as opposed to how economists say a rational person ought to behave.


Then Richard Thaler and Cass Sunstein applied the lessons of behavioral economics to everyday life with their book Nudge. The duo nudged so successfully that in recent years, their prescriptions have been put to work in corporate retirement plans—and even public policy—on a global scale.

When I spoke to Thaler to discuss his newest book, Misbehaving, a series of stories documenting the rise of behavioral economics, he told me that he has a message for those who seek to employ his methods:

“Nudge, for good.”

And why does he say that?

Should You Really Be Buying That?

How To Decide If A Purchase Is Really Worth It

Originally in Forbes“It was totally worth it.” In this case, “it” referred to a Vitamix blender that a friend recently had purchased. He wasn’t the first. Indeed, I don’t know anyone who has purchased a Vitamix blender and didn’t share my friend’s effusive sentiment, even after spending between $429 and $719 (for the new line of G-Series models). For a blender.

San Francisco, CA - April 2014: Tesla Motors model S sedan elect

But despite my appreciation for these friends and their opinions, I can’t help but notice their errors in judgment, explained by behavioral science, that, if followed, could lead to an unwise purchase for you or me.

To be clear, it’s not their purchase of the blender that I’m questioning. Rather, it’s their insistence that said purchase is a universal must. Worth, you see, is relative. What is “worth it” for you may not be “worth it” for me. Ultimately, determining the worthiness of your next purchase depends on many factors, but chief among them are 1) the joy you receive from using the product, 2) your personal cash flow, 3) how much you will use the product, and 4) the cost of available alternatives.

The Top 5 Ridiculous Reasons NOT To Buy Life Insurance–With Anthony Anderson

Originally in ForbesAnthony Anderson is a funny dude. The Emmy-nominated actor has been making people laugh on television and in film for 20 years. But now he’s bringing his sense of humor to a surprisingly unfunny topic—the need for life insurance.

Anthony Anderson and son

The big question I had for him was: Why? Why, with your career exploding and recent Emmy nomination (for lead actor in the show Black-ish), are you investing time and effort to be the spokesperson for Life Insurance Awareness Month?

“I know firsthand from friends and other family members who’ve never had a policy, who’ve never thought about having a policy.  And then all of a sudden someone passes in their family and they don’t know what to do,” Anderson told me.

Fair enough. Many people aren’t even aware of the need for life insurance, and that lack of education is a big concern for Anderson, and a major driver of his dedication to public awareness.  But as we continued our conversation, it shifted focus. What it seemed to begin revealing were some of the tragically comic, ridiculous reasons that many people choose not to buy life insurance. Here are the Top 5:

5) I’ve got more important things to insure.

“People insure their flat screen televisions, they insure their cars, they insure jewelry, but they don’t insure themselves,” says Anderson with a chuckle. He’s also evidently frustrated by this reality. “If it weren’t for themselves, they would have none of those things to insure.”