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For decades behavioral finance was largely an academic pursuit, more recently this body of knowledge has been recognized for its impact on investing. Daniel Kahneman and Richard Thaler have been awarded Nobel Prizes for their contribution to this field of research. What follows is behavioral finance in plain English. Knowing these mental blind spots might make you a better investor.

Legendary economist and investor Benjamin Graham said it best “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

Your own behavioral biases are often the greatest threat to your financial well-being. As investors, we leap before we look. We stay when we should go. We cringe at the very risks that are expected to generate our greatest rewards.

Most of the behavioral biases that influence your investment decisions come from mental shortcuts we depend on to think more efficiently and act more effectively in our busy lives. Usually these short-cuts work well for us. They can be powerful allies when we encounter physical threats, or even when we’re simply trying to stay afloat in the sea of decisions we face every day. These same survival-driven instincts that are otherwise so helpful can turn problematic in investing.

Let’s take a look at these concepts…

Anchoring: Going Down With the Ship. Fixing on earlier references that don’t serve your best interests.
Real life scenario: I paid $11/share for this stock and now it’s only worth $9. I won’t sell it until I’ve broken even.

Confirmation: The “I Thought So” Bias. Seeking news that supports your beliefs and ignoring conflicting evidence.
Real life scenario: After forming initial reactions, we’ll ignore new facts and find false affirmations to justify our chosen course … even if it would be in our best financial interest to consider a change.

Familiarity Breeds Complacency. “Familiar” doesn’t always mean “safer” or “better.”
Real life scenario: By over concentrating in familiar assets, you decrease global diversification and increase your exposure to unnecessary market risks. This is very common when employees own a large stake in their employer’s stock.

Fear: “Get Me Out NOW!”. The panic we feel whenever the markets encounter a rough patch.
Real life scenario: While you may be well-served to run from a dangerous physical situation, doing the same with your investments might lock you into a loss without participating in the recovery.

Greed: Excitement Is an Investor’s Enemy. Fear of missing out, Chasing hot stocks, sectors, or markets, hoping to score larger-than-life returns.
Real life scenario: When you speculate, you can get burned in high-flying markets. Remember to focus on what really counts: managing risks, controlling costs, and sticking to the plan.

Loss Aversion: Avoiding Pain Is Even Better Than a Gain. We are hardwired to despise losing even more than we crave winning.
Real life scenario: We attempt to time the market by selling before it drops. Ultimately, market-timing is more likely to increase costs and decrease expected returns.

Overconfidence: Better Than Average? Everyone believes they’re above average. Clearly, not everyone can be correct.
Real life scenario: Overconfidence makes you believe you’ve got the rare luck or skill required to consistently “beat” the market, instead of patiently participating in its long-term returns. Slow and steady wins the race.

Sunk Cost: Throwing Good Money After Bad. It’s more painful to lose something if you’ve already invested time, energy, or money into it.
Real life scenario: The past is past. Don’t let sunk cost fallacy stop you from unloading an existing holding once it no longer belongs in your portfolio.

Don’t go it alone – your brain has a difficult time “seeing” its own biases. Having an objective advisor dedicated to serving your highest financial interests is among your strongest defense against all of these mental traps.

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Harrisburg, PA – July 10, 2023 – Conrad Siegel, delivering comprehensive employee benefits and investment advisory services, recently announced that Catherine Azeles, CFP®, RICP®, CDFA® has been appointed a partner at the firm.

Azeles, an investment consultant, works within the firm’s Wealth Management division – the organization’s fastest growing line of business. She has worked at Conrad Siegel since 2018 and has played a key role in the firm’s growth during that time.

Azeles specializes in comprehensive financial planning, investment management, and retirement planning for local families. She has quickly grown her client base and will now move into a leadership position that not only focuses on serving clients but also shaping the future vision of the firm.

“We are very proud to welcome Catherine as a partner,” said Tracy Burke, Partner and Investment Consultant at Conrad Siegel. “From a technical perspective, Catherine is as good as it gets. She brings a tremendous amount of investment and financial expertise to our team. What really sets her apart is her care and compassion. It shines through in everything Catherine does. She cares about our clients, our team, and our community which perfectly aligns with our firm’s mission – making her the perfect fit to join our leadership.

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Conrad Siegel’s Tracy Burke, CFP®, ChFC® and Catherine Azeles, CFP®, RICP® share an overview of the investment world. Together, they take a look at what the market did during the last quarter, what we can expect moving forward, and what this all means for you.

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So, what’s up with the U.S. debt ceiling? As potential threats loom large, we’re seeing articles in abundance, explaining where we’re at, how we got here, and what to expect next.

We wouldn’t be human if we didn’t share in your frustration over the maddening lack of resolution to date. It’s stressful to watch huge, consequential events unfolding, over which we have no control. And who needs more stress in their life?

Which is why we encourage you to think of your investments as a bright spot of relief in an otherwise unmanageable world. In the face of everything we cannot control, the one place you can call your own shots is within your well-structured, globally diversified investment portfolio. And here’s more good news: As an investor, you don’t really need to know that much about the real-time details of the debt ceiling negotiations. Instead, as with any other breaking news, a healthy degree of arm’s length disinterest will likely serve you best, especially if you might otherwise respond to the current fever pitch of news that’s news because it’s in the news.

To illustrate, let’s consider what we believe to be your most advisable investment strategy under various outcomes. With history as our guide, it is perhaps reasonable to expect today’s political brinksmanship-as-usual will lead to some form of resolution, probably arriving at the last possible moment. Then what? Likely, the “fix” will be partial and imperfect, and the hand-wringing will continue apace over the next challenges inherent in the latest “kick the can” legislation. The talking points might shift, but markets will remain as volatile and unpredictable as ever. In this likely scenario, we would advise …

Staying invested in your carefully constructed, globally diversified investment portfolio, structured for your personal financial goals and risk tolerances.

What if negotiations in Washington fail? What if we experience U.S. credit rating downgrades, debt defaults, and unpaid Social Security benefits (to name a few of the uglier possibilities)? In a worst-case scenario, the U.S. dollar could lose its global currency status, a position it’s held since before most of us were born. What then?

If a worse- or worst-case scenario occurs, our efficient financial markets would once again respond by pricing in the good, bad, and ugly news well before we can successfully trade on it. Global diversification would be as important, if not more critical. Selling in a panic as markets adjust to the worsening news would remain as ill-advised as ever. In other words, your advisable course would remain …

Staying invested in your carefully constructed, globally diversified investment portfolio, structured for your personal financial goals and risk tolerances.

Last, and probably least likely, what if Washington defies our doubts, and achieves a happy and timely debt ceiling resolution, with little to no harm done? Hey, anything is possible. In this best-case scenario, the breaking news would be better than most of us expect, so markets would likely respond at least briefly with better-than-expected returns, rewarding us for staying put. At the same time, just in case the next bit of news were to disappoint, or even be less exciting than expected, we’d want to temper any concentrated market exposures by, you guessed it …

Staying invested in your carefully constructed, globally diversified investment portfolio, structured for your personal financial goals and risk tolerances.

We would be happy to offer more insights and analysis about the debt ceiling if you are interested in learning more. We’re also here to review your portfolio mix any time your personal circumstances may warrant a change. Otherwise, guess what we would advise you to do while the debt crisis continues? If you’re not sure, please give us a call. We always enjoy hearing from you.

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Whether your kids or grandkids are 4, 14, or 24, teaching them about money is one of the most important gifts you can give them. Good money skills last a lifetime. Budgeting, prioritizing savings, living within your means, long-term investing, are all skills that we can teach. Obviously, the application of these skills will differ based on the child’s age, but it is best to start when they are young.

If we teach them our values and principles about money today, they will be well positioned to succeed in the future.

Younger kids tend to live in the moment, with little consideration of the future. Encourage them to save a portion of each cash gift with an eye on the future. Show them how a savings plan can help them obtain a more expensive or treasured item in the future.

For teenagers with a job, help them understand their paycheck. Explain FICA (Federal Insurance Contributions Act is a United States federal payroll contribution directed towards both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers). To help them get started with savings, offer to make a matching Roth contribution if they are willing to save some of their hard earned pay.

If you thought it was challenging explaining good money habits to teenagers, just wait until they are in college and have everything figured out. They will be out on their own for the first time with little money and lots of spending opportunities. College students are flooded with credit card solicitations. Credit cards can be useful in an emergency or to help build a credit history, but they can easily lead to overspending. This is a good time to discuss credit cards and avoiding high interest debt.

As your young adult starts their career, make sure they prioritize savings from the start. Encourage the establishment of an emergency fund and contributions to a retirement account. Their lifestyle will adjust to their take home pay. As bonuses and pay increase, so should their commitment to savings. Show them how slow and steady savings grows over 40 years.. According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

What should we tell them about investing?… focus on the long-term, stay invested through all market cycles, and own a low-cost diversified portfolio.

We frequently field questions about this topic and have many resources to share. If this involves an adult family member, please feel free to make an introduction to us. If you would like additional advice and guidance, please reach out, we are here to help.

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Who doesn’t enjoy tying up year-end loose ends? The original SECURE Act was signed into law on December 20th 2019. Its “sequel,” the SECURE 2.0 Act, was similarly enacted at year-end on December 29th 2022.

Both pieces of legislation seek to reform how Americans prepare for retirement while juggling current spending needs. How, when, or will each of us retire? How can government incentives, regulations, and safety nets help more people safely do so—or at least not get in the way?

These are questions we’ve been asking as a nation for decades, across shifting socioeconomic climates. Throughout, a hard truth remains:

Employers and the government play a role in helping you save for and spend in retirement, but much of the preparation ultimately falls on you.

That’s America for you. The good news is, you get to call your own shots. The bad news is, you have to. Neither the original SECURE Act nor SECURE 2.0 has fundamentally changed this reality. SECURE 2.0 has, however, added far more motivational carrots than punishing sticks. Its guiding goal is right there in the name: Setting Every Community Up for Retirement Enhancement (SECURE). Following is an overview of its key components.

Note: Implementation for each SECURE 2.0 provision varies from being effective immediately, to ramping up in future years. Many of its newest programs won’t effectively roll out until 2024 or later, giving us time to plan. We’ve noted with each provision when it’s slated to take effect.

Below are a few provisions that may have an impact on your future financial planning:

  • Required Minimum Distributions (RMDs) pushed back in 2023 (Age 73 if born between 1951-1959, Age 75 if born in 1960 or after)
  • Elimination of RMDs for Roth accounts within employer-sponsored plans in 2024
  • Employers may deposit matching or profit-sharing contributions to Roth accounts, which would be taxable to employee in year of contribution in 2023
  • High wage earners (wages in excess of $145,000 in previous calendar year) will be required to use Roth account for catch-up contributions in employer-sponsored plans, which would be taxable to employee in year of contribution (beginning 2024)
  • 529-to-Roth IRA transfers – may be able to move unused 529 plan money into Roth IRA –subject to numerous restrictions and limits in 2024
  • Post-death option for surviving spouse beneficiary to delay RMDs until when deceased spouse would have reached RMD age – only applies if younger spouse pre-deceases older spouse in 2024
  • IRA catch-up contribution limit ($1,000) indexed for inflation starting in 2024
  • Increased employer-plan catch-up contributions when in 60’s – catch-up contribution limits will be higher (at least $10,000 and inflation adjusted) for those ages 60, 61, 62, and 63, starting in 2025
  • New QCD rules which start in 2024 include:
  • Maximum annual amount of $100,000 indexed to inflation
  • One-time $50,000 QCD allowed to charitable trust/charitable gift annuity

How else can we help you incorporate SECURE 2.0 Act updates into your personal financial plans? The landscape is filled with rabbit holes down which we did not venture in this article, with caveats and conditions to be explored. And there are a few provisions we didn’t touch on here. As such, before you proceed, we hope you’ll consult with us or others (such as your accountant or estate planning attorney) to discuss the details specific to you.

Come what may in the years ahead, we look forward to serving as your guide through the ever-evolving field of retirement planning. Please don’t hesitate to reach out to us today with your questions and comments.

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There have been so many big events competing for our attention…

Inflation is real, and needs to be managed. Heightened levels of market volatility across stock and bond markets alike may have left you once again wondering whether this time is different. Wider worries prey on our minds as well, such as the war in Ukraine; totalitarian aggression in other hot spots around the world, political discord at home, and natural disasters.

But it’s also important to remember, we’re biased to pay more attention to recent alarms than long-ago news. In the right context, this form of recency bias makes perfect sense. As we go about our lives, it’s often best to prioritize our most immediate concerns.

However, as an investor, if you overemphasize the news that looms the largest, you’re far more likely to damage your investments than do them any favors. You’ll end up chasing hot trends, only to watch them combust or fizzle away. Or you’ll jump out during the downturns, without knowing when to jump back in.

Yesterday’s News
How do we defend against recency bias? It can help to place current events in historical context. Do you remember what investors were worrying about a year, several years, or several decades ago? If you experienced some or all of these events first-hand, you might recall how you felt at the time, before we had today’s hindsight to inform our next steps:

  • 2021: The Taliban takes control in Afghanistan, while a “ragtag army” of online traders led by Roaring Kitty storms Wall Street.
  • 2020: COVID-19 shuts down economies worldwide. Civil unrest rides high across a gamut of socioeconomic concerns, and a divisive U.S. presidential election looms large.
  • 2018: Two U.S. government shutdowns occur—in January and again at year-end, with the latter lasting more than a month.
  • 2017: The year-end Tax Cuts and Jobs Act (TCJA) upends U.S. tax code.
  • 2016: The Brexit referendum and U.S. presidential election deliver surprising outcomes.
  • 2015: A long-simmering Greek debt crisis erupts.
  • 2013: A 16-day U.S. government shut-down occurs in the fall.
  • 2012: The U.S. narrowly averts plummeting over a fiscal cliff.
  • 2011: For the first time, the U.S. federal government credit rating is downgraded by one of the major rating agencies from AAA to AA+, and the Occupy Wallstreet movement is born.
  • 2008: Wall Street broker and former NASDAQ chair Bernie Madoff is arrested for fraud.
  • 2007: The Great Recession and global financial crisis begins. 2001: The 9/11 terrorist attacks send global markets reeling. An accounting scandal at Enron culminates in the energy giant’s bankruptcy.
  • 1999: The dot-com bubble bursts; the Y2K bug spurs massive, worldwide computer reprogramming.
  • 1990: Iraq invades Kuwait. 1980: U.S. inflation peaks at 14.8%; Americans are marching in the streets over the price of groceries. Also, the U.S. Savings and Loan crisis begins, ultimately costing taxpayers an estimated $124 billion.
  • 1973: An OPEC oil embargo “fueled bedlam in America.”

Investment Mainstays
These are just a few examples. They don’t include the market’s endless stream of lesser alarms that are easy to dismiss in hindsight, but often generated as much real-time storm and fury as the more memorable events.

The point is, there’s always something going on. And even as global markets persist, we forget or rewrite our memories, until they’re no longer available to inform our current resolve.

In the face of today’s challenges and tomorrow’s unknowns, we advise looking past recent trends, and focusing instead on a handful of investment basics that have stood the test of time. They may seem unremarkable compared to the breaking news. But when has “buy low, sell high,” or “a penny saved is a penny earned” become a bad idea once all the excitement is over?

It’s always important to take a step back and reflect. Stay tuned for more in our Investing Basics series!

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Conrad Siegel’s Tracy Burke, CFP®, ChFC® and Catherine Azeles, CFP®, RICP® share an overview of the investment world. Together, they take a look at what the market did during the last quarter, what we can expect moving forward, and what this all means for you.

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