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Financial Advisors: Here’s How Market Volatility Impacts Investor Psychology

Market volatility is a stressful reality for any investor. But when market turbulence strikes, financial advisors are in a unique position to help their clients anticipate and manage their anxiety around money. All it takes is understanding a little psychology.

And while it’s true that stock markets have improved since the recession in 2008, surveys show that investors and financial advisors still expect volatility to return throughout the next few cycles.

In fact, according to the Eaton Vance Spring 2019 ATOMIX survey, financial advisors consider managing their clients’ relationship to volatility to be one of their major concerns this year.

So what is an advisor to do? To better understand how a client might react to a volatile trend, it might help to think about their deep-rooted feelings about money and how they view their personal control of events.

Research shows that the wealthiest investors — those who make up the richest “one percent” — have a different relationship to investments than the less wealthy: They have what’s known as a heightened internal locus of control.

For the most part, humans either think that they’re in charge of what happens in their life, or they believe that life happens to them (those who believe they’re in control of their life and its outcomes have an internal locus of control).

Having an internal locus of control is associated with higher wealth, and because these people are more likely to take responsibility for the outcomes in their life, the top one-percenters are also more likely to believe in their own abilities to solve problems and achieve goals, make better investment decisions and react more calmly when volatility strikes.

Having an external locus, however, is associated with self-destructive financial behaviors.

Financial advisors can help clients move to a more centered approach by asking thoughtful questions about past financial decisions, and can assist in determining where a client’s locus of control lies.

Dr. Brad T. Klontz, an associate professor of practice in financial psychology at Creighton University Heider College of Business and the cofounder of the Financial Psychology Institute, uses what he calls “money scripts” to help understand investor behavior.

Money scripts are unconscious beliefs about money, which are developed in childhood, and drive financial behaviors as adults. Klontz considers there to be four groups: money avoidance, money status, money worship and money vigilance — and the first three are associated with lower levels of net worth, lower income and higher amounts of revolving credit.

Klontz offers questions that you can ask to determine a client’s unique script makeup.

What’s also encouraging is that, while volatility can be stressful for any investor, recent research shows that volatility can indeed lead to increased adaptability. Yale researchers found that primate brains are more actively learning when a situation is unpredictable than when the situation is easier to predict. This suggests that our brains become more engaged when facing a high-risk-high-return situation, because this is when we absorb new information and adapt for future outcomes with preferred results.

Watch our video above to see how you can leverage your clients’ psychological background to inform and build an investment strategy to help meet their goals.

From iShares:

Championing investor progress has been at the heart of BlackRock iShares’ mission from the very beginning, relentlessly pursuing better ways to invest. That’s why iShares by BlackRock is bringing you Macro Mindset, a series that equips financial advisors with psychological knowledge to enlighten their clients about the myriad factors that come into play when in tricky investment situations. To learn more about why ETFs should be considered in building a strong strategy, visit iShares.com.

Important information about iShares ETFs:

Visit www.ishares.com to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal.

Investing involves risk, including possible loss of principal.

Diversification and asset allocation may not protect against market risk or loss of principal.

This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

Source: Financial Advisors: Here’s How Market Volatility Impacts Investor Psychology

131K subscribers
What is Volatility? -The magnitude of the change -It is independent of direction, it refers to the change of ups and downs Why is it Important? -The more volatile the market is, the crazier it gets -Trends are harder to spot when they are more volatile -Swing trading becomes riskier -It is better to stick to day trading during high volatility days or months because you want to lower your risk on those days What to do on High Volatility Days: -Inverse ETFs (e.g. BGZ, SKF, TZA, FAZ) -They are opposite of the market -They are more stable than one specific stock. -Can trade off of 15 minute or 5 minutes charts (day trading charts) #marketvolatility #tradingvolatiledays #volatiledays #understandmarket #stockmarket Posted at: https://tradersfly.com/blog/understan… 🔥 GET MY FREEBIES https://tradersfly.com/go/freebies/ 🎤 SUBMIT A VOICE QUESTION https://tradersfly.com/go/ask 👀 START HERE: FOR NEW TRADERS https://tradersfly.com/go/start/ 🎉 START HERE: OPTION TRADERS https://tradersfly.com/go/start-options/ 📈 MY CHARTING TOOLS + BROKERS https://tradersfly.com/go/tools/ 💻 MY COMPUTER EQUIPMENT https://backstageincome.com/go/comput… 💌 GET THE NEWSLETTER https://tradersfly.com/go/tube/ 🔒 SEE OUR MEMBERSHIP PLANS https://tradersfly.com/go/members/ 📺 STOCK TRADING COURSES https://tradersfly.com/go/courses/ 📚 STOCK TRADING BOOKS: https://tradersfly.com/go/books/ ⚽ GET PRIVATE COACHING https://tradersfly.com/go/coaching/ 🌐 WEBSITES: https://tradersfly.com https://rise2learn.com https://backstageincome.com https://mylittlenestegg.com https://sashaevdakov.com 💌 SOCIAL MEDIA: https://tradersfly.com/go/twitter/ https://tradersfly.com/go/facebook/ ⚡ SUBSCRIBE TO OUR YOUTUBE CHANNEL https://tradersfly.com/go/sub/ 💖 MY YOUTUBE CHANNELS: TradersFly: https://backstageincome.com/go/youtub… BackstageIncome: https://backstageincome.com/go/youtub… 📑 ABOUT TRADERSFLY TradersFly is a place where I enjoy sharing my knowledge and experience about the stock market, trading, and investing. Stock trading can be a brutal industry, especially if you are new. Watch my free educational training videos to avoid making big mistakes and just to continue to get better. Stock trading and investing is a long journey – it doesn’t happen overnight. If you are interested to share some insight or contribute to the community we’d love to have you subscribe and join us!

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Here’s Why This 44-Year-Old’s Happiness Grew After She Abandoned Early Retirement

When Lisa first learned about the financial independence, retire early (FIRE) movement she was stunned that so many people, often younger than her, could possibly save enough to retire. Reading the blogs and first-person stories invigorated her. She wanted to follow suit. It changed the way she and her husband spent money. They cut out restaurants, wore old clothes and avoided coffee shops, funneling all the extra cash into paying down debt and building retirement funds.

“It really did motivate us,” Lisa said.

But as someone who has worked in the pharmaceutical industry for a number of years, she never had a huge problem with her job. The more Lisa saved, though, the more she felt annoyed at going to work. The more she saved, the more she wanted to watch HGTV before bed. The more she saved, the more she couldn’t understand why she should walk around in a coat with holes in it simply to prove that she was good with money.

The whole effort “made me unhappy,” said Lisa, who asked to only use her first name since she’s still working full-time. That’s why, four years after starting her FIRE goal of retiring young, Lisa and her husband decided to abandon the ‘retire early’ portion of their savings plan. Instead, she’s decided to focus on financial independence, but also not worry if they want to eat out on a Friday night.

Today In: Money

There’s a fine line between frugality and feeling guilty over every dime that you spend in order to save a little bit more. Those that enter FIRE often ignore that line during the accumulation phase, saving as much as possible without regard to how it makes them feel today while sometimes sacrificing their health or well being. But it’s not a feat for everyone. For Lisa, this excessive frugality only became a hindrance to life.

It doesn’t mean she’s giving up saving. Or now, suddenly, going to rack up credit card debt. Instead, Lisa, who blogs about her experience at Mad Money Monster, is reevaluating her life again, figuring out what to keep and what to ignore when it comes to her financial independence (FI) strategy.

Abandoning Her Great Health Care Wasn’t An Option

As they saved, one factor that grew increasingly concerning was the health and welfare of her mom. “My mother depends on us for help for basic living expenses,” Lisa said. She expects to care for her mother as she grows older. While Lisa was making strides paying back debt under the FIRE plan, she had to spend $2,000 on her mother’s dental expenses.

Usually that cost comes out of pocket, and they expect to have to do the same with vision care and some other wellness needs.

This unknown complicated their financial picture. But also Lisa sees her mom’s situation, and then recognizes her luck with her current health care plan, which she describes as “really good.” The idea that she would walk away from that plan, simply so she could retire early – she’s about 60% of the way to her original FIRE mark – she now views as “selfish.” And she’s not comfortable with some of the other options out there for health care coverage, including the public markets or health shares.

“For me to walk away from that [healthcare] would be kind of dumb,” Lisa added.

Keeping A High Savings Rate

Despite rejecting the idea of early retirement at this point in her mid-40s, she’s made great strides in reshaping her financial situation.

When she learned about FIRE, her and her husband had just walked away from buying a large, expensive home that would have put them in a tricky financial predicament. They thought they needed the big house because that’s what people did after getting married. Instead of getting the house, she’s paid off her student loans, two cars and some credit card debt. The family has also invested in two single-family hoes, which they rent out, covering the mortgages.

At the peak of their saving they stashed away about 70% of their income. Now it’s closer to 50%. Still a strong level, but not with early retirement as the goal.

Lisa’s realization that there’s little desire to retire before traditional age has given her the freedom to build wealth for other purposes. She has the financial knowledge now and she’s using it to provide a large inheritance for her daughter one day.

“I want to build legacy wealth for my family,” she said. She has no problem staying at her job to grow that wealth.

But she’s also in a much more secure position, whenever her job does go away.

She’s Not Deprived Of Time

Often when people say they want to retire in their 30s or 40s they have dreams of traveling across the world, seeing new sights and meeting new people. That’s not the case for Lisa. “I’m so content with and entrenched in the adult family life,” she said.

She doesn’t demand much more travel than the summer vacation her family already goes on. Meanwhile, her husband, who works in the film industry, never wants to retire because he’s already found a job he would do even if he didn’t have to work.

“I feel like [we’re] not being deprived of time,” said Lisa.

And now that she has clarified her goals, it makes going into work much easier.

Follow me on LinkedIn. Check out my website.

I’ve written about personal finance for Fortune, MONEY, CNBC and many others. I also authored The Everything Guide to Investing in Cryptocurrencies.

Source: Here’s Why This 44-Year-Old’s Happiness Grew After She Abandoned Early Retirement

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‘Time poor’ is the catch-cry of our era, and yet end-of-life retirement means we have an average of two decades of feeling time rich to look forward to… when we’re old. In this talk, Lacey shares how combining financial independence and mini-retirements is one way to bring that time rich feeling into our youth.  Lacey Filipich started her entrepreneurial journey with a hair wrap stall at 10 years old. Today, she is the co-founder and director of two successful businesses; Money School and Maker Kids Club. Between hair wraps and start-ups, Lacey graduated as valedictorian from the The University of Queensland with an Honours degree in Chemical Engineering. She moved to Australia’s ‘wild west’ to begin her career in mining, rising quickly through the ranks. A health scare and her sister’s suicide opened Lacey’s eyes to the world beyond work, leading her to redesign her life and take five mini-retirements in the next five years. This was achievable because of Lacey’s financial position: she started investing at 19 and now earns a passive income. Lacey considers herself time rich: able to choose if, when, where, how, on what and with whom she works. Her story is one of many in the Financially Independent Retiring Early (FIRE) movement supporting the idea that end-of-life retirement is optional. This talk was given at a TEDx event using the TED conference format but independently organized by a local community. Learn more at https://www.ted.com/tedx

The Greatest Fund Managers Midyear Review

An updated spreadsheet of the greatest fund managers is available to download at the link at the end of this article.

An updated spreadsheet of the greatest fund managers is available to download at the link at the end of this article.

At the midpoint of the year, it’s time to review the performance of the greatest fund managers. I have received many emails from readers asking how to use the spreadsheet listing the greatest fund managers that I make available for download. Many readers start by sorting the spreadsheet by year-to-date returns. Let me explain why that does not get you to funds I would recommend as top choices.

The top 3 funds on the spreadsheet sorted by year-to-date (YTD) return are Kinetics Internet (WWWFX) up 38.47% YTD, Virtus Zevenbergen Innovative (SAGAX) up 36.58% YTD, and Artisan Mid Cap (ARTMX) up 33.95% YTD. Here’s how I look at each of them.

Kinetics Internet

Murray Stahl has been at the helm for 18 years. For the last 10 years, he has beaten his category benchmark by 0.26% a year — including the past 6 months of stellar returns. If you invested $10,000 in this fund 10 years ago, you would have beaten the category benchmark by $263.06. Beating his benchmark for 10 years is an achievement for Stahl, but the outperformance is not enough to make a difference for investors.

Virtus Zevenbergen Innovative

Brooke de Boutray has managed this fund for 11 years. Over the last 10, she beat her category benchmark by 3.21% a year which translates to an additional $3,715.69 return on a $10,000 investment over 10 years — that’s more like it. The only problem is the fund has a hefty 5.75% load. Although the manager has proven her skill, I would prefer not to pay a load unless there was no other alternative.

Artisan Mid Cap Investor

James D. Hamel has managed the fund for 10 years, outperforming his benchmark by 1.19% a year which means Hamel added $1,255.79 over 10 years on a $10,000 investment on top of the benchmark return.

My Take: The best evidence of a manager’s skill is the margin of outperformance over a market cycle (10 years minimum). The bigger the gap between the manager’s return and the benchmark the more confident you can be of a manager’s skill.

Stahl’s outperformance of 0.26% a year, is better than about 98% of mutual fund managers, but it is not large enough to be compelling. I leave him on the spreadsheet because he may be the best one available in many 401k plans, but he would not be among my top choices.

Even when a great manager outperforms by a large margin (as Boutray did) the fund company can make it a bad choice for investors by loading up the fees. I leave Boutray’s fund on the spreadsheet, because a lot of 401k plans only offer load funds. In that case, Boutray’s fund could be your best choice, even if it would not be among my top choices.

Hamel’s Artisan Mid Cap Fund is the best of these three, but there may be others what have performed slightly less well year-to-date but with much bigger margins over their benchmark for the past 10 years. There is a trade-off to make between recent returns and long-term returns. I will do a deep dive on this next time.

Click here to download the most recent spreadsheet listing all the funds that passed muster.

To see previous articles in this series, click here.

Follow me on Twitter or LinkedIn. Check out my website.

I am the CEO and founder of Marketocracy, Inc.,and portfolio manager at Marketocracy Capital Management, LLC. My firm maintains a database of the world’s greatest

Source: The Greatest Fund Managers Midyear Review

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