Invest for the future, not the past

submitted by Michael Garry, CFP®, JD/MBA, Yardley Wealth Management, LLC

Much financial news purports to be about the future but is really just an account of the past. When stocks have fallen heavily in price, this is routinely reported as, “More bad news for investors today…” In fact, if you are a long-term investor, that could be good news unless you had to sell then. The key is how your portfolio performs from now on, not what happened yesterday. Investment is about the future, not the past. Because the future is unknown, you should strive to manage the uncertainty by diversifying across stocks, sectors, asset classes, and countries.

Everyone’s individual future is different, which means the investment strategy each of you adopts will vary. Some will want a strategy that delivers regular income; others will be more focused on capital growth. Some will be risk takers, others risk-averse.

This is why an assessment of the future and the uncertainty surrounding it should not just be approached from the level of the overall market but from the needs of each individual. That is the role of a qualified financial advisor: to help connect each individual’s circumstances and needs to their goals.

Nobody can control the future. One response to future uncertainty is to speculate and try to position one’s portfolio to take advantage of one possible outcome or another. Another response is to stay highly diversified and to use the information in market prices to stay focused on dimensions of expected return.

By hoping to diversify against risk and ensuring that your portfolio addresses your individual circumstances, this can help ensure that you are making the most of your investment. While you cannot prepare the future for your portfolios, you can still strive to prepare your portfolios for the future.


Check your beneficiary designations

submitted by Michael Garry, CFP®, JD/MBA, Yardley Wealth Management, LLC

Chances are, when you bought life insurance, you put a lot of thought into it. How much coverage did you need? Were you covering the potential loss of income due to premature death, or were the proceeds to pay estate taxes or provide an inheritance? What kind of coverage did you want?

But many people who shop for life insurance spend almost no time considering how to fill out one of the most important parts of their policy: the part of the form where you name the beneficiary. The contingent or alternate beneficiary designation is usually an afterthought. Once made, those decisions are almost never reviewed. They should be.

The same goes for 401ks, 403bs, IRAs, etc. It doesn’t matter what you want or what you put in your Will, it only matters how you fill out the form.

For retirement plans it is more important than ever to check your beneficiary forms. For the last few years, your beneficiaries have been able to use Inherited IRAs when you die, and they can be much more tax efficient than if you leave the beneficiary form blank or let it intentionally go to your estate (there may be times when you want it to go to your estate, but not many, so it had better be thought through with the help of an Estate Planning attorney).

If you have children, and they are not mature adults, you should probably have a Trust provision in your Will, and your life insurance and retirement plan beneficiary designations should reflect that. It’s not a good idea to leave money or benefits to minor children in their own names. Nor is it usually wise to leave outright gifts to most children in their 20’s. You would know if your twenty-something is the exception!


Actively managed mutual funds vs. passively managed index funds

submitted by Michael Garry, CFP®, JD/MBA, Yardley Wealth Management, LLC

Mutual funds provide various benefits including diversification, convenience and cost advantage, so it’s no wonder that more than 13 trillion US dollars are invested in them. When deciding which mutual funds to invest in, there are many questions investors must ask themselves, including whether an actively or passively managed fund best matches their investment objectives. 

In actively managed funds, a portfolio manager attempts to outperform an index via stock picking, sector weighting and/or market timing. With passively managed index funds, the manager buys a portfolio of securities that replicate an index such as the S&P 500 or Barclay’s Aggregate Bond Index, or a portion of the market, such as large company stocks or small company stocks.

On the face of it, it seems like active management would be the way to go. Why not just pick the good stocks and forget about the bad ones? The problem is that it isn’t so easy to do.

On average, most actively managed funds trail the index that they try to beat. There are a few managers that do beat their indices over time, but it is as hard to pick a manager that will outperform as it is to pick a stock that will outperform.

Managers with good five- or 10-year track records tend to underperform over the next five or 10 years. The reason that this is so is because the markets are fairly efficient. There are literally millions of investors trying to beat the markets and what happens is that all of those investors trying to buy and sell to gain advantage wind up becoming the markets.

As a whole, they tend to underperform.


The importance of diversification

submitted by Michael Garry, CFP®, JD/MBA, Yardley Wealth Management, LLC

Say you were presented with three investment opportunities: one was expected to return 2%, another was expected to return 7%, and the last was expected to return 10%.

Would you simply put all of your money into the investment that was expected to return 10%? You might be tempted to, but probably shouldn’t. 

In order to expect higher returns on your investments, you have to take on additional risk. Since the average investor is risk-adverse, they may want to spread their money out and invest a portion of it in each of these opportunities. This is the concept of diversification.

So how does diversification work?

Pretend that you have a portfolio in which you invested all of your money in one stock, GM. Now say that a news story hits about a manufacturing defect in one of GM’s cars and its stock price drops 3%. Your entire portfolio has now lost 3% of its value.

Now instead pretend that you have a portfolio in which you invested half of your money in GM and half in risk-free T-bills, and now that same news story hits. This time, you’ve only lost 1.5% of your portfolio’s value.

Although a simplified version, this is the general idea behind diversification. Allocating your assets among various asset classes, and to various investments within those different asset classes, can dramatically decrease risks related to firm-specific factors as well as to general economic conditions.

With some amount of diversification, you can decrease the risks more than you reduce the expected returns. This is the so-called “free lunch” of diversification, and it may be the only one in investing!

It’s best to sit down and determine which diversification strategy best fits your needs and risk tolerance and then allocate your assets accordingly.


What is your stance on the efficient market hypothesis?

submitted by Michael Garry, CFP®, JD/MBA, Yardley Wealth Management, LLC

With such a diverse range of investment strategies out there, it can be difficult to determine which strategy is the best fit for you and your financial goals. Behind this decision lies an investor’s stance on the efficient market hypothesis. The efficient market hypothesis posits that financial markets react immediately to incorporate new information.

Therefore, an efficient market is one in which asset prices reflect all available information.  There are three types of market efficiency:

  • The weak form efficient market hypothesis suggests that low-cost information including past prices/ returns and trading volumes is fully incorporated into asset prices. An investor who believes this form of the hypothesis is unlikely to invest their money with a technical trader because they believe that you cannot consistently beat the markets using only this information.
  • The semi-strong form efficient market hypothesis suggests that all publicly available information is fully incorporated into asset prices. This information includes earning forecasts, management quality, dividend announcements and other public information, in addition to past prices/ returns and trading volumes. An investor who believes this form of the hypothesis is unlikely to invest their money with an active trader (without insider information) because they believe you cannot consistently beat the markets using only this information.
  • The strong form efficient market hypothesis suggests that all information, even insider information, is fully incorporated into asset prices. An investor who believes in this form of the hypothesis would likely only invest with passive management firms because they believe it is impossible to consistently beat the markets, no matter how much information you have. 

Rather than trying to beat the markets, clients should consider allocating their assets to various asset classes based on their financial goals, and then periodically rebalancing their portfolio back to its target allocation model.


Should you invest in hedge funds?

submitted by Michael Garry, CFP®, JD/MBA, Yardley Wealth Management, LLC

SAC Capital’s criminal indictment for insider trading may raise questions about who hedge funds are really benefitting. A closer look gives us statistics that are difficult to ignore.

Hedge funds, sought after by wealthy investors, charge fees that are much higher than those of other money managers. SAC charges a three percent management fee plus 50% of portfolio profits. 

This may lead investors to ask, “How high of a return must be attained in order to justify such a high fee?” If the S&P500 returns 10% in a given year, SAC would need to return 23% just to match it.

Such a return would be difficult, if not impossible, for managers to reach, especially year after year. Even managers charging the industry standard for fees would need to return 15% to match the S&P that year.

If all of the money that has ever been invested in hedge funds had instead been invested in T-Bills, investors would have earned higher returns overall, according to hedge-fund veteran Simon Lack in his book “The Hedge Fund Mirage.”

In 2008, Warren Buffet reportedly made a bet with hedge fund manager Protégé Partners that over the decade, the S&P500 would outperform Protégé’s selection of hedge fund managers. The bet is to prove Buffet’s assertion that hedge funds underperform due to high fees and costs associated with active trading. Thus far, he is on course to win.

If hedge funds aren’t benefitting the investor, whom are they benefitting?  An alarming statistic amid recent articles about SAC gives some insight: Of the $14 billion that the hedge fund manages, $8 billion of that belongs to founder Steve Cohen himself, and approximately another $1 billion to his employees.

Reread that sentence, mull that statistic over and draw your conclusions as you may.


Interest rate movements are still unpredictable

submitted by Michael Garry, CFP®, JD/MBA, Yardley Wealth Management, LLC

Academic research offers strong evidence that the bond market is efficient, and that bond prices and interest rates are not predictable over the short term. This uncertainty is reflected in the often-contradictory interest rate forecasts offered by economists, analysts, and other market watchers.

Even when the experts share similar views on the direction of the economy and credit markets, reality often proves them wrong. Since 2008, pundits have been saying bond yields have to rise sharply and so far they haven’t except for some movement in May and June this year. The 10-year U.S. Government bond was still yielding less than 2.5% for most of 2013. If we had switched your investments in 2008 because of what the pundits had said, you would have missed out on a lot.

Today’s bond prices already reflect expectations for tomorrow’s business conditions and inflation, and these expectations can change quickly in response to new information. This new information is unknowable. Investors who accept market efficiency should not be surprised when the credit markets foil the experts. If prices were easy to forecast, you should find a host of bond fund managers with market-beating returns, but most of them underperform their respective benchmarks over longer time periods.

Since no one has a reliable method for determining whether interest rates will rise or fall in the near future, investors should avoid making fixed income decisions based on a forecast, media coverage, or their own hunches.  Instead make a plan for the type of fixed income you will own and stick to your plan as long as it makes sense for you.


Have some bonds, not all bonds

submitted by Michael Garry, CFP®, JD/MBA, Yardley Wealth Management, LLC

I read something pretty distressing in Jason Zweig’s column in the Wall St. Journal last week. In “Here Comes the Next Hot Emerging Market: the U.S.,” Mr. Zweig wrote that according to Morningstar, investors have pulled $22 billion from U.S. stock funds and added $339 billion to bond funds in the last year.  

Those amounts don’t sound like ordinary re-balancing, which we advocate. They sound like many people are still scared to death of stocks and/or are choosing funds by chasing past performance and putting too much money into bond funds.

If you can’t emotionally handle the volatility of stocks, you aren’t alone.

Know, however, that bond funds are not a panacea. Some are risky and will go up and down as much or more than some stock funds.  

Because yields are so low, many investors are buying longer-term and junk bond funds to try to bump up their yields. It hasn’t hurt them so far. That doesn’t mean it can’t or won’t. A swift rise in yields just to normal yields might take some of these funds down 20-30%.

How many people piling into bonds do you think realize that? 

I’m all for having some bond funds. You might want to have close to half of your investments in bond funds.

Doing more than that is probably not prudent. (We buy short and intermediate-term, investment grade, global bond funds that are hedged for currency risk. They won’t react as negatively to a swift rise in interest rates as the bond funds in the last paragraph.)

Figure out your appropriate asset allocation and re-balance to it regularly.

Piling all of your money into stocks or bonds can be a risky strategy, though the numbers suggest that many people are acting without a strategy.  


Everyone can’t be an expert at everything

submitted by Michael Garry, CFP®, JD/MBA, Yardley Wealth Management, LLC

If you want to do financial planning right, find an independent CERTIFIED FINANCIAL PLANNER™ professional. Everyone who has subject matter expertise knows pretty quickly when speaking to someone about their subject, whether the other person knows what they are talking about.

I run into some people who have a very good understanding of financial planning and investing. Unfortunately, some of the people that I have met that do their own financial planning and investing have scared me with their recklessness, and it’s usually based on overconfidence in their abilities. Amazingly, the most overconfident people seem to think that they know what to do and that no one else does!

Many of the popular books for consumers tend to oversimplify things and make it seem as if anyone can read a 200-page book and then handle all of their financial planning and investment needs. In some ways, the books do a service when they tell you to avoid the big Wall Street firms.

Unfortunately, the real solution is not to try to handle it on your own, but to find an independent financial adviser who will act in a fiduciary capacity to you.

A problem with using books for subject matter advice for your financial planning and investment needs is that the authors don’t know your situation, and therefore cannot tailor their advice to your needs. Even if they could, there is just too much to put into one book.

The course work to become a CERTIFIED FINANCIAL PLANNER™ professional is thousands of pages long. How can you read 200 pages and be expected to handle everything on your own?

You need someone who can put it all together for you and that is where your independent financial planner comes in.

Find one at


Why does financial planning seem so hard? Hint – there is a lot to it!

submitted by Michael Garry, CFP®, JD/MBA, Yardley Wealth Management, LLC

While investments have always been difficult for consumers to figure out, the ideas behind much of financial planning are still relatively new, and as the field grows it seems to get harder. There has been a surge in the available financial products, and much of the decision-making framework keeps changing.

The law with respect to taxes, retirement plans, and estate planning seems to stay in a perpetual state of flux, and the government just overhauled the U.S. Tax Code again, for about the millionth time. The financial planning marketplace is very different than it was just a few years ago.

In the past 15 years the following common investment vehicles either came into being or reached mainstream acceptance: Roth IRAs, Exchange-traded funds, 529 college savings plans, Coverdell Education Savings Accounts (Education IRAs), Series I bonds, Treasury Inflation-Indexed Securities (known more commonly as Treasury Inflation-Protected Securities, or TIPS), separately managed accounts (SMAs), hedge funds and online trading.

All of these offerings have greatly increased the options available for consumers, and freedom of choice is a great thing. Unfortunately, choosing wisely can be difficult, and sometimes having so many options makes it harder for people to figure out what to do.

We all have busy lives and don’t need to spend big chunks of it figuring out the latest consumer financial products! As a financial planning practitioner it is a constant challenge trying to keep my clients and myself properly informed; and educating the public is no picnic either.

Financial planning, for the most part, even with the wide-ranging choices, can still be a pretty simple process if you have someone who is highly qualified and independent helping you with it.