Retirement

The Pitfalls of Recency Bias

May 18, 2023 by Hans Blake, CFA, CPA

Reading Time: 3 minutes

In a recent episode of Intelligent Money Minute, we had the pleasure of interviewing Larry Swedroe, the head of Financial and Economic Research at Buckingham Strategic Wealth. Our discussion centered around the dangers of recency bias, a common emotional tendency among investors. Larry emphasized the importance of understanding historical context and avoiding the trap of projecting recent events onto the future. In this blog post, we’ll share some key takeaways from our conversation and explore strategies to overcome recency bias in investment decision-making.

Recognizing Recency Bias

Recency bias refers to the tendency of investors to give excessive weight to recent market events when making investment decisions. We have a natural inclination to believe that what has just occurred will continue in the short term. This bias often leads us to ignore historical data and overlook the importance of long-term correlations. Larry stressed the need to become students of history and cautioned against relying solely on recent trends to guide our investment choices.

Larry highlighted that recency bias is one of the most detrimental mistakes investors can make. While there is evidence of short-term momentum, where recent winners tend to continue performing well for a limited period, it’s crucial to remember that trees don’t grow to the sky. Valuations can reach unsustainable levels, driven by investor enthusiasm. Larry cited examples like the dot-com era and the recent market bubble, where unprofitable companies achieved sky-high valuations based on recent success. However, high valuations eventually come back to haunt investors. To avoid this pitfall, he emphasized the importance of sticking to your investment plan and not being swayed by recency bias.

Strategies to Mitigate Recency Bias

To counteract the influence of recency bias, we discussed several strategies during the interview. One effective approach is disciplined portfolio rebalancing. By selling some of the high-priced winners and buying assets that have performed poorly but offer higher expected returns, investors can maintain a balanced portfolio and avoid chasing recent winners. Additionally, we explored the role of trend following, specifically managed futures, as an investment class that captures short-term momentum swings. However, it’s crucial not to allocate all your assets to trend following, as it can underperform for extended periods. Larry recommended considering a 5% to 10% allocation to mitigate tail risk during prolonged bear markets.

Recency bias can be difficult to overcome alone, especially during times of market volatility. That’s why having a financial accountability partner is vital. This partner can help design a financial plan and keep you grounded when fear and greed tempt you to deviate from your investment strategy. At our firm, we provide clients with proprietary interrogations that guide their decision-making and minimize financial stress. We believe in the power of having someone who holds you accountable and helps you stay on track to achieve your financial goals.

Recency bias is a common pitfall that can hinder investment success. By recognizing the bias and incorporating strategies like disciplined rebalancing and selective trend following, investors can overcome this challenge. Moreover, having a financial accountability partner can provide valuable guidance and prevent emotional decision-making. Remember, it’s essential to view investment decisions through a historical lens and remain committed to your long-term investment plan. By doing so, you can minimize the impact of recency bias and maximize your chances of achieving financial success.

Schedule a short discovery call or meeting

We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.

Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has since authored seven more books.

Larry Swedroe Bio

Since joining Buckingham Strategic Wealth in 1996, Chief Research Officer Larry Swedroe has spent his time and energy educating investors on the benefits of evidence-based investing.

In his role as chief research officer and as a member of the firm’s Investment Policy Committee and Board of Directors, Larry regularly reviews the findings published in dozens of peer-reviewed financial journals, evaluates the outcomes and uses the result to inform the firm’s formal investment strategy recommendations.

Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television shows airing on NBC, CNBC, CNN and Bloomberg Personal Finance. Larry is a prolific writer, contributing regularly to multiple outlets, including Advisor Perspectives and ETF.com.

Before joining Buckingham, Larry was vice chairman of Prudential Home Mortgage and senior vice president at Citicorp.

Larry holds an MBA in finance and investment from NYU and a bachelor’s degree in finance from Baruch College.

Credits: This blog was written in part by ChatGPT, an AI language model developed by OpenAI. The content of this blog reflects the knowledge and opinions of ChatGPT, may or may not reflect the knowledge and opinions of Intelligent Investing, and is protected by copyright laws. Please do not reproduce or distribute without giving proper credit to ChatGPT and OpenAI.

Why Did Traditional Diversification Fail in 2022?

May 11, 2023 by Hans Blake, CFA, CPA

Podcast: Play in new window | Download

Reading Time: 3 minutes

Traditional diversification failed in 2022, but why did it happen, and will it happen again? On this episode of Intelligent Money Minute, Hans Blake interviews Larry Swedroe, the head of economic and financial research at Buckingham Wealth Partners, who also co-authored 18 books. According to Swedroe, traditional diversification, which was within the 60/40 stock and bond allocation, failed in 2022. Both stocks and safe treasuries had double-digit losses, which is the first time this has happened, making it almost the worst year for a 60/40 portfolio. Moreover, longer-term treasuries lost over 20%, and the S&P was down by about 18%. Correlation between these two risk assets has been negative for the last 20 years. However, if you look at the last hundred years, the correlation was positive at about 0.2. Therefore, traditional diversification failed because correlations between stocks and safe bonds are time-varying.

Swedroe emphasizes that investors shouldn’t treat correlations as a permanent number, as they are time-varying. He explains that correlations do not mean that when one asset goes up, the other goes down. It means that when one has a better-than-average return, the other one has a worse-than-average return. During the last 20 years, we had a negative correlation between stocks and safe bonds, so investors thought that when stocks got crushed, bonds would tend to do better than their average. However, that didn’t happen in 2022, making investors rely solely on safe bonds and equity bonds, which could be risky.

Swedroe recommends that investors consider including other non-traditional assets that will do well in such periods. For instance, reinsurance, private floating debt, long-short equity, private real estate, and other alternatives can help dampen the risk in an investor’s portfolio. He mentioned that last year, all of the alternatives he owned were up, which helped diversify his portfolio. He advises investors to consider adding other unique sources of risk to their portfolio and not rely solely on safe bonds and equity bonds. Lastly, he says that investors must have a diversified portfolio to help mitigate these unusual time periods when correlations of traditional assets rise.

Schedule a short discovery call or meeting

We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.

Larry Swedroe Bio

Since joining Buckingham Strategic Wealth in 1996, Chief Research Officer Larry Swedroe has spent his time and energy educating investors on the benefits of evidence-based investing.

Before joining Buckingham, Larry was vice chairman of Prudential Home Mortgage and senior vice president at Citicorp.

Larry holds an MBA in finance and investment from NYU and a bachelor’s degree in finance from Baruch College.

Top Tips to Keep Your Financial New Year’s Resolutions

January 27, 2023 by Hans Blake, CFA, CPA

Reading Time: 2 minutes

Top Tips to Keep Your Financial New Year’s Resolutions

I trust you had a merry Christmas, and if you are like me, it is easy to set a bunch of new year’s resolutions for the new year, only to struggle to keep them until the end of January. Did you know that making New Year’s resolutions possibly started 4,000 years ago by the ancient Babylonians? And I bet they didn’t do a good job of keeping their resolutions either. In fact, I saw a t-shirt that said, “My new year’s resolution is to do last year’s resolution, which was also the previous year’s resolution. Today, I’d like to share with you a resource that should help you as you consider making your New Year’s resolutions. Though the following video was created last year, the truths mentioned are still true.

New Year’s Resolution Facts

This is the time of year where most people make New Year’s Resolutions. According to the University of Scranton, only 8% of those who make New Year’s resolutions actually keep them. In fact, research conducted by Strava using over 800 million user-logged activities in 2019 predicts the day most people are likely to give up on their New Year’s Resolution is January 19. Well that’s depressing. Wouldn’t it be better to just not have resolutions, that way there isn’t the associated guilt of not keeping them?

As Zig Ziglar says, “If you aim at nothing, you will hit it every time.”

I’ve found that one of the best ways to meet your financial goals is to break them down into smaller chunks.

I tend to start with writing down annual goals (including some stretch goals) that are a little beyond my reach.

Let’s say you want to pay off a $50,000 loan next year, you can break that down into quarters, months, and even paychecks. Remember, there is only one way to eat an elephant: a bite at a time.

Financial Freedom Calendar

Intelligent Investing believes in minimizing financial stress to maximize your lives. We created this financial freedom plan that includes monthly tasks as well as things to consider buying and things to avoid buying each month.

For example, the Financial Freedom calendar suggests that in January you should consider automation. Recently, I decided to automate all my bills to be paid and I can already tell you that the stress has been reduced instead of wondering, did I already pay that bill? When is that one due?

We love organizing our clients’ “financial junk drawers” and would love to organize yours as well. Feel free to share this Financial Freedom Plan with others.

A Resolution You Can Keep

One last resolution to consider…becoming more financially educated. You can start by simply subscribing to our Intelligent Insights Newsletter. You can also subscribe to our Intelligent Money Minute podcasts.

If you are ready to get some accountability partner and are looking for a new financial advisor, we’d love to have a complimentary call or coffee with you. Click here to get started.

Approaching Retirement? Here Are 6 Tips to Consider

January 19, 2023 by Hans Blake, CFA, CPA

Reading Time: 4 minutes

As you approach retirement, you are often overwhelmed by the vast number of decisions that need to be made. When should I retire? How much do I need when I retire? How should I roll over my 401k? What am I going to do in retirement? etc… It can be either a procrastinating or paralyzing time in your life as you contemplate the choices to be made. There are several critical “once-in-a-lifetime” decisions that are made within the 10 years leading up to retirement. These unique decisions can have life-lasting impacts, and we don’t want you to have a “regret period” in retirement. Here are six helpful considerations as you approach retirement:

1. Reassess Your Living Expenses

A step you will probably take several times between now and retirement is thinking about how your living expenses could or should change. For example, while commuting and other work-related costs may decrease, other budget items may rise. Healthcare costs, in particular, may increase as you progress through retirement.

Try to estimate what your monthly expense budget will look like in the first few years after you stop working. And then continue to reassess this budget as your vision of retirement becomes a reality. According to a recent survey, 38% of retirees said their expenses were higher than expected. Keeping a close eye on your spending in the years leading up to retirement can help you more accurately anticipate your budget during retirement.

2. Consider All Your Income Sources

First, figure out how much you stand to receive from Social Security. The amount you receive will depend on your earnings history and other unique factors. You can elect to receive benefits as early as age 62, however, doing so will result in a reduced benefit for life. The longer you wait, the larger it will be.

Next, review the accounts you’ve earmarked for retirement income, including any employer benefits. Start with your employer-sponsored plan, and then consider any IRAs and traditional investment accounts you may own. Try to estimate how much they could provide on a monthly basis. If you are married, be sure to include your spouse’s retirement accounts as well. If your employer provides a traditional pension plan, contact the plan administrator for an estimate of that monthly benefit amount as well.

Do you have rental income? Be sure to include that in your calculations. Might you continue to work? Some retirees find that they are able to consult, turn a hobby into an income source, or work part-time. Such income can provide a valuable cushion that helps retirees postpone tapping their investment accounts; giving the assets more time to potentially grow.

3. Pay Off Debt, Power Up Your Savings

Once you have an idea of what your possible expenses and income look like, it’s time to bring your attention back to the here and now. Draw up a plan to pay off debt and power up your retirement savings before you retire.

Entering retirement debt-free including paying off the mortgage will put you in a position to modify your monthly expenses in retirement if the need arises. If you don’t, you’ll have less of an opportunity to scale back your spending adding strain to your retirement plan.

In these final few years before retirement, why not save and invest as much as you can in your employer-sponsored retirement savings plan and/or IRA? Aim for maximum allowable contributions, and if you are 50 or older, you can take advantage of catch-up contributions, which enable you to contribute an additional income to your 401k plan and IRA.

4. Manage Taxes

As you think about when to tap your various resources for retirement income, remember to consider the tax impact of your strategy. For example, you may want to withdraw money from your taxable accounts first to allow your employer-sponsored plans and IRAs more time to potentially benefit from tax-deferred growth. Keep in mind, however, that generally you are required to being taking minimum distributions from tax-deferred accounts the year you turn 70½.

If you decide to work in retirement while receiving Social security, understand that the income you earn may result in taxable benefits. IRS Publication 915 offers a worksheet to help you determine whether any portion of your Social Security benefit is taxable.

If leaving a financial legacy is a goal, you’ll also want to consider how estate taxes and income taxes for your heirs figure into your overall decisions. Managing retirement income in the best possible tax scenario can be extremely complicated. Intelligent Investing strives to alleviate this financial stress by sharing and taking some of the burdens off you. Our financial planning provides probability statistics that allow our clients to know the success rate of their retirement plan.

5. Account for Health Care

As you age, the portion of your budget consumed by health-related costs (including both medical and dental) will likely increase. Although original Medicare will cover a portion of your costs, you’ll still have deductibles, copayments, and coinsurance. Unless you’re prepared to pay for these costs out of pocket, you may want to purchase a supplemental Medigap insurance policy.

Another option is Medicare Advantage (also known as Medicare Part C), which allows Medicare beneficiaries to receive health care through managed care plans and private fee-for-service plans.

Also think about what would happen if you or your spouse needed home care, nursing home care, or other forms of long-term assistance, which Medicare and Medigap will not cover. Long-term care costs vary substantially depending on where you live and can be extremely expensive. For this reason, people often consider buying long-term care insurance. Policy premiums may be tax deductible, based on a number of different factors.

6. Ease the Transition

These are just some of the factors to consider as you prepare to transition into retirement. Breaking the bigger picture into smaller categories and using the years ahead to plan accordingly may help make the process a little easier.

If retirement planning seems overwhelming, We would love to help. We love serving our high-net-worth clients by minimizing financial stress and maximize their lives using our proprietary Intelligrations™.

You can start by subscribing to our Intelligent Money Minute podcasts or by subscribing to our Intelligent Insights blogs.

Better yet, if you are finally ready to get some professional help, and want to collaborate or outsource this to qualified fiduciary professionals, please click here to reach out for a complimentary call or coffee. We’d be honored to spend some time with you to help you sort out your “financial junk drawers.”

Source: Broadridge Financial Solutions, Inc.

2023 IRA and Retirement Plan Limits

January 19, 2023 by Hans Blake, CFA, CPA

We all know it is important to plan for the future. This is a time of year where we set new resolutions and a great time to make a plan for your investable dollars. Note the following chart which shows the annual savings limits of the plan for this year and adjust your savings to take full advantage of the annual contributions. Remember, a missed year is a missed opportunity that does not come back.

We love automating this for our clients to improve their behavior and increase their odds of reaching their goals.

How to Use the Above Chart

Identify the type(s) of retirement saving that you currently use.

If you are 50 years or older, add the catch-up amount to your potential savings total.

Take note of the income limits within each plan type. For traditional IRA’s, if your income is below the noted threshold, your taxable income is reduced by your contributions. The deductibility of your contributions is also limited if your spouse has access to a plan. In the case of Roth IRAs, the income limits restrict who can participate in the plan.

Consider setting up new accounts for a spouse and set up automatic savings on a regularly-scheduled basis.

Please click here to connect with us if you need help in automating your contributions to help you reach your long-term retirement goals.

8 Key Takeaways from the SECURE 2.0 Act

January 19, 2023 by Hans Blake, CFA, CPA

Reading Time: 3 minutes

Do you have questions about SECURE 2.0 Act that passed in the final hours last year? You are not alone. I’ve been reading a lot about it and I too even have some questions for lawmakers.

As we wrapped up 2022, President Biden signed the SECURE 2.0 Act into law on December 29th.[1] The new act is being called SECURE 2.0 based on the name of its thematic predecessor, the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”). This legislation makes notable changes to qualified retirement plans. These will increase the age for RMDs, make enrollment and escalation automatic for most new 401(k)s and 403(b)s, and increase tax credits for low-income retirement savers, among other changes. Here’s a summary of some notable changes that occurred.

The age for RMDs goes up to 73 for those who turn 72 in 2023 and 75 in 2033. This is great news for those who don’t need the funds from qualified accounts. We help our clients with Roth conversions, and this allows more years to do this.
Most of the new 401(k)s and 403(b)s will be required to enroll employees automatically and escalate contributions automatically after December 31, 2024. This is what we preach about–improving investor behavior. Check out our behavioral finance page to learn more.
RMDs are eliminated from Roth accounts in 401(k)s and 403(b)s for tax years after December 31, 2023. As a result of SECURE Act 2.0, plan Roth accounts and Roth IRAs will be on more of a level playing field. It won’t be quite so obvious to determine whether or not rolling over a plan Roth account to a Roth IRA is in your best interest going forward. (We can help you with the decision)
Catch-up contribution limits will go up for those age 60 and 63 after December 31, 2024 to the greater of two: either $10,000 or 150% of the regular catch-up amount for those 50 and older. (Keep in mind that high wage earners will be required to use Roth option for catch-up contributions.)
The bill decreases the penalty for missed RMDs (or distributing too little) from 50% to 25% of the shortfall, and if the mistake is corrected in a timely manner, the penalty is reduced to 10%. (If you are a client of Intelligent Investing–we handle this automatically for you.)
There are some great (and complicated) planning options around Roth accounts inside and outside your employer plans. The Act authorizes the creation of both SIMPLE Roth accounts, as well as SEP Roth IRAs, for 2023 and beyond. Previously, SIMPLE and SEP plans could only include pre-tax funds. We help business owners setup Simple IRAs and manage their wealth in a cohesive way. (Side note: do you know it typically makes sense to put your “efficient” assets in a Roth IRA and your “less-efficient” assets in qualified accounts. It’s called tax location and something we love doing for our clients to reduce their tax bills)
Transfers from 529 plans to Roth IRAs (max amount in individual’s lifetime is $35,000) may be an area for high-net-worth families to consider. Great planning opportunity for high-net-worth families who have been funding their 529 Plans for a long time.
Those who are charitably inclined can give from qualified accounts directly to charities via Qualified Charitable Contributions (QCDs) and they can still be taken at 70.5 before reaching the new RMD ages. (We currently do this for some clients and can help you with this)

This summary scratches the surface on what all is in the SECURE 2.0 Act. Taxpayers (and especially those approaching retirement) are all but guaranteed to continue to have an endless stream of questions with respect to this complicated area.

Ask yourself: Do I have a trusted advisor who specializes in tax planning? Does my financial advisor have the right credentials (such as being a qualified CPA?) Is my advisor a true fiduciary? (i.e., do they put your interest AHEAD of their own at ALL times?)

Why don’t you make a new year’s resolution to get your “financial junk drawer” in order this year. We would love to help. We love serving our high-net-worth clients by minimizing financial stress and maximize their lives using our proprietary Intelligrations™.

You can start by subscribing to our Intelligent Money Minute podcasts or by subscribing to our Intelligent Insights blogs. Or if you are finally ready to get some professional help, please let us know.

If you want to collaborate or outsource this to qualified fiduciary professionals, please click here to reach out for a complimentary call or coffee.

Reference: Michael Kitces’ Perspective on the Secure Act 2.0

How Inflation May Affect Your Retirement Distributions

November 10, 2022 by Hans Blake, CFA, CPA

Podcast: Play in new window | Download

Reading Time: 2 minutes

On today’s Intelligent Money Minute, we continue our conversation with Morningstar’s director of personal finance, Christine Benz on how inflation may affect your retirement distributions. One of the major questions that retirees face is how much to distribute from their portfolio in retirement. Retirees also want to know which buckets to distribute from first, and what happens if they withdraw too much during a downturn. During this episode, Christine Benz walks us through the impact inflation has on retirement planning and distributions.

At Intelligent investing, we love answering these types of questions. We perform various stress tests, we strive to use conservative assumptions, and we try to educate to improve investor behavior—all with the underlying passion of minimizing financial stress to maximize lives.

You may be unsatisfied with your current financial advisor or perhaps you’ve never worked with one before. You may find yourself with a lot of financial stress and would like a second opinion on your financial situation or portfolio. Don’t stress any longer than you need to when it comes to your financial picture.

Intelligent investing is a boutique wealth management firm serving high net worth individuals and families using Intelligrations™ and behavioral coaching. Consider requesting a complimentary no-obligation call or coffee with us.

Schedule a short discovery call or meeting

We’ll be interviewing Christine on several podcasts regarding retirement strategies, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.

Christine Benz Bio

Christine Benz is Morningstar’s director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. She holds a bachelor’s degree in political science and Russian/East European studies from the University of Illinois. Christine lives in the Chicago suburbs with her husband, Greg. She is an avid cook, a political junkie, and a long-suffering Chicago Cubs fan. Follow Christine on Twitter.

Don’t Assume You’re Getting an Inheritance

September 29, 2022 by Hans Blake, CFA, CPA

Podcast: Play in new window | Download

Reading Time: < 1 minutes

On today’s Intelligent Money Minute, we continue our conversation with Morningstar’s director of personal finance, Christine Benz on don’t assume you’re getting an inheritance. Financial communication is critical, especially between generations. Many children in our country are making a dangerous assumption; that a lucrative inheritance is headed their way. Yet many come to the reading of will only to be devasted that the inheritance they’re expecting doesn’t exist. During this episode, Christine Benz stresses the importance of talking about finances with family members before it’s too late.

At Intelligent Investing, we focus on helping facilitate and communicate on difficult financial topics between family members. If you find it difficult to communicate with the next generation regarding your estate or your wealth, please consider reaching out for a complimentary no-obligation call or coffee to discuss your financial situation. We’d love to be considered your financial accountability partner.

Schedule a short discovery call or meeting

We’ll be interviewing Christine on several podcasts regarding retirement strategies, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.