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

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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 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

How Inflation May Affect Your Retirement Distributions

November 10, 2022 by Hans Blake, CFA, CPA

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How Inflation May Affect Your Retirement Distributions with Christine Benz

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.

Should I Take Lump Sum Social Security Benefits?

March 10, 2022 by Hans Blake, CFA, CPA

Reading Time: 3 minutes So, you are about to start taking Social Security, and you set up a call with a Social Security agent. While on the phone, they tell you about a special option to receive up to six months of benefits in a lump sum when initiating Social Security retirement benefits. You look over at your spouse who shrugs, and you tell the agent, “Yes. We’ll take a lump sum amount.” Little do you realize, you may have rushed the decision and you didn’t understand the tradeoffs in taking this lump sum. This blog is intended to educate you in understanding the tradeoffs so you can be more an Intelligent Investor and make a wise decision.

Social Security Lump Sum Benefit History

The lump sum benefit option isn’t new and has been available when claiming retirement benefits at your full retirement age (FRA) or later. This is usually between the ages of 66 and 70. Social Security representatives are required to fully explain this choice to eligible applicants, whether they ask about it or not, and since it is offered last minute, a knee-jerk reaction can make the applicant decide to take the offer—not fully realizing what they have done until hanging up the phone. The representative may even try and persuade the applicant to take the lump sum by saying things like, “Most people take it.”

The Way the Lump Sum Works

Once you’ve hit FRA (age 66 for those born in 1943-1954, and over age 66 on a sliding scale for those born after 1954), the option to take a lump sum is available. You can choose to receive a lump sum of up to six months of benefits. You’ll get to start your Social Security retirement benefits with a nice big bonus payment. Sounds pretty good, doesn’t it?

The Cost of Taking the Lump Sum of Social Security Benefits

First, the amount of your monthly benefit going forward is reduced. Let’s walk through an example: John Smith contacts Social Security and says he wants to start taking Social Security benefits when he hits age 70, receiving the maximum allowable benefit. Under his earnings history, he’s due $4,000 per month. After hearing the representative explain the lump-sum option, he chooses it and receives a lump sum of around $23,040 (six times the monthly benefit he would have received at age 69 ½). But taking the lump sum option moves his official beginning age for benefits back to 69 ½ instead of 70, and the monthly benefits he’ll begin receiving will be based on that age. He’ll receive $3,840 per month, which is 4% less than his maximum benefits at age 70. (Remember, by delaying benefits after FRA, your benefits increase 8% annually through age 70.)

What Should You Do?

Well, like most financial planning, it depends on several factors. If John Smith decides to use the lump sum to pay off some high interest-bearing loan, it may make sense. However, if John has been waiting until age 70 to start taking benefits, it shows that he is disciplined and likely doesn’t have much debt. If he invests the lump sum well, he could end up with more money than if he had taken the higher monthly benefit. If John is married and is the higher-earning spouse, it may make more sense to decline the lump-sum benefit in order to maximize his monthly benefit so that whichever spouse survives has the highest possible monthly benefit for life. The right choice also depends on your and your spouse’s (if you are married) longevity. If you are single and suddenly diagnosed with a terminal illness you may want to take the lump sum and the smaller benefit. The lump sum could go to an heir, while the monthly benefit will end at the beneficiary’s death. If you are married and facing a terminal illness, then the decision to take the Social Security lump sum benefit becomes a bit tougher to analyze. A higher-earning spouse faced with a suddenly shortened life expectancy may want to reject the lump sum. The reason is the survivor benefit will equal 100% of the higher earner’s benefit at his or her death. If the surviving spouse has a long life expectancy, the boosted survivor benefit can more than make up for declining the lump sum.

Let Us Help You with Your Social Security Benefit Questions and Planning

At Intelligent Investing, we are a boutique wealth management firm serving high net worth individuals and families. We would be happy to have a complimentary meeting over a call or coffee to learn more about your family and your financial needs. We love organizing our clients’ financial junk drawers so that we can minimize financial stress to maximize lives. We’d love to do the same for you. If you’d like to become a client of Intelligent Investing, please click here to call or schedule a “discovery” meeting.

Tips for Dealing with Tragedy, Sadness, & Poor Health Over the Holidays.

December 9, 2021 by Hans Blake, CFA, CPA

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Reading Time: 2 minutes

Despite Christmas being a cheerful time of year, many people find the holidays very depressing. Shelly experienced tragedy on Mother’s Day when her son Jonathan passed away. During this episode, Shelly Hamilton gives tips on how to deal with tragedy, sadness, and trials during the holidays. She highlights the value of speaking the truth to yourself to stay grounded and encouraged.

As Shelly mentioned, practicing self-talk and redirecting your negative thoughts to others and the blessings in your life can help as you deal with grief and the loss of loved ones. One of our core values at Intelligent Investing is Compassion, and as we work with other widows, I want to share some of our resources. You can visit investedwithyou.com, search our blogs by topic and find another blog titled “10 Tips for Caring for a Spouse or Parent who has become a child.” If you’d like to learn more about Intelligent Investing or would like to become a client, click here.

Shelly Hamilton recently published a book titled, “Always Only Good.” This book details Shelly’s journey of faith through her son Jonathan’s mental illness shortly after his death in 2013. You can purchase the book here.

If you haven’t subscribed to our podcasts, you can go to our podcast page and choose whichever method you want to download them. While you are there, you can go to our blog page and subscribe so you can get our latest Intelligent Insights directly in your inbox.

Shelly Hamilton Bio

Shelly Hamilton, the daughter of Frank Garlock, married Ron Hamilton aka “Patch the Pirate” in 1975. They have managed Majesty Music and written sacred music for children and adults since they joined the ministry in 1978. Shelly currently ministers at Majesty Music as pianist, composer, arranger, and recording producer. In 2013, their son killed himself after years of struggle with mental health issues. The family’s public struggle and acknowledgement of mental health issues has reached people around the world. Most recently her family faces a new challenge: Ron Hamilton’s early onset of dementia. Her insight and music will encourage anyone facing the challenges of life.

In January 2018 Majesty Music announced their third generation of leadership. After years of waiting for God’s timing, Ron and Shelly transitioned the ministry over to their son-in-law Representative Adam Morgan and his wife, Ron and Shelly’s daughter, Megan.

Living in a Glass House Pt.2

September 23, 2021 by Hans Blake, CFA, CPA

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Reading Time: 2 minutes

On this episode of Intelligent Money Minute, we’ll be interviewing Shelly Hamilton on living in a glass house. During this episode, Shelly is joined by her son-in-law and daughter, Adam and Megan Morgan. A glass house is a term used for more those whose lives are more public than the average person. They talk about the hurdles, challenges, and experiences of living in a glass house. Shelly stresses the value of staying true to their faith and values whether people are watching or not.

One of Intelligent Investing’s core values is Truth. We believe that speaking the truth in love is so vital…especially when it comes to talking within families. We strive to unite families with financial communication, and if you are going to be transferring your business in the near future (especially to another family member), we’d love to start having a conversation with you. We can help be the liaison between family members, and we can help you plan for the many aspects of transferring a business.

Shelly Hamilton Bio

Retirement Planning Is Boring?

September 7, 2021 by Hans Blake, CFA, CPA

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Retirement Planning is Boring with Christine Benz

Reading Time: < 1 minute On today’s Intelligent Money Minute, we continue our conversation with Morningstar’s director of personal finance, Christine Benz on why retirement planning is boring. The last thing you expect to hear is that retirement is boring. Retirement finances and strategies can consume and overwhelm any pre-retiree couple. During this episode, Christine Benz explains how retirement planning can be simple and boring. As Christine said, Doing the boring stuff such as saving and living below your means can really impact your financial future. Having both spouses working and saving for the same goals can be challenging, yet rewarding. Don’t be confused by other advisors that may confuse you into buying something you don’t need or want. If you are wanting a second opinion, we’d love to have a complimentary coffee or call with you to learn more about your concerns, struggles, and goals. If you want to learn more, you can click here to learn more. 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

Living in a Glass House Pt.1

August 12, 2021 by Hans Blake, CFA, CPA

Podcast: Play in new window | Download

Reading Time: 2 minutes

On this episode of Intelligent Money Minute, we’ll be interviewing Shelly Hamilton on living in a glass house. During this episode, Shelly is joined by her son-in-law, Adam Morgan. A glass house is a term used for more those whose lives are more public than the average person. They talk about the hurdles, challenges, and experiences of living in a glass house. Shelly stresses the value of staying true to their faith and values whether people are watching or not.