Avoid emotional investing decisions.

The old cartoon character Pogo famously commented: “We have met the enemy and he is us.”

Pogo could well have been describing an investor trying to navigate through today’s markets. We can be our own worst enemy with our emotions betraying our sound advice at any moment.

One of the most valuable lessons you can learn in investing is to beware of your emotions.

Feelings like fear, euphoria, or greed act as powerful unseen motivators. A behavioral finance paper stated that financial gains trigger the same “reward circuitry” in the brain as cocaine, while financial losses trigger a hard-wired “fight-or-flight” response.1

Emotional investing.

Various emotional states can sabotage your investing behavior and hard-worked, long-term financial plan. Examples of common investing emotions that lead to mistakes are:

– Euphoria: The delight of seeing your stocks go up day after day makes success seem self-perpetuating. An investor can catch the “bubble” mentality of the crowd.

– Fear: When an ugly day (or week or month) brings falling market prices, an investor can be tempted to sell everything and “go to cash,” possibly missing an opportunity as the market rebounds.

– Overconfidence: In a rising market, an investor may believe his or her own superior abilities are causing the gains. It is easy to ignore warning signs or the need for caution.

– Hyperactivity: Bombarded constantly with real-time information, an investor can react to every twist and turn in the market. Tinkering is costly and distracts from the long-term plan.

– Denial: An investor watching an asset drop in price may be reluctant to sell and recognize a loss. Selling a depreciated asset goes against an emotional tendency not to admit failure.

– Greed: In any market, the allure of “more” can entice an investor like seeking more yield on a bond, more growth in a stock. But beware — the promise of more return also means more risk.

Follow your plan.

Discipline can be the antidote to the emotions that drive your investing astray. Following a well-designed investment plan will keep you on track to achieve long-term financial goals. Some pointers on avoiding the emotional tug of war in investing:

– Have a specific plan: Most investors follow a strategy in their head that is highly changeable. A more structured plan — spelling out long-term goals, approaches to risk and return, and strategies to achieve those goals — will serve as a steady guide.

– Track progress on a schedule: Obsessing over investments daily or moment-to-moment is counterproductive because of the temptation to make frequent changes. Reviewing your portfolio regularly but not frequently and meeting with your financial advisor at least twice a year will help separate you emotionally from the swings of the market.

– Talk with an investment advisor: An experienced financial professional can offer you perspective on the fluctuations of the market.  Investment advisors, acting as fiduciaries, can offer objectivity and commitment to your best interests, giving you an anchor against the emotional winds of the market and sensational media coverage.

– Learn how to sit still: Be aware that volatile markets make it hard to do nothing. If the stock market drops today, the temptation is to sell stocks, buy, or to react in some way. But responding to every market fluctuation is focusing on the small picture. Practice the habit of focusing on the larger picture which includes your financial goals and long-term strategies.

Benefits of discipline.

Changing your investment positions based on emotions can be costly and counterproductive. The frequent activity of a reactive investor tends to run up commissions and other transaction costs. If you invest by feelings, your tendency may be to do the wrong thing at the wrong time — sell out of fear when prices are down, buy out of greed when others have driven prices up.

Instead, a smart investor works on the habits of disciplined investing: following a structured plan, tracking progress, getting objective advice, emphasizing asset allocation, and — more often than not — knowing the value of doing nothing at all.

What to do next.

– Give yourself a check-up on the common emotions that lead to investing mistakes.

– Put your energy into designing and following a sound long-term investment plan.

– Review your portfolio regularly and talk with your financial advisor as your personal situation changes.

– When the market threatens to change your investment positions based on emotions, talk to an experienced professional investment advisor.

 

1 Lo, Andrew. (August 28, 2011). Fear, Greed, and Financial Crises: A Cognitive Neurosciences Perspective. Retrieved October 4, 2017, from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.360.3908&rep=rep1&type=pdf

September 2017 Mailbag | Straight talk from Financial Engines

Outliving your money in retirement. Account changes. Market reactions to geopolitical events and weather catastrophes. These are some of the topics on the minds of our clients. Read how we address them in our latest Mailbag.

Download Mailbag Now! >>

Have a question for our next issue? Click here to ask us. >>

 

©2017 Financial Engines, Inc. All rights reserved. Financial Engines® is a registered trademark of Financial Engines, Inc. All advisory services are provided by Financial Engines Advisors L.L.C. or its affiliates. Financial Engines does not guarantee results and past performance is no guarantee of future results. CPY19916

August 2017 Perspectives – Synchronized swimming

From talking about the U.S. economy’s treading water in last quarter’s Perspectives, we’ve now moved to “synchronized swimming” in our current issue. Synchronized swimming, you ask? We think that’s a fitting metaphor for the global expansion we’re seeing from the world’s major economic players.

International equity markets have led the way so far this year, and in this quarter’s Perspectives, we take a look at what’s been driving their performance. We also consider whether more interest-rate hikes are back on hold and look ahead to the second half of 2017 and the market and economic questions that may help shape it.

Read our August 2017 Perspectives below, or click here to download >>

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Market Summary: May 2017

Calm economics, turbulent politics

Once again, international stocks led the way. Developed-market stocks, which make up most of the value of international stocks, closed up +3.67% (MSCI EAFE index). Emerging-market stocks also did well, ending May up +2.96% (MSCI Emerging Markets index) and bringing year-to-date returns to +14.01% for developed-market and +17.25% for emerging-market stocks. Domestic stocks saw mixed returns. While large-cap stocks, which dominate the U.S. market, rose by +1.41% (S&P 500), small- and mid-cap stocks fell by -2.13% (S&P 600) and -0.49% (S&P 400). Bonds slipped early in the month as interest rates inched up, but they came back by mid-month to end slightly up at +0.77% (Barclays Aggregate index). A brief burst of volatility shook things up mid-month with a down day on May 17. This was the only day in May that the S&P 500 moved by +/-1%.

June 2017 Mailbag | Straight Talk from Financial Engines

From how world events and legislative actions might affect you to impacts of recent stock market activity, let our latest Mailbag help guide you.

At Financial Engines, we give you the objective, straightforward information you need to help reach your goals.

Download Mailbag now! >>

Have a question of your own? Click here to ask us >>

 

©2017 Financial Engines, Inc. All rights reserved. Financial Engines® is a registered trademark of Financial Engines, Inc. All advisory services are provided by Financial Engines Advisors L.L.C. or its affiliates. Financial Engines does not guarantee results and past performance is no guarantee of future results. CPY19153

Should You Refinance Your Student Loans?

The latest figures from the Federal Reserve show that Americans are weighed down by more than $1.4 trillion in student loan debt.1

The goal for many people with student loans is to get out from under that debt load as quickly as possible. This is especially true if the interest rates on the debt are high relative to current interest rates.

Getting rid of your debt.

There are three ways to pay down a loan and reduce the amount of total interest you owe:

  • Increase the amount of each payment to shorten the loan term.
  • Qualify for a lender’s interest rate reduction program (if available).
  • Refinance to a lower interest rate.

Most federal and private student loans let you increase the amount you pay and how often you pay it. If you have the monthly cash flow, this may be the easiest and fastest way to get rid of your debt. Even adding an extra $50 a month to your payment may end up saving you thousands.

Some loan servicers will reduce your interest rate if you enroll in an automated payment plan or if you’ve made a certain number of payments on time. Check with your loan servicer to see if this option is available for you.

Refinancing federal loans.

Refinancing a mortgage is often a no-brainer. But with student loans, refinancing may not always be the best choice.

If you have a federal student loan, you can’t refinance it into another type of federal loan. This is because interest rates on federal loans are fixed by law. You can, however, refinance a federal loan into a private loan. But if you do this you’ll give up federal loan protections, including income-based repayment plans and loan forgiveness.

Refinancing private loans.

Interest rates in the United States continue to be at all-time lows. That means many bank and non-bank lenders have deals for people who want to refinance student loans.

Yet, there are some catches. To get the lowest rates from private lenders, you’ll need to show steady employment, a good monthly income and a strong credit score. You also can’t have much other debt. This is different from most federal loans, which do not consider your credit. If you’re a rock star in all these areas, you may be able to qualify for interest rates in the 2%-3% range. If your current loan rates are several points higher, this could save you some serious cash.

Keep in mind that when you refinance your student loan, you reset your loan term. You get a lower interest rate, which could reduce your monthly payments. On the flip side, you could be making those lower payments longer, which could increase the total amount you end up paying. One way to work around this is to refinance to a lower interest rate but keep making the higher payments that you were before. This will pay off your new loan faster at a lower interest rate.

Should you or shouldn’t you?

Did you recently graduate? Is your employment situation unstable? Do you have federal loans with reasonable fixed rates? If you answered yes to any of these questions, then it may be smart to keep your loans set up the way they are now. One of the biggest advantages to this is that you’ll keep your flexible repayment options.

If you have private loans and a stable job, compare rates and requirements from several lenders to see if refinancing makes sense.

There’s no “one-size-fits-all” answer to if and how you should refinance student loans. Just as you did your research as a student, you should do your research on how it makes the most sense to pay off your loans. The right approach can help you pay off your debt sooner and save you money in the long run.

 

1 (17 May 2017). U.S. Student Loan Debt Statistics for 2017. Student Loan Hero. Retrieved May 20, 2017, from https://studentloanhero.com/student-loan-debt-statistics/

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Why a Health Savings Account Could be Right for You

Health savings accounts (HSAs) can be an essential part of both your health care and retirement savings strategies. In fact, more and more people are enrolling in them. A new survey found that “enrollment in employer-sponsored HSA/high-deductible plans more than doubled from 5% in 2005 to 11% in 2015.”1

If you’re not familiar with an HSA and how it works, you could be confused about why it may benefit you. Here are the basics.

What is an HSA?

An HSA is an account that you can use to pay medical bills. It’s available to people enrolled in a high-deductible health plan (HDHP). Money in an HSA can also be invested, like money in a 401(k) plan.

What is an HDHP?

An HDHP is a health insurance plan that has lower premiums and higher deductibles.

  • The deductible is the amount that you pay out of your own pocket to your doctor before an insurance company will pay extra expenses.
  • The premium is the amount you pay each month to your health insurance company.
  • In an HDHP, you’ll pay less each month to the health insurance company but will pay more each time you go to a doctor.

What are the benefits of an HSA?

It can pay medical expenses: First and foremost, an HSA is an important complement to an HDHP. It’s money that’s set aside to pay for what your HDHP won’t. This includes medical expenses like doctor’s visits, prescription drugs and dental care.

Your money can grow: You can invest your HSA balance in mutual funds or other investments. This may help increase your balance over time.

It offers a triple tax advantage:

  • Contributions to an HSA are tax-deductible. They’re either taken from your paycheck after taxes (which reduces your take-home pay) or are made before taxes are deducted, which lowers what you owe.
  • Interest from your HSA investment is not taxed either.
  • Withdrawals from your HSA are also not taxed if they’re used for qualified medical expenses.

There aren’t any required distributions: Traditional 401(k) plans and IRAs require a minimum distribution at the age of 70 1/2. This rule does not apply for an HSA. Money contributed into an HSA can stay there as long as the account owner wants it to. Also, unused funds roll over each year.

It doesn’t fall under the Federal Insurance Contributions Act (FICA): Contributions to an HSA are not subject to the FICA tax, which is a combination of Social Security tax and Medicare tax. In 2017, the FICA tax is 7.65%.2 This means if you contribute $100 from your paycheck to your HSA, $100 would end up in your account (in most states). If you did this same transaction with a 401(k) plan – which is subject to the contribution tax – only $92.35 would wind up in your 401(k) plan.

Employers can contribute: Like a company match in a 401(k) plan, employers can contribute to your HSA.

Is an HSA right for you?

It’s worth looking into. Do your homework first and understand how it works. We’re here to help you with that.

 

1 More Employers View HSAs as Part of Retirement Strategy. Employee Benefit Adviser retrieved May 12, 2017, from https://www.employeebenefitadviser.com/news/more-employers-view-hsas-as-part-of-retirement-strategy

2 Publication 15 – Introductory Material. Internal Revenue Service. Retrieved June 1, 2017 from https://www.irs.gov/publications/p15/ar01.html

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In Whose Best Interest?

The overwhelming majority of Americans think that financial advisors for retirement should be legally required to put their clients’ best interest first. The reality is, though, that many aren’t. And even more troubling, more than half of Americans misunderstand their advisor’s priorities.

 

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How Can You Tell if Your Financial Advisor Is a Fiduciary?

Are you one of the 60%?

Here are some questions to ask your current or potential advisor and what to look for in their answers.

  • Are you a fiduciary? A direct question deserves a direct answer. Pay attention to how the advisor responds. If your advisor has told you that he or she is acting as a fiduciary, ask them to show that to you in writing.
  • Do you receive any type of compensation in addition to what I’m paying you? Some advisors receive commissions or other product-based compensation when they steer clients into particular investment products (such as mutual funds, annuities and variable annuities). This is a clear conflict of interest and can indicate that the advisor is not, in fact, a fiduciary. Make sure your advisor is providing unbiased advice and not simply selling you investment products.
  • Are you “dual-registered”? Some advisors are registered as both investment advisors and broker-dealers. Often, a broker-dealer is acting in the role of salesperson. If your advisor is also a broker-dealer, make sure you understand which hat they are wearing when providing advice to you.
  • Have you ever been cited by a professional or regulatory organization for disciplinary reasons? To be extra sure, you can look up the advisor’s records on FINRA’s BrokerCheck to find out if they have any complaints. Keep a close eye out for complaints related to providing financial and advisory services.

 

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Worrying Is Like a Rocking Chair

The Employee Benefit Research Institute (EBRI) recently released their 2017 Retirement Confidence Survey, which found Americans are stressed about retirement. But despite reporting high stress levels, many aren’t preparing for retirement.

About 30% of workers feel “mentally or emotionally stressed about preparing for retirement,” according to the survey. Yet only 61% “say they have saved for retirement,” and only 41% “have tried to figure out how much money they will need in retirement.”1

You know how the adage goes: Worrying is like a rocking chair. It gives you something to do but gets you nowhere.

Don’t let today’s worry get in the way of planning for tomorrow’s financial success. Here are a few places to start:

Take full advantage of your employer’s company match.

If your employer offers a 401(k) or other defined contribution plan, they want you to save for your retirement. One way to help you is by matching your own contributions according to a preset formula and up to a certain amount.

Our 2015 report2 found that the typical employee leaves $1,336 of unclaimed money on the table each year because they don’t save enough in their 401(k) to receive the full company match.

Don’t borrow against your 401(k).

While you can borrow from many employer-sponsored retirement plans, it generally isn’t a good idea to do so. One downside to borrowing against your 401(k) — it can result in lower ending balances.

Your 401(k) can benefit from the compounding of returns. Money you earn on your balance (your “return”) can itself earn returns when invested. When you take money out of your 401(k), you have a smaller balance upon which to earn returns. This may not make much of a difference over a few months, but it can add up over several years.

Instead of borrowing against your 401(k), create a financial plan that focuses on building your savings and emergency fund. With that cushion, you won’t find yourself feeling like you have to take money out of your 401(k) before retirement.

Calculate how much you’ll need in retirement.

Determine how much income you’ll need in retirement. While your needs and hopes for retirement are your own, many financial planners estimate that a person needs about 70% of their current salary to live comfortably during retirement.3

Be mindful of Social Security claiming strategies.

Regardless of whether you’ll retire in a few months or a few years, start exploring Social Security claiming strategies now. Social Security is a complex program with a lot of options, so take the time to learn about it to help yourself feel prepared (and a little less stressed!). Try our Social Security Planner to learn more about claiming strategies that work best for you.

Set up a financial plan.

A financial plan helps investors see the big picture of their financial life. You can set long- and short-term goals and provide direction in making financial decisions.4 If you are one of those without a formal plan, the time to start is now. You can begin by putting the pieces together yourself or looking for a financial advisor in your area.

It’s understandable to stress about retirement, but we all know worrying gets you nowhere. Instead, start taking steps today toward achieving the retirement you want — and have worked hard for — in the future.

 

1, 4 (21 March 2017). Employee Benefit Research Institute. 2017 RCS: Many Americans Are Stressed about Retirement, Aren’t Taking Steps to Prepare. Retrieved April 28, 2017, from https://www.ebri.org/pdf/surveys/rcs/2017/PR.1185.RCS17.21Mar17.pdf

2 (May 2015). Financial Engines. Missing Out: How Much Employer 401(k) Matching Contributions do Employees Leave on the Table? Available at https://financialengines.com/workplace/resources

3 (21 December 2012). Financial Engines. Retirement Planning Checklist. Available at https://financialengines.com/education-center/retirement-planning-checklist/

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