Diversification is a fundamental principle of investing - examples of the concept date back as far as Talmudic texts estimated to have been written over 3,000 years ago, stating "Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve." The diversification principle received a further boost in the recent era when Harry Markowitz's Modern Portfolio Theory supported the notion that the volatility of a portfolio may be less than the volatility of its parts, such that the introduction of even a high-return high-risk asset to the portfolio may improve the portfolio's risk-adjusted return (or even outright reduce its volatility). Yet at the same time, both the rabbis of the Talmud and Markowitz would probably agree that the first step of investing your assets is even more basic: make sure you own stuff that has a reasonable expectation of providing a useful return in the first place. Unfortunately, though, we seem to have lost sight of this rule in recent years!Read More...
In mid-August, the CFP Board issued some proposed changes to the CFP Board work experience requirement, including differentiating the work experience requirement for those personally deliver financial planning, from those who work in a supporting, supervisory, or teaching role. Up until now, all experience has been treated the same; but under the proposed rules, those who support, supervise, or teach will need more experience than those who personally deliver planning. Yet at the same time, the proposed changes make the differentiation by reducing the work experience requirement for those who personally deliver financial planning from three years, down to only two years. Is this strengthening the standard, or weakening it?Read More...
Investors in the U.S. have become increasingly numb to the reality of investing here - a world where stocks pay a dividend barely over 2%, and short-term bonds or CDs give a yield barely more than 0%. Accordingly, we have few options for return aside from investing in risk-based assets to seek - or at least, hope for - capital appreciation. Yet the ultra-low returns on everything in the U.S. - necessitating a significant amount of appreciation just to generate a reasonable total return - is not the norm for U.S. investing historically, nor even currently around the world outside of the U.S., as I was reminded during my recent trip to Australia. In fact, I was somewhat shocked while I was there to wonder: how would investing in the U.S. be different if we, too, could get local short-term bank CDs that paid nearly 6%!?Read More...
Psychologists Daniel Kahneman and Amos Tversky won the Nobel prize in economics for developing a theoretical framework to show how we make often irrational decisions when faced with real life economic trade-offs. As a part of their prospect theory research, they showed that we are naturally loss averse; this means we experience more negative feelings associated with a loss, than we do positive feelings for a comparable gain. For instance, we feel worse about losing $100, than we feel happy for winning $100. Yet despite the recognition that this research has received, are we ignoring it in the financial planning world? Simply put: If our clients feel worse about a loss than they feel good about a comparable gain, shouldn't we be more proactive about protecting them from losses, even at the risk of giving up more gains?Read More...
The common refrain from practice management consultants for years is that to survive and succeed, planning firms need to clearly define their target market. After all, if you don't know who you're trying to serve, you can't create unique value for them, and you can't focus your limited resources. The good news is that after years of this messages, a recent trend suggests that financial planners are finally getting it... sort of. Planners are saying that they've defined a target market in increasing numbers; the problem is, their target market is often defined as no more than "people who can afford my services" - and that is NOT a target market!Read More...
A recent common refrain at conferences is that when done best, financial planning is a process, not an event - meaning that financial planning is not about delivering "THE plan" at the end, but about the ongoing process of continually aligning money with goals as life and circumstances continually change. In turn, this implies that the value of financial planning will be rooted in the ongoing experience that the client has while engaging in the planning process. But how good is that experience, recently? Perhaps not so great... as one researcher's recent focus group described financial planning as feeling "like a mix between a dental visit, math class, and marriage therapy." Ouch.Read More...
