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What is portfolio rebalancing and why does it matter?

by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management

When we talk about Walnut Investing, we frequently talk about portfolio rebalancing and the value you gain from the process.

What is portfolio rebalancing anyway, and why does it matter?

A typical portfolio contains different kinds of assets, such as equities, bonds, and cash, called asset classes. Equities tend to be higher risk (with higher potential gains) than bonds. Bonds tend to be higher risk (with higher potential rewards) than cash. When creating a portfolio, an individual investor or financial advisor will typically assess the investor’s risk tolerance and goals and allocate assets to match those goals.

Sample Portfolios with Assets Allocated for Different Investors

younger-investor     older-investor

For example, if an investor has 30 years to save for retirement, the proportion of equities in their portfolio may be much higher than the proportion of equities in the portfolio of someone with a five-year timeline. Putting 68 percent of a portfolio into equities is likely to be a lot less risky at age 25 than it is at age 70.

Once a portfolio is created and funded however, the different assets earn different returns over time. Left untended, the asset allocation begins to change as different segments perform better or worse than others. If the stock market is having a good year, the proportion of equities in the overall portfolio will tend to creep up over the year, creating a riskier portfolio than the investor desired.

Hypothetical Portfolio Growth Over One Year (Above Average Stock Market Performance)

initial-balance     balance-1-year-later

In the hypothetical example above, in a year of above average stock market performance, the equities portion of the portfolio grew faster than the bonds and cash portions of the portfolio. As a result, without rebalancing, the portfolio has become increasingly risky over the year. Without intervention, the portfolio will likely move further and further from the original asset allocation strategy.

If you’re managing your own money, the best thing to do is check in on your portfolio frequently and modify how you buy and sell when one segment outperforms another. For example, you might move gains from equities into bonds and cash to return to the original allocation strategy.

If that sounds like more involvement than you want, you can of course use a traditional financial advisor or a service like Walnut which will frequently rebalance your portfolio for you.

Five personal finance tips better than skipping your daily latte

by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management

You’ve probably read the plethora of financial advice columns telling you that if you
would just skip your Starbucks latte every morning, you’ll be rich before you’re 45.

But ask yourself this: Are you prepared to never venture into a coffee shop again?*

Most likely, you’ll buy another latte. “Just this once,” you’ll tell yourself. And you’ll tell yourself this over and over again until you’re buying lattes every day and feeling

defeated. At the end of the day, if you enjoy a latte in the morning, skipping it isn’t going to be realistic way to fund your retirement plan.

But is it possible to make the equivalent savings over the long term some other way?

Yes! And it doesn’t require daily willpower.

1. Negotiate your bills

People are accustomed to just accepting the price shown on their phone and utility bills, presuming the price they see is the price they must pay. But we shouldn’t assume that our bills are set in stone.
Bills are ongoing expenses so negotiating with the company can save you a significant amount of money in the long term. Some bills are more flexible than others, and I recommend trying your cell phone bill first.

To do so, check which plan you are on and see if the company can offer you on which is more appropriate to your usage. Don’t pay for something you don’t use!\

If you have been a customer for a long time, use this history as leverage. Tell the phone representative (nicely) that you want to cancel your contract and they’ll pass you through to someone who will offer you all kinds of discounts to stop you from canceling. If you manage to cut just $10 off your phone bill every month, you’ll have made $120 a year all from one phone call.

(See more tips on negotiating a phone bill here.)

2. Ask for a pay raise

The most straightforward way to accumulate more money is to make more money, so try asking for a pay raise. Many people shy away from asking for more money, but you shouldn’t.

You’ve surely had days at work when you think to yourself “I don’t get paid enough for this.” Well, you’re probably right and your boss probably knows you’re right. Appraisals and progress meetings are the best opportunity to bring up a pay raise.

3. Buy in bulk

Buying in bulk doesn’t necessarily mean buying food in enormous quantities at Costco.

Think about other recurring expenses, including travel. If you use public transport to commute to work, check to see if there is a monthly, seasonal or annual travel pass. You’ll be making savings every time you travel without having to conjure up any willpower whatsoever.

Similarly, if you like to get massages or other salon services, you can usually buy a
package of 4 or 10. While the bulk price tag might look hefty, you’ll save money in the long run if you’re a regular customer.

4. Move to a new neighborhood
If you live in a metropolitan area, the difference in rent by neighborhood can be
astonishing. A property just a mile away might be hundreds of dollars per month
cheaper for comparable floor space. Over the course of a year, you could invest
thousands of dollars that would have otherwise gone to your landlord.

If you rent it’s likely that you are used to moving anyway, so consider what is actually important to you in a property. Is it square footage? A home office? A backyard? A dishwasher and gas stove? Compare the different areas with your criteria in hand and consider a cheaper property that meets your needs. If you cut your rent bill, you’ll save money every day just by living there.

5. Review all of your financial products

Oddly, the public perception of and insurance companies is that they are not a company selling products. And yet, they offer different rates and incentives for things like credit cards and mortgages.

If you’re not using all the bells and whistles of a service, such as the rebate options on a Visa credit card, you might be paying more for something you don’t need.
Review your credit cards: Look at the interest rate you currently get and see if you can get a better deal by switching to a new card at a lower rate or an initial 0% interest rate.

If you call your credit card company and tell them about your intent to switch to a new card (and mean it), they may offer you a better rate.

Look at your life insurance coverage and consider whether you really need to be insured for as much as you are. It’s very comforting to think that you have a policy worth millions but does your family really need it? It’s financially responsible to protect your family against the worst, but be careful not to overprotect them with an expensive policy that drains you of your resources when you’re alive.

Saving doesn’t have to be a daily sacrifice. By taking action just once you could be
making big savings in the long term — and you don’t necessarily have to cut back or
change your lifestyle to do so.

*If you’re not a coffee drinker, substitute your own personal indulgence here.

wealth-creation

What The Richest People Know About Wealth Creation

Early and Often: What The Richest People Know About Wealth Creation

by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management

Of the 320 families on the Forbes 400 list in 2011, (such as the Waltons of Walmart and the Johnsons of Fidelity), 85% owned a business.

Of the number of families who had remained on the list since its creation in 1982, 97% of them achieved their wealth via a family business.

As I started to think about this more, I realized that this phenomenon isn’t exclusive to the Forbes 400 list, it plays out on a smaller scale in towns and cities across America.

Think of the 10 wealthiest people in any community, and chances are they built their wealth by running a company. (Or they inherited wealth that was sourced from operating a company.) It could be the local car dealership or a chain of dry cleaners or a software development company. What matters is that growing a business delivers big compounded financial growth.

Not everyone is suited — or has a desire — to take risks with capital, hire and fire employees, buy equipment, lease warehouses, or negotiate loans larger than some developing nation’s GDP. So what can the non-business owners learn from the statistics?

A lot of investing is simply math. Smart, wealthy families invest early and often in their business.

Why early? It’s about the law of compounding returns. In a business, that means pouring everything you have into a startup so that it will reap enormous gains over the coming years. In the stock market, it looks somewhat similar.

One hopes to, and often does, double their money every seven years when the market returns its average of just over 10% over time. (Operative words: over time)

If you miss your initial cycle of doubling, that will forever stump your long-term result.

Why often? This takes advantage of all market prices, especially when things are in a rough patch and prices are lower. With the discipline of regular slugs of cash going into your portfolio, you will appear to be a genius and smartest one in your group long after the market has recovered, and those fund prices are much higher from where you dutifully purchased.

You may never be on the Forbes list (though if you are, congratulations!), yet learning good habits from those who are can help you grow your own wealth.

Five personal finance tips better than skipping your daily latte

by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management

You’ve probably read the plethora of financial advice columns telling you that if you would just skip your Starbucks latte every morning, you’ll be rich before you’re 45.

But ask yourself this: Are you prepared to never venture into a coffee shop again?*

Most likely, you’ll buy another latte. “Just this once,” you’ll tell yourself. And you’ll tell yourself this over and over again until you’re buying lattes every day and feeling defeated. At the end of the day, if you enjoy a latte in the morning, skipping it isn’t going to be realistic way to fund your retirement plan.

But is it possible to make the equivalent savings over the long term some other way? Yes! And it doesn’t require daily willpower.

  1. Negotiate your bills

People are accustomed to just accepting the price shown on their phone and utility bills, presuming the price they see is the price they must pay. But we shouldn’t assume that our bills are set in stone.

Bills are ongoing expenses so negotiating with the company can save you a significant amount of money in the long term. Some bills are more flexible than others, and I recommend trying your cell phone bill first.

To do so, check which plan you are on and see if the company can offer you on which is more appropriate to your usage. Don’t pay for something you don’t use!

If you have been a customer for a long time, use this history as leverage. Tell the phone representative (nicely) that you want to cancel your contract and they’ll pass you through to someone who will offer you all kinds of discounts to stop you from canceling. If you manage to cut just $10 off your phone bill every month, you’ll have made $120 a year all from one phone call.

(See more tips on negotiating a phone bill here.)

  1. Ask for a pay raise

The most straightforward way to accumulate more money is to make more money, so try asking for a pay raise. Many people shy away from asking for more money, but you shouldn’t.

You’ve surely had days at work when you think to yourself “I don’t get paid enough for this.” Well, you’re probably right and your boss probably knows you’re right. Appraisals and progress meetings are the best opportunity to bring up a pay raise.

  1. Buy in bulk

Buying in bulk doesn’t necessarily mean buying food in enormous quantities at Costco. Think about other recurring expenses, including travel. If you use public transport to commute to work, check to see if there is a monthly, seasonal or annual travel pass. You’ll be making savings every time you travel without having to conjure up any willpower whatsoever.

Similarly, if you like to get massages or other salon services, you can usually buy a package of 4 or 10. While the bulk price tag might look hefty, you’ll save money in the long run if you’re a regular customer.

  1. Move to a new neighborhood

If you live in a metropolitan area, the difference in rent by neighborhood can be astonishing. A property just a mile away might be hundreds of dollars per month cheaper for comparable floor space. Over the course of a year, you could invest thousands of dollars that would have otherwise gone to your landlord.

If you rent it’s likely that you are used to moving anyway, so consider what is actually important to you in a property. Is it square footage? A home office? A backyard? A dishwasher and gas stove? Compare the different areas with your criteria in hand and consider a cheaper property that meets your needs. If you cut your rent bill, you’ll save money every day just by living there.

  1. Review all of your financial products

Oddly, the public perception of and insurance companies is that they are not a company selling products. And yet, they offer different rates and incentives for things like credit cards and mortgages.

If you’re not using all the bells and whistles of a service, such as the rebate options on a Visa credit card, you might be paying more for something you don’t need.

Review your credit cards: Look at the interest rate you currently get and see if you can get a better deal by switching to a new card at a lower rate or an initial 0% interest rate. If you call your credit card company and tell them about your intent to switch to a new card (and mean it), they may offer you a better rate.

Look at your life insurance coverage and consider whether you really need to be insured for as much as you are. It’s very comforting to think that you have a policy worth millions but does your family really need it? It’s financially responsible to protect your family against the worst, but be careful not to overprotect them with an expensive policy that drains you of your resources when you’re alive.

Saving doesn’t have to be a daily sacrifice. By taking action just once you could be making big savings in the long term — and you don’t necessarily have to cut back or change your lifestyle to do so.

 

*If you’re not a coffee drink, substitute your own personal indulgence here.

The man who bought a $30,000 couch

The man who bought a $30,000 couch

by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management

Lust:

1. : personal inclination: wish

2 : an intense longing: craving

We live in a consumer society, and lust is a powerful motivator.

There is something very virtuous about saying no to something you want NOW and putting off your desire to have it.

The Stanford marshmallow experiment provided interesting insight into the merits of delayed gratification. The marshmallow experiment was a series of studies on delayed gratification in the late 1960s and early 1970s led by psychologist Walter Mischel. Mischel and his team placed a number of children alone in a room at a table with a marshmallow in front of them. They were instructed if they did not eat the marshmallow, but could wait until the tester returned, they could get two marshmallows.

The agonizing period of time was about fifteen minutes. About one third of the children could delay the satisfaction with hilarious tactics to witness: talking to themselves, sitting on their hands, singing, etc.

The remaining two thirds simply could not withstand the temptation and plunged into the sweet and chewy lone marshmallow.

The fascinating piece of this study came years later when scientists followed up years later to see what had happened to these children. In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures.

I often mention this study when talking to younger people and their money. The things you can do now to set aside funds can have so much greater influence on your options and net worth than if you were to upgrade to a fancier car, better apartment, or newer IPhone.

One example I remember from a friend of mine, when I was working at an investment bank in the early 90’s. Like many companies, our firm would give options or shares for being dutiful employees.

My friend and his wife wanted so badly to buy a $1,000 couch to match their apartment’s drapery and painted walls. With very little available cash, he sold off some of their available company shares he had accumulated. It was only about 18 months later that the stock of our company rose by a factor of 30.

Long after they moved from that small apartment, he refused to sell or trash this now faded and threadbare loveseat. He would, in a humble manner, lead guests down to the basement’s TV room and ask them if they would care to sit on a $30,000 couch.

This is not say one should live like a monk. But, if you sense you may be that child who would dive into the single marshmallow to have immediate satisfaction, keep this in mind when you find yourself rationalizing your next purchase.

And consider investing that same amount instead.

The stock market averages 9 percent returns. The average investor averages just 5 percent. Here’s why.

by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management

Here’s an astonishing fact:

Between 1928 and 2014, the average return of the S&P 500 was 10 percent per year. The average returns for investors with money in the market over that same timeframe was just 5.02 percent.*

That’s an incredibly poor average performance given the performance of the market over the same time frame! Why do investors leave so much money on the table?

bar-chartIn one word, emotion. Fear and desire take over the frontal cortex of even the smartest people I know and drive decision making when the market is at an extreme.

When the market is hitting new highs week after week, it’s easy to start checking your 401k two to three times a week while dreaming of an early retirement. It’s at this point in the cycle that people begin to buy more and more stock. And yet, these are the times when people should be selling some of their holdings or, at a minimum, rebalancing to a slightly more conservative portfolio. (When you’ve made a lot of money, it’s better to convert it into a form that will hold its value over time, whether that’s hard cash or shares that historically stay steady over time.)

At the other end of the curve are those times when the market has been decimated, and you should actually be adding to your holdings. (It’s like a clearance sale, in a way. When the price drops, buy!) Instead, the typical behavior in a struggling market cycle is to leave your portfolio statement unopened, tucked into drawer, and clinging to the dream that it will one day all come back. This isn’t actually a bad strategy either, as the stock market historically rebounds after a drop, given enough time. The people who stay in hiding are lucky people. Most people, eventually, will crack and sell out for cash.

In other words, most people in charge of their own mutual funds, driven by powerful emotions and good intentions, buy high and sell low. And by waiting for the market to recover before buying again, people miss the fastest growing days of the market.

Remember this: Over a period of years, it is not about “timing the market” but rather “time in the market.”

Depending on what decade you are looking at, the historical returns of the market can be between 8 to 11 percent. Those numbers are a seductive call to move into the market, but the reality is very few people achieve these returns because they thwart their own success by trying to time the market.

There are two primary things you can do bolster yourself and your finances:

  • Brace yourself and commit to buying more when the market drops and leaving your portfolio alone (or rebalancing to a more conservative portfolio) when the stock market soars.
  • Work with a financial adviser who can help you make the best decisions given the inevitable dips and swells of the market.

We provide the latter service, of course, and we’d love to work with you to set up a portfolio. Either way, keep educating yourself about finances so that when the market swings, you operate from a place that is logical and informed. We’ll be posting educational material here on a regular basis to help you out.

*Data based on the 2014 DALBAR Qualitative Analysis of Investor Behavior report

When your relationship starts to get serious, have the money talk

by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management

It’s complex enough for one person to figure out how to manage their money (and where!). When you decide to commit yourself to a long-term relationship or marriage, the complexity doubles and things get interesting.

It’s been fascinating to watch over the 30 years as I’ve counseled couples on their life goals, financial stresses, hopes, dreams, layoffs, educational accounts, vacation, and first and last homes.

No matter how long a couple has been together, their original “familial DNA” will bubble up. Everyone is brought up with a different relationship to money, and those patterns stick.

Some people’s history is best described as: “Well, we never had any money, but gosh, it was always talked about. How much everything cost, what we would do if we could, and so on.”

And others might say: “We always had enough for anything we wanted, but we never spoke of money.”

From my vantage point, it is almost a therapy session to then get two well-meaning people together on the same financial page to manage a life together, including possibly raising children. Each comes to the table with a deeply seeded feeling on finances, a topic that is one of the top three causes for divorce. (For many reasons, such as when one person’s spending grows out of control and causes anxiety and tension in the relationship.)

I say therapy, because like all relationship issues, it comes down to communication and honesty. There can be some real resentment, grown over time and deeply buried, which only emerges, and sometimes in an ugly way, when challenged.

It is a lot easier to move through the inevitable rough spots in life if both people have a better sense of where the other is coming from. I tell people that having the money conversation is the first investment to make in one another in order to really start out as a united front. It will pay great dividends in the future.

CNBC put together a helpful list of topics to talk through that can help you get started, which you can read here.

Automatic Advisory

The Valley of Death

Valley of Death for the Average Investor and the Financial Services Industry.

category- Automated investment platform
by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management

To financial advisers, it’s no secret that the financial services industry has been retooled and refabricated ever since the deregulation of commissions on May 1, 1975. (Read more about the deregulation here.)

On that day, the industry become bifurcated with a young upstart named Charles Schwab who was the first to offer discounted trades without any frills. The playing field suddenly was separated to into two camps:

  • High service + High cost
  • Low service + Low cost

This event sparked industry innovation and served as an introduction of Wall Street to Mr. and Ms. Common Person. For people who did not have enough money to make their finances worth a financial advisor’s time, they now could get in the game.

This is terrific, but all too often this sort of setup turns a whole new market into unsuspecting targets when the market’s party is about over.

It’s usually the new investor who is the last person sitting at the table when check arrives after a long evening of eating and drinking. This is not to say all DIY investors are left with the bill every time, but all too often the wealthier people are home and long asleep when the lights start to dim and the waiter is looking to leave — if you’d just pay the bill already.

Up to this point, it would be common for institutional money managers and brokers to demand a minimum of $250,000. Recently, a number of retail brokers have raised this minimum to $500,000.

This sort of division leaves a lot of people dependent on themselves, various guidance on the web, friends at work and general gut reactions to make pivotal decisions.

This place between having enough money for some real attention and being left to your own devices is what I call “The Valley of Death.”

If you can make out of there by gathering enough assets you can grasp some help and access to professional knowledge, intellectual property and know-how. Otherwise, you can be left figuratively staring at a waiter while searching for your credit card or literally wondering what just happened to your 401k, house savings or child’s education account as happened to many people in 2000 and 2008.

Thanks to technology, there has been another bifurcation within the Low cost/Low service segment. Technology now provides the scalability to deliver a sound and accurate portfolio at a nominal fee.

The technology route is called “automatic advisory” or “robo advisory.” The magic of this option is it allows for frequent rebalancing (ask your broker to do that with your $5,000 account!), uses Exchange Traded Funds ETFs (a cost-conscious  move), and if you care to, allows you to set automatic monthly contributions to help keep you on track.

These elements seem small, but when employed can have a large impact on your long-term results. While the investment world initially started out as the Haves and the Have Not’s, you now can get much of these benefits without having an extra $250,000 laying around or paying the full bill.