Patrick

About Patrick Eng

This author has not yet filled in any details.
So far Patrick Eng has created 44 blog entries.

Avoid the Behavior Gap

avoid the behavior gap

I’ve been a big fan of Carl Richards, the New York Times Sketch Guy and financial planner, since I stumbled upon his work in 2009. His illustrations and insights are both simple and impactful when it comes to investment and planning concepts. A great example is the Behavior Gap.

Financial research firm DALBAR produces the Quantitative Analysis of Investor Behavior (QAIB) report annual; it has been the nation’s leading study on investor behavior for 27 years and has shown a consistent and regular outcome regarding stock market returns and average equity fund investor returns. Though the numbers may vary from one year to the next, the clear and critical message holds true – investment returns are consistently greater than investor returns. This difference is what Carl Richards has termed the Behavior Gap and shows clearly in the sketch below.

Behavior GapWhy does the gap exist?

The typical stock market investor, unfortunately, buys high when things are going well and sells low when the markets drop. This behavior causes the gap in long-term returns.

Another one of Richards’ sketches (below) illustrates the unfavorable pattern that causes the Behavior Gap. It depicts what happens when we allow emotions, such as greed and fear, to take over the decision-making process for our portfolio. This pattern leads to the type of underperformance that many average investors experience.

As the sketch suggests, making rational decisions about our investments is not automatic for most people, especially in volatile markets. It takes a certain mindset or temperament, along with a well thought out investment plan to avoid this situation.

Behavior Gap cycle

Sketches and Behavior Gap © Carl Richards
By |2022-03-11T09:50:53-07:00March 28th, 2022|Investing|

Teaching Kids Money Concepts

teaching kids money conceptsTeaching kids money concepts is easier with The Four Money Bears. A book review by Patrick Eng.

I was recently introduced to a book called The Four Money Bears, by Mac Gardner, a Certified Financial Planner practitioner based in Tampa, Florida.  He created it to help teach youngsters (ages 5 to 10 years) about money. It’s a charming story, and a great way to begin money conversations in any family. Grandparents can read this book to their grandkids, and parents can use it to introduce financial concepts to their children at an early age.

Gardner uses the four money bears – Spender Bear, Saver Bear, Investor Bear and Giver Bear – to teach kids about the four primary functions of money. Each has their own strengths and weaknesses; and, as such, they cannot be successful on their own. By working together to create a game plan (budget), they can all be successful.

Reading the book as a family is a great way to discuss the many uses of money and learn how to view each in a healthy way. You can go online at www.teachkids.money to learn more.

Teaching kids money concepts with The Four Money Bears.

The Four Money Bear Rules:

  1. Spend Cautiously
  2. Save Diligently
  3. Invest Wisely
  4. Give Generously
By |2022-01-13T09:02:20-07:00January 31st, 2022|Books, Financial Planning|

Your Investment Policy Statement

Have you ever wondered why we at Perspective Financial Services have annual reviews and discussions about your Investment Policy Statement (IPS)? A well-written, up-to-date IPS is a powerful communication and planning tool, with three key benefits:

  1. It allows you and your advisor to discuss and document your goals, as well as your tolerance for investment risk, to create an effective investment strategy and asset allocation.
  2. It helps clarify how and why your portfolio’s investment mix determines its performance over the long-term. (The chart below offers a good visual regarding why asset allocation is so important.)
  3. It enables you and your advisor to periodically re-visit your goals and strategy, to ensure they remain appropriate to changes in your life and needs.

An Investment Policy Statement (IPS) is a document prepared by an investment manager and their client. It states the goals and the strategy for how to reach those goals through a specific investment mix agreed upon by the client and the investment manager. It’s prevalent within the institutional investment management space and is becoming more so at the individual or retail level. Perspective Financial Services has utilized the IPS for its clients since Mike McCann founded the firm in 2003.

Your Investment Policy StatementCall or email your advisor if you have any thoughts or questions about your IPS. We’re happy to go over it with you any time.

 

By |2021-12-02T14:05:37-07:00January 3rd, 2022|Financial Planning, Investing|

Aligning Investments and Values

aligning investments and valuesEven before the 1971 founding of Pax World fund – the first socially responsible mutual fund in the United States – many people have wanted to make a difference with their dollars. The question remains, is there a practical way of aligning investments and values?

In the early days of socially-responsible investing (SRI), most of the strategies revolved around excluding “sin stocks,” primarily those associated with alcohol, tobacco, and gambling. The list of exclusionary stocks grew in the 1980s, adding oil and gas companies in the wake of disasters like India’s Union Carbide gas leak and the Exxon Valdez oil spill.

SRI has since evolved into an inclusive investment strategy with active management and deep research into companies that claim to be good corporate citizens. The emphasis is now on investing in companies with high marks for environmental issues, societal responsibility, and corporate governance (ESG).

The idea of influencing positive change in society through our investments is a noble pursuit. The premise of developing an ESG framework to analyze how a company measures up against its peers can provide a more holistic understanding of a company to complement its financial data.

There are obstacles, however, to obtaining good ESG data. Many companies are reluctant to add more data to their already long list of legally-required reporting and disclosures. Another problem is “greenwashing” – using public relations and advertising tactics to convey a more environmentally-friendly and socially-conscious image than is accurate. Plus, a standardized ESG rating system doesn’t exist; environmental issues, societal responsibility, and corporate governance have different weightings and levels of importance in each industry and to each investment analyst.

Historically, well-run companies with a holistic operational approach have always been a good long-term investment. As more companies begin to disclose accurate ESG metrics that can be more-rigorously applied to the investment process, companies with good ESG scores will ultimately attract investment dollars and prosper.

By |2021-11-09T08:51:56-07:00December 6th, 2021|Current Affairs, Investing|

Win the Retirement Race

Eng-WEBA 401k account through your employer is one of the best tools to use for retirement savings. It’s an investment account that allows your money to grow tax-deferred or, in the case of a Roth 401k, tax-free. It can help you win the retirement race.

These retirement savings accounts make it very simple to put your saving and investing on auto pilot. It even gives you options to rebalance your investment portfolio on a regular basis.

If you’re just starting out and have less than $50,000 in your 401k, a target date retirement fund is a simple option. These funds “target” your retirement year based on your age and invest accordingly; the investment vehicle provides a diversified portfolio all-in-one fund using a variety of stocks and bonds. They’re professionally managed and therefore require very little monitoring.

As your account balance grows, you may consider adding more funds to the mix.

How many years before retirement?

Your time horizon calculates how long you will be investing and when you want to retire and begin withdrawing money from your account. It’s a key factor in how and where you invest. In general, the longer amount of time you have, the more aggressive you can afford to be and the more stock market volatility you can withstand.

Many young people believe they need to be “safe and conservative” with their retirement accounts. Really, the opposite is true. Investors in their 20s and 30s can afford to take some risk with an account they will not use for 30 or 40 years.

How comfortable are you with risk and stock market volatility?

Even if you’re young and have a long time-horizon, you may find watching your retirement account bounce up and down to be unnerving. In that case, a more conservative strategy makes sense. You can add bonds to your investment mix to help bring income and stability to your portfolio.

Either way, staying invested in the market – rather than jumping in and out, and trying to time the markets – is a key to long-term success. Think of investing is a marathon, not a sprint, if you want to win the retirement race. Even after you retire, keeping investments in the stock market will help your money continue to grow and outpace inflation.

Win the Retirement Race

 

By |2021-10-12T10:39:00-07:00October 12th, 2021|Retirement, Taxes|