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Biases Can Drive Your Investment Decisions

The Discerning Investor by by Julie Jason
by Julie Jason
The Discerning Investor | September 18th, 2020

Have you made an investment decision during the coronavirus market that you regret? Perhaps you sold out of your stock investments or stock mutual funds in March when news headlines were dire?

On March 21, Bloomberg reported the following:

-- New York City Mayor Bill de Blasio said: “This is the beginning of the crisis. It’s going to get a lot worse before it gets better.”

-- James Bullard, president of the Federal Reserve Bank of St. Louis, predicted U.S. unemployment could hit 30% in the second quarter, and the gross domestic product could plunge 50%.

Meanwhile, the stock market (S&P 500) was rapidly declining -- a nasty fall of 32% over a matter of weeks from the peak of Feb. 19.

That was March 21. Did you react? Did you sell?

Only a few days later, on March 23, the decline stopped. Since then, the S&P 500 rose dramatically (through press time, Sept. 17) by over 50% from the bottom.

What moves some to sell and others to stay the course?

Some point to behavioral biases.

“Our minds take shortcuts when we make decisions. ... Usually, these shortcuts are for the better: They help us react quickly, and they help us manage the thousands of decisions we make every day. There are times, however, that mental shortcuts lead us astray -- that’s when they become biases.”

The above quote is an introduction to a report by Morningstar, a global financial services company, titled “Bursting Biases in Volatile Times: A Behavioral Checklist for Investors Facing Turbulent Markets” (tinyurl.com/y2wecpvk). The following are the six points in the checklist:

Get to know your biases

“Research shows that understanding our biases can help us spot them in our decisions,” the report says. That’s a point well made, but it does take some homework.

Turn down the noise

“When volatility hits, you may want to create a modified schedule (of when you listen to the news), but still keep it calm and moderate -- maybe make a rule that you can only catch up on the news once at the end of the day, or even once a week.”

Another good point. And I’ll go further: Use the news to enhance your knowledge, but not to trigger an action.

Create speed bumps for decisions

“Sometimes, the only thing we need to make a good decision is time. But it can be tough to slow down when our emotions are running awry.”

Agreed. Emotions should not rule.

Reconnect with your goals

“If you start feeling anxious about your finances, take a break from day-to-day market performance and check in on your financial goals.”

This step is the most important, from my point of view as a professional money manager. Behavioral economics tells us that shortcuts come into play when we are faced with uncertainty and are without a plan.

Any good financial plan needs to include what to do in a market meltdown. For example, retirees who depend on their investments for income need assurance that they can hold steady during a declining market. Part of the plan can be as simple as setting aside a cash reserve for such times, to protect against having to sell positions during a market decline.

Be your own devil’s advocate

This point is also helpful in slowing down an emotional reaction. Argue both sides before taking any action. That is, ask yourself to state the reasons for selling an investment (the market is going to zero) and the reasons why you might want to buy that same investment (fundamentals are strong and the price is right). That exercise might give you a different perspective, revealing the logic behind a decision before taking action.

Thoughtfulness matters

“It’s extremely hard to stay calm and wait out the storm when your portfolio’s losing value -- we all have a tendency toward action. Don’t suppress this urge; redirect your efforts.”

Look at the opportunities that the current market might offer. To read more on behavioral finance, go to juliejason.com/columnist/resources.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

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COVID-19Money
life

401(k) Day Is a Reminder to Save for Retirement

The Discerning Investor by by Julie Jason
by Julie Jason
The Discerning Investor | September 11th, 2020

During this pandemic, you’re probably not thinking about celebrating 401(k) Day, especially since it occurs on the first Friday in September after Labor Day, which happens to be 9/11 this year.

But, let me tell you why you should.

Every year, National 401(k) Day, which originated with the Plan Sponsor Council of America, reminds everyone to do a personal checkup, just like New Year’s Eve reminds us to plan for the new year.

Think about these important questions: Are you participating in your company’s 401(k) plan? Are you taking full advantage of your company’s matching contribution? Are you maximizing your salary deferral? If you just started working at a new job, have you checked out eligibility requirements?

Everyone who works for a company that sponsors a 401(k) plan needs to know the answers to these questions. You owe it to yourself to participate and maximize the benefits your plan offers. If you are just starting out, my best advice is to contribute to your 401(k) as soon as you become eligible.

There is simply no better way to save for retirement. First, it’s easy to do: set up a salary deferral through payroll deductions. You won’t need to think about it again after your deferrals are in place.

Second, review your tax withholding allowances to consider reducing your withholding. By doing that, you can keep your paycheck as high as possible even though you are saving money. The rationale behind this move is this: Your salary deferral is not subject to income taxes; in fact, if you look at your W-2 after enrolling, you’ll see your taxable income decline by the amount of your salary deferral. The deferral is not reported as taxable income on your W-2.

Third, select your investment options from a menu that has been chosen for you by the sponsor of your plan, your employer. Your plan may offer target-date options that simplify investment choices -- just choose the plan that matches your age.

Last, but certainly not least, take the advice of Laura Dobbins, one of three 2020 winners of the 401(k) Champion® Award, which my company (Jackson, Grant) and I sponsor annually (see tinyurl.com/y25v5h4g).

Laura started saving small amounts of money through her 401(k) at work when she was 23; 18 years later, her 401(k) had grown to more than $300,000. What would her future retirement be like if she hadn’t started at 23? “More than likely I’d be working well into my 70s, living in a small apartment on a fixed income with no room to splurge on things I enjoy. ... I want that time of my life to be my best years, not my worst.”

Take some time now to do a personal financial checkup. It’s an investment in your future retirement.

On another note, if you are interested in learning how to set objectives to meet your personal goals through saving and investing, join me for a virtual presentation, “Investment Basics I: How to Set and Meet Investment Objectives,” on Friday, Sept. 18, at 10:00 a.m. EDT, sponsored by the Greenwich Library. To register, go to tinyurl.com/yyxmjytw or contact Yang Wang, 203-622-7924, ywang@greenwichlibrary.org.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

MoneyAging
life

Are Seniors in Your Family Being Scammed?

The Discerning Investor by by Julie Jason
by Julie Jason
The Discerning Investor | September 4th, 2020

It seems that seniors will never get a break. Fraudsters continue to prey on them with all sorts of scams. If you have a senior in the family, there’s no better time than now to talk about just a few of the tricks that most people -- of any age -- may not be aware of.

Take this example: You get a phone call from the IRS. You check your caller ID to make certain it’s not a scammer, and sure enough, the caller ID confirms that the Washington, D.C., number that is calling is the IRS. You take the call. The “IRS” warns you that you will be sued and/or arrested if you don’t pay your “tax bill” (usually by wire transfer or a prepaid debit or gift card).

Or, you receive a letter congratulating you on winning $1 million. To claim the jackpot, you’ll need to send in a small processing fee.

The Justice Department investigates such frauds. The first example is possible with technology that tricks your caller ID with a fake phone number. The second example is a longtime scam; it just won’t go away.

But fraudsters are being caught. For example, earlier this week, four people were charged with “defrauding thousands of elderly and vulnerable victims.” The fraud? Mailings of prize notices that requested money be sent in order to “win” a bigger payment. The charge? “[C]onspiracy to commit mail fraud and multiple mail fraud and wire fraud counts for running a fraudulent mass-mailing scheme that tricked thousands of consumers into paying fees for falsely promised prizes.” The National Council on Aging has put prize scams among the top 10 financial scams targeting seniors.

What’s the likelihood of being approached with a potential scam? You tell me. Have you received spam emails? A safe guess is “Yes, indeed.”

What you need to know is this: Federal authorities are very much aware of the threats, and they are pursuing ways to inform seniors of the dangers. According to a Justice Department Agency Priority Goal Action Plan from July of this year, every U.S. Attorney’s Office (USAO) will be conducting elder fraud outreach. The goal is to provide a “channel through which comprehensive elder fraud prevention and disruption messaging can flow to local communities.”

What can you do now? Be alert to potential scams. A good start is the Federal Trade Commission’s “10 Things You Can Do to Avoid Fraud” at tinyurl.com/y4ogmptd. Also, the National Council on Aging has “8 Tips for How Seniors Can Protect Themselves From Money Scams” at tinyurl.com/ycmk7rud.

You can stay informed about scams by receiving alerts from the Federal Trade Commission via email. Go to ftc.gov/scams to sign up. And if you are a victim of a scam, you can report it at ftc.gov/complaint.

In March, the Justice Department launched the National Elder Fraud Hotline to report potential scams. The number is: 1-833-FRAUD-11 (1-833-372-8311). According to the department, “Reporting can help authorities identify those who commit fraud, and reporting certain financial losses due to fraud as soon as possible can increase the likelihood of recovering losses.” The hotline is staffed seven days a week, from 6:00 a.m. to 11:00 p.m. EDT. Don’t hesitate to report.

As Attorney General William Barr said in his remarks at the White House in June, “Studies show that older Americans are sometimes embarrassed to report fraud, but they should not be. The sooner fraud is reported, the better the chances of catching the perpetrator and recovering the victim’s money.”

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

AgingMoney

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