When Overconfidence Hurts
There are times in our lives when being confident is a good thing. But there are situations where being overconfident can hurt, especially when it comes to investments. Psychologists have studied confidence, and how it relates to previous knowledge we have. During the study, they asked questions that would require a range of answers based on previous knowledge such as “how long do you think the Nile River is; 20 miles, 50 miles, or 100 miles long”? What they found was that the participants of the study were more often wrong then not! Expecting only a small percentage of incorrect answers to their study’s questions, the reverse happened where only a small percentage of participants were right in their answers! They termed this phenomenon the overconfidence effect. The overconfidence effect also applies to forecasting, such as the stock market’s performance over a year, leading one to being overconfident that their predictions will be accurate. Interestingly, the study found that people that are believed to be ‘experts’ in their field of study (or experiences) will suffer from the overconfidence effect more than the average person. They actually believe the incorrect answer is right.
When thinking about investments, being overconfident can hurt us by making us believe that we are more knowledgeable than outside sources. Other people with knowledge pertaining to investments, such as financial advisors, could help us make better decisions. The overconfident investor tends to trade too often, cost themselves more money, and sets the stage for poor performance over time by picking investments that are not aligned with their goals. They tend to believe they are outperforming in the stock market in comparison to others, which tends to be inaccurate. The study also found that overconfidence effect is more prevalent in men than in women; women tend to not overestimate their knowledge as much.
To overcome being an overconfident investor, discussing your investments with a financial advisor in Las Vegas may help. Setting goals, diversifying, and working toward your goals over time and not just in the short term can change the outcome of bad decisions being made due to being overconfident. Confidence is not a bad thing, but getting a second opinion on what is truly happening with your investments and not what you perceive to be happening is never a bad idea.
Transferring Wealth Through Estate Planning
Transferring Wealth has no ‘right or wrong’ way of doing it, but is best done in the way that you prefer, and you consider how it will affect your heirs. Planning to transfer assets should involve more than one professional as you develop and plan for transferring wealth. Always include an attorney, tax professional, and your financial advisor so that everyone involved can explain benefits and consequences to your heirs and your surviving spouse, if still living. No one solution works for every family. With 2016’s tax exclusion at $5.45 million per individual estate donor ($10.9 million per couple), you don’t want your giving to result in financial consequences for your heirs.
You want to regard your wealth transfer as ‘leaving a legacy for others’ which includes protecting others while you pass on your values and financial dreams for them. Some people consider transferring wealth to benefit their children and their children’s children, and if the wealth is great enough, endowments can be created to benefit many people. The complexity of the wealth transfer increases with the number of people it is being created to benefit, and the length of time you want the assets to last. Wealth transfer may become complex due to the personalities of the people it benefits, just like a family can be complex due to different personalities.
Important things to consider are how much control you want to have prior to passing, understanding issues that can arise from not equally distributing assets among family members, and if part of the estate should start to be transferred now and the remainder at death. Transferring wealth through estate planning should not be a ‘quick decision’ decided in only one appointment. Not considering all outcomes and how it will affect all heirs can be costly, as well as lead to relationship consequences.
Once you’ve created your estate plan talk to your family about it. Invite open dialog, and invite their questions while appropriately answering them. Help your family understand the reason behind your decisions, but don’t be swayed by your decision to be generous if not all members agree with decisions. Letting them know the resources for information that helped you to your plan many times eliminates concerns when family members know you consulted legal, tax, and asset professionals. You may not choose to disclose certain information regarding the wealth transfer, which is your decision. Informing family members that there is an estate plan in place many times eliminates concern regarding asset transfer.
The Value of Planning
Planning is valuable for many reasons and helps to ‘normalize’ things when you find yourself in the middle of an unexpected life event. A death, job loss, new family member, an inheritance, divorce, or a catastrophic event that can cause a major financial detour. How you plan will help determine how you survive and normalize after these events.
Planning can be as simple as making sure you have the right insurance coverage, from personal to property insurance. All insurance is in place to offset risks and protect other assets that you’ve worked hard to accumulate. Another step in planning is to make sure you have a will in place if something happens to you so that your loved ones know you want things taken care of.
As strange as this may sound, some people even go as far in their planning to offset risks to their financial plan if they go through divorce. Financial advisors are working with couples to plan for the life event of going through a divorce to help plan for offsetting financial risks of saving and planning for one! Not all people plan for the ‘what if I become single again’ risk and may find themselves unprepared for income and savings being decreased.
With life’s constantly changing events, you may need to reassess your goals and plans for achieving them. Are you on track for retirement if any of the above circumstances happen? Does your portfolio strategy reflect sudden life changes? In working toward your financial goals it is possible to run scenarios to see the outcome of life events and the possibility of how it may affect you. If you get detoured by a life event, or even a bad investment decision, planning (and previous planning) helps you to recover sooner to what felt ‘normal’. We all know life can be messy, and what you do now can help make the difference for what may happen later. No one can predict the future, but it helps to prepare ourselves as much as we possibly can.
Planning for all types of events is valuable. If you would like to visit regarding planning for potential risks to your retirement plan, please contact our Las Vegas office to set an appointment.
Money Market Reform
One of the last reforms to happen after the financial crisis fallout of 2008 is Money Market Reform, implemented in October 2016. Money market funds have at times been misunderstood by investors as a ‘safe investment’ during times of financial crisis. The reality is that money market funds are traded in the same manner as other securities. There is no ‘safety net’ or ‘guarantee’ your investment in a money market will not lose value. Money Market funds took a hit during the financial crisis just like the rest of the stock market did. Reform of money markets? Here’s why:
Money Market Funds managed by the Reserve Primary Fund prior to 2008 were at a fixed $1 NAV (Net Asset Value). When the market started to drop and investors started liquidating Money Market funds because their value had dropped below the $1NAV, mass redemptions started taking place, causing a loss of more than two thirds of the value of the fund in 24 hours.
Now, eight years later the SEC (Securities and Exchange Commission) has issued new rules for the management of money market funds to help with stability and restrictions on the fund’s holdings and liquidity requirements. These money market funds now have a ‘floating’ NAV, no longer a fixed NAV.
Secondly, fund providers are now required to impose ‘liquidity fees’ in an effort to deter a liquidation run on a money market fund that is triggered when the fund’s value starts to drop. Fees can range from 1-2%. Funds can also suspend liquidation of the fund for up to ten business days in a 90 day period in order to deter mass liquidation.
Who may be affected by this new ruling? Retail investors may not see any changes since retail money markets still maintain the %1NAV, although there may be liquidation stipulations. However, investors in 401k plans will see changes as institutional funds are subject to the new rules. Most of the money market funds inside these plans will switch to US Government money markets which are not subject to the floating NAV. Those investors seeking a ‘higher return, higher risk’ money market will have to invest outside of their 401k plan as many plans will be switching their money market option to another solution, or removing money market funds completely.