When a new client who had recently received an inheritance opened up an account with me, he transferred this new portfolio from a well-known brokerage firm. After the transfer was completed, we sat down to review his current holdings and adjust the portfolio. Some of the client’s stocks were showing large losses. However, he explained that since he had received them as an inheritance, he felt awkward about selling them. He felt attached to them and didn’t think they should be sold. He then said that as he realized that such attachments were not beneficial to investment, he was going to wait for them to move back up to the price for which his recently deceased father had bought them. Then, he would sell them.

This is a very common scenario. Children often refuse to make changes to a portfolio that they have received as an inheritance. Very often, this is due to sentimental reasons. In other cases, investors stick with a losing position for years in the hope that it will return to the original price they paid for it. However, this is not the best approach to investing.

We All Make Mistakes

Sometimes you may have a little extra money at your disposal, and you decide to invest it. Maybe a friend gave you a handy stock tip, or you read about a company that sounded like an interesting prospect. After doing some research, you decide to invest in this company because it seems like an obvious winner.  But when you receive your first statement, you see that the stock has dropped. So you decide to follow the policy of being patient. As time goes by, you keep checking, but the stock keeps dropping. Eventually, you become living proof of the old adage that patience is a virtue. The stock market may be moving up, but you are stuck with a loser.

In fact, chances are that if the stock starts dropping by 10, 15 or 30 percent, there could be problems with the company, and it may potentially pay to sell. However, many of us find it psychologically difficult to admit that we have picked the wrong stock. It’s hard for us to say that we made a mistake.

Opportunity Cost

Very often, the longer you hold onto an under-performer, the more money it costs. The reason for this is that the investor could have put his funds into something that actually made money. Therefore, stubbornly holding onto a losing stock will only cause financial harm to the investor. In economics, this situation is referred to as opportunity cost. Opportunity cost is defined as the cost of an alternative that must be forgone in order to pursue a certain action, or the benefits that could be received from taking an alternative action.

Profit from Losses

Never think that all is lost. Some good can actually be derived from losing stock positions. When the position is sold, the investor realizes the loss, which may have certain tax advantages. The loss can be used to offset other gains, thus lowering the tax bill. In fact, although they may not realize it, for many investors tax-loss selling may be the most important way to reduce their tax bill. If done correctly, receiving the appropriate advice before making any trades, it can save the investor money and help diversify the portfolio in various ways.  

Working with licensed and experienced financial advisers can help you evaluate objectively whether you are holding bad positions. It is then worthwhile working with an accountant to create a tax-efficient portfolio. Many professional investors live by the credo that you should ride your winners and dump your losers. The reason is simple. There may be a reason why the stock is performing poorly, namely, that the company is not executing their business up to its potential. This indicates that is probably a good place for you, the investor, to avoid putting your hard-earned money.

There is a good chance that the relative that left the money for you as an inheritance would like you to gain from it. Speak with your financial adviser to see if your newly inherited portfolio matches your investment goals and needs and whether it is invested in an efficient manner.

Aaron Katsman is President of Global Investments at Profile Investment Services.  He is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the U.S. Securities are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, SIA. For more information, go to www.profile-financial.com  or email aaron@profile-financial.com 

For the past nine months or more, most business news reports will tell you that the global stock markets are down again. However, although the media tend to play this up, it is in fact nothing unusual. Generally, though past performance is no guarantee of future returns, markets have a few good years, followed by a less-than-stellar year or two. For example, in the current market cycle, there were four or five good years, and now the markets have dropped. That’s precisely why investors in the stock market need a long-term horizon, as well as to be able to withstand all of the market ups and downs. Below are three investing tips that may help investors remain sane during market downturns:

Diversify
To understand this concept more easily, we first need to define the meaning of diversification. Diversification is an investment technique that uses many varied investments within a single portfolio. The idea behind it is that a portfolio of different kinds of investments may, on average, yield higher returns and pose a lower risk than a single investment. Diversification tries to smooth out volatility in a portfolio caused by market, interest rate, currency and geopolitical risks. In laymen’s terms, don’t put all your eggs in one basket. It’s important to remember that diversification does not assure against a loss.

If you include bonds or FDIC-insured Certificates of Deposit (CDs) in your stock portfolio, it may take away some of the volatility of the portfolio, allowing for potentially, more stable returns over the long run.

Don’t Panic
Keep you eyes glued to your long-term goals. It’s important to remember that markets go up and down, and if you made a financial plan, it would have taken this type of market volatility into account. The worst thing you can do as an investor is panic and sell everything and then wait for the market to recover. The market tends to recover very quickly. Large market gains often come about in quick and unpredictable spurts, and missing just a few days of strong market returns can substantially erode long-term performance. Remember the famous investing principle of buying low and selling high. Investors who panic often end up selling low.

Rebalance
The third principle is for investors to update or rebalance their investment portfolios.  Rebalancing is necessary for two main reasons. First of all, it keeps your asset allocation in line with your risk level and, secondly, it keeps your portfolio in line with both your short- and long-term goals and needs.

Let’s use the following example: When you first decide to invest, you decide that an allocation of 70% stocks and 30% bonds seems right for your $100,000 portfolio. We can also assume that over the course of the past few years, the stock market moved up strongly, and bonds barely moved up at all.

Based on the assumption that all gains and dividends were reinvested, and you didn’t deposit or withdraw any money, you would find that the stock portion of the portfolio would be worth a lot more than the initial $70,000. On the other hand, your bond holdings would be worth little more than the $30,000 invested in them.

However, while it is true that over the last few years your portfolio in this case would have grown, it would unfortunately have also become riskier. The reason for this is because the portfolio would move from being a 70% stock and 30% bond allocation to an allocation of 80% stocks and 20% bonds.

In this situation, if you don’t rebalance and you have a riskier portfolio, when the market starts to drop, this could lead to a greater loss.  It is a good idea to implement these three tips, as they are a possible means to help you weather the storm of volatile markets.
Past performance is not a reliable indicator of future results. The S&P 500 index measures large-cap stocks and US stock market performance of leading companies in leading industries. An investor can not invest directly in an index.

Aaron Katsman is President of Global Investments at Profile Investment Services. He is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the U.S. Securities are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, SIA. For more information, email aaron@profile-financial.com

Very interesting post over on grownchildren.net (what a great title, btw).  The gist of the post is the importance of having “The Chat” with your kids.  I’m squimish when it comes to discussing adolescence but for some reason, I find financial discussions to be easier.  Not so for most people.

So, it got me thinking about 3 important reasons to discuss finances with kids:

1. logistics: it happens that parents pass away without ever telling children where their assets are located.  In my job as a financial planner, I see this occur with more frequency than you’d expect.  Children spend the time post-mortem looking for and tracking down assets.  Bequeath the assets or give them away but don’t lose them.  Keep your kids in the loop.
2. ethical inheritance: use these discussions to impart your values on your children.  Let them know why you worked so hard all your life.  Explain to them how you manage the work/life conundrum.  These discussions, however awkward, mean a lot to your children, while you’re around and after.  AS Penny mentioned in the article linked to above, it’s also a great forum to explain divergence in inheritances between family members.  I remember my grandfather, OBM, showing me his mother’s will which effectively left nothing to him and all to his siblings because he had done well in business.  He understood what he mother meant by her actions and in fact, respected her for such decisions.
3. wealth transfer: how frequently we see new clients coming into money for the first time in their lives while in their late 50s and 60s.  Their parents lived to a ripe age and left money for their middle-aged children.  Frequently, as we see the baby boomers retire, this requires the children receiving inheritance to learn basic asset management skills and/or shop around for an advisor.  The sooner the children are brought into the circle of trust, the sooner and quicker they can start scaling the knowledge curve required to manage money responsibly.

Many of us want to start investing, or improve our current investment strategy, but don’t know where to start. Here are four steps that I think will help you get started on your path to becoming a more savvy investor:

How should you choose a financial professional?

First and foremost it’s very important to use a licensed financial advisor. This will help ensure that you receive the appropriate advice that you should be given, as well it gives the client a legal outlet for any complaints a client may have.

Plan Ahead

Before you meet with an investment advisor, broker, or other investment professional, it’s a good idea to map out your financial goals. Using an expert will help you decide how to invest your savings, but you should first have a firm handle of your short and long-term goals and needs. How much income you will need to supplement your existing Social Security or other pension fund to meet fixed expenses? Do you have children or grandchildren to marry off? Are your elderly parents in need of care? You need to determine your own budget needs and your ability to tolerate risk first, and then ask your advisor what kinds of investments would best fulfill these goals. Use your advisor as a sounding board. The advisor can tell you if your goals are realistic, and if not, you can work together to come up with goals that can be achieved. Then you should take the time to understand the various investment products you may be considering. If you receive a lump sum pension payment or an early retirement payout, you may feel pressure to invest it quickly in order to avoid adverse tax consequences. Intelligent investing requires careful consideration. If you need time to fully explore your options, put the funds in a short-term deposit and then invest once you feel ready to do so. Otherwise, you may be susceptible to high-pressure sales tactics of those who will “take care of your problems for you.” A quick fix is not the answer in this situation. Your money is too important to lose!

Understand your investment

Focus on the whole range of the investment’s characteristics in your decision-making, not simply on promises of a high return. Before you purchase an investment, you should understand the cost, degree and nature of the risks, investment goals, performance history, and any special fees associated with the investment. Never assume that your investment is federally insured, low risk, or guaranteed to deliver a certain return. Make sure you understand the information you are given. Once you have that information, check it against your own goals and risk profile to see if the recommended type of investment is a good fit.

Check Account Statements

Be sure you understand your account statements. Your account statement should reflect only the pattern of investing that you have authorized. If there is a discrepancy, raise the problem immediately with your broker and, if necessary, the branch manger who supervises the broker. If there is something that you don’t understand (for example: an unfamiliar term or abbreviation) that appears on your statement, don’t hesitate to ask your advisor. If an investment professional is unwilling to take the time to answer your questions he may not be someone with whom you want to handle your life savings. The account statement is your primary tool as an investor for policing your investments, so make sure to take full advantage of it. Continued cooperation with your financial advisor will ensure that your investments remain consistent with your goals. It is important to review your portfolio with him periodically, and make sure that it is still consistent with your needs. On the same note, make sure that your investment strategy remains current. If there is a change to your financial situation, consider whether your strategy needs to be reevaluated. With smart planning and continued monitoring of your investments’ progress, you and your financial advisor should have a valuable, long-lasting relationship.