Charleston Wealth Management Advisors

Charleston Wealth Management Blog

A recent study performed by the investment research firm, Openfolio, found that the wealthiest 1 percent of American investors had higher returns, or less of a loss, than the rest of investors, year over year. Of course, we all know that wealthier people make more money than those with less money, given the same rate of return. (Five percent of $1 million is a lot more than 5 percent of $100,000.) That's to be expected, but it has been found that the return is not even the same, not even close really, according to Openfolio.

The analysis performed by Openfolio has shown historically about a 7 percent difference between the two groups of investors each year, in favor of the wealthy. Now, the market isn't simply handing out better returns to the wealthy because they put more money in.

The difference in their returns is due to the investment behavior of the wealthy, a behavior that all investors would be wise to replicate.

So, what is it that they are doing differently? The main difference is that ever-important investment strategy: diversification. You see, if a portfolio is focused on very few stocks or sectors, any movement in those few stocks or sectors can lead to dangerous volatility. The rich, however, are much less likely to put their money into single stocks like Apple or General Electric; they tend to be much more diversified in many different stocks in a variety of sectors.

Openfolio broke it down into specifics. The bottom 5 percent of investors have positioned the vast majority (over 70 percent) of their portfolios into single stocks, creating a very volatile portfolio, with volatility within the portfolio of over 33.23 percent. The rich guys, on the other hand, have much less volatility just 14.9 percent (less than half) because they have less of their holdings focused on single stocks. Essentially, they are heavily diversified, have less volatility, giving them a higher probability of success. The report further suggests that wealthier investors tend to take on less risk, while other investors are chasing returns resulting in more risk. Of course, some of these riskier bets pay off. However, over time, the data overwhelmingly says that this type of strategy does not work.

As an advisor, I believe a strategy focused on managing volatility and downside risk is the key to long-term investment success.

An annual study of investors conducted by DALBAR, the nation's leading financial market research firm, found one of the primary reasons why small investors fail is due to their investment process, or lack thereof. The DALBAR study also found that most small investors make investment decisions based on their emotions, perceptions, or instincts about the market. We find that it is this lack of process that often leads individual investors to fall into the all-familiar cycle of buying high, and selling low.

Having a diversified portfolio, backed by strategies that use facts and logic to help manage downside risk, take advantage of gains and minimize losses, that might not earn you the lifestyle of the rich and the famous, but can give you the consistency that makes a successful investment strategy.

This content created by Rick Durkee in conjunction with Fusion Capital Management.

I remember sitting in a history class back in high school, I didn't often pay attention but apparently I was this day and our teacher was discussing one of the many, many wars in our world's history and he said, "Nearly all wars are simply a battle for power, and power is one of the most finite resources on earth."

I remember that because I had never thought of the world that way - that every time someone gained power, they weren't just creating that power for themselves, they were taking it from somewhere or someone else. They were seizing control or capturing territory leadership from another leader or a free people or another government.

The amount of money that you have is what you have, and if you want to allocate some of it somewhere, you are likely taking it away from somewhere else.

I think about that realization often as a financial advisor, as I see money in a very similar way as that description of power. Sure, it's a bit less limited as you can make more money for yourself and grow what you can, but in a large sense, the amount of money that you have is what you have, and if you want to allocate some of it somewhere, you are likely taking it away from somewhere else. You are losing an opportunity in one area, to capture an opportunity somewhere else because, specifically in the short term, your financial resources are finite.

This concept, or idea, is especially relevant when people ask me about the best way to use their money; the best use for those limited financial resources. One of the more common questions I get from folks is whether it makes sense to pay off a mortgage early or to use that "extra" money for something else.

Frankly, there really is no right or wrong answer to that question and any such decision needs to be based on an individual's unique financial situation.

There's a sense of freedom or accomplishment that comes with paying off a mortgage.

So, let's talk through some of the factors possibly affecting such a decision, starting with a very common impetus for wanting to allocate limited resources to paying off a mortgage: emotions. I get it; there's a sense of freedom or accomplishment that comes with paying off a mortgage. But this feeling or emotion should not be the reason to pay off a mortgage early. Never let your emotions get the best of you, and make sure that, if you do decide to pay off your mortgage early, you are doing it because it makes the most financial sense, not just because it makes you feel good.

Determining what makes the most financial sense often depends on the terms of a mortgage. What's the interest rate? Is that rate fixed or adjustable? How many years are remaining? What is the income tax deduction for the mortgage interest paid? Mortgages are often considered financially beneficial because they free up money to be used in other areas or invested so that it will grow at a rate higher than the interest rate on the mortgage.

The other thing to consider is the comfort or security of the current financial situation. Like I said, money, in the short term, is a limited resource. So if you use that resource to pay off your mortgage, you need to be very confident that you will have enough of that limited resource remaining if you lose your job, need to buy a new car or pay for college, et cetera. Paying more money toward your mortgage is not necessary, but paying to get your car fixed so you can drive to work is.

You should also think about how prepared you are for retirement and make sure you are comfortable with the amount you have saved.

As many financial professionals will remind you, it is possible to get loans for a house or for an education but no one will loan you money for retirement.

So remember that lesson about war and the seizing of power: oftentimes, the amount of money you have is limited, finite, and, in a large sense, out of your control, but determining the best way to use those limited resources is wholly in your control.

Our society today is very focused on the quantifiable characteristics of a person. What was your GPA? How much money do you make? How many years' experience do you have? But there is one number that is becoming more and more critical, and it is often ignored by millions of Americans. It is a number that can determine whether someone gets a home, a job, maybe even a spouse.

That number? A person's credit score.

Having a good credit score is one of the best tools you can arm yourself with for financial success. Besides helping to secure better loan terms (potentially saving tens of thousands of dollars over a lifetime), a strong credit score can also impact other areas of life, like rental applications, cellphone plans, and approvals for other large purchases.

A survey from the National Foundation for Credit Counseling reported more people would be embarrassed to admit their credit scores (30 percent) than their weight (12 percent).

Now I'm sure most of you have a solid handle on your credit score, and know the importance of maintaining it. But we, as adults, have a responsibility to teach our youth! The most important time to focus on building good credit is in your 20s and 30s, which is why it should be important to young people looking to start down their financial path on the right foot.

For those who feel embarrassed of their credit score, that is okay… we can work on improving it.

What is not okay is to not know your credit score. Sticking your head in the sand never turns out well.

So, let's first understand what affects that number. The Fed put together a list of factors that most often define a person's credit score. I want to take some time to go through that list, and give you a few tips on how to easily get a credit score moving in the right direction.

The first is your track record for paying bills. The most obvious impact on a person's credit score is declaring bankruptcy. Creditors are going to be reluctant to extend credit if you have been deemed bankrupt in the past. Additionally, to have good credit, you must also pay your bills on time. Problems with either past bankruptcies or late payments can take a huge chunk out of your credit score, and can be the most difficult to repair down the road.

The second factor revolves around outstanding debt. A person's credit limit is graded in direct relation to his or her outstanding debt.

The recommendation is not to use more than 30 percent of your total credit limit, with the ideal ratio of debt to outstanding credit being just 10 percent.

It does not matter if you pay off your card in full every month, the percentage is still important. So if you need to adjust that ratio, you have two easy options, decrease spending or increase your limit. If you feel like you can increase your limit without being tempted to increase your spending, that could be a great option. If you know that if you have a larger limit, you will simply go on a larger spending spree, do not take this route.

Your credit score is also based on the length of credit history available for review. If you have a very short history, you may find yourself with a lower score because there is less of a record to base the number on, and so more risk to the creditor. But having a short history of on-time payments and low balances is better than a long one with substantial bad debt. The easiest way to start a credit history is to open up a credit card, and use it responsibly.

Your credit score can also be negatively affected by applying for numerous new cards and loans. Make sure you don't just start willy-nilly going for broke (for lack of a better term) and applying for loans and credit cards too often. This will hurt your chances at success and hurt your score as well.

The last thing to consider is the diversity of your credit accounts. I talked about the importance of opening up a card and starting your credit history early. In addition to opening a credit card, making payments on other types of loans, such as a car loan or student loan, can help to start building a positive track record by diversifying your credit.

But I will stress again, doing this is only valuable if you are responsible with these payments!

Also, if you have too many finance company accounts or too many credit cards, your score could suffer. It is a delicate balance.

I mentioned earlier that more people are embarrassed by their credit score than their weight. The correlation between those two concepts goes even further. Just as with weight loss, improving your credit score requires commitment, diligence, and patience because it won't happen overnight. So put down that cookie and pick up that credit report.;;

This content created by Rick Durkee in conjunction with Fusion Capital Management.

Coastal Financial Planning Group

78 Ashley Point Drive Suite 201 
Charleston, SC 29407

(843) 735-5065

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Investment advisory services are offered through Fusion Capital Management, an SEC registered investment advisor. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration is not an endorsement of the firm by the commission and does not mean that the advisor has attained a specific level of skill or ability. All investment strategies have the potential for profit or loss. 

Third-party rankings and recognition from rating services and publications do not guarantee future investment success. Working with a highly-rated adviser also does not ensure that a client or prospect will experience a higher level of performance. These ratings should not be viewed as an endorsement of the adviser by any client and do not represent any specific client’s evaluation. Generally, ratings, rankings and recognition are based on information provided by the adviser. Please contact the adviser for more information regarding how these rankings and ratings were formulated.

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