Pre-Retirement Advice
When we make big decisions in life, most of us look for a source of expertise and guidance to help us make thoughtful choices. That’s what professional financial advice is all about.
BEHAVIORAL COACHING
Most people act like humans, not investors. But when it comes to investing, acting like a human may actually cost you money.
Today’s modern advisor is now also a behavioral scientist and coach. Someone whose goals are to help their clients avoid bad decision making, whether market volatility, and stay on track with their financial plan. A strong behavioral coach understands an investor’s goals and fears and is able to help steer their financial behavior.
It’s common for investors to become overly optimistic when markets are rising, or overly pessimistic when markets are declining. Left to their own devices, many investors buy high and sell low. An advisor can help an investor remain objective and disciplined through the cycle of market emotions. Avoiding behavioral mistakes is a significant contributor to the overall value of a financial advisor.
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THE BASICS OF BEHAVIORAL FINANCE
OVERCONFIDENCE
We tend to overestimate the accuracy of our predictions. For an investor this could mean believing their knowledge of an investment is greater than it actually is.
FAMILIARITY BIAS
We prefer outcomes and patterns we have observed previously. Investors in the midst of a long bull market run may not feel a need to rebalance, as they have become familiar with the direction of the market and forget about corrections and consequences.
HERDING
The concept of herding refers to individual investors finding comfort in following the crowd, or “herd”. This behavioral phenomenon can easily cause an investor to abandon their personal financial goals for fear of missing out on opportunity or making mistakes.
INFORMATION OVERLOAD
Well-rounded financial plans require an advisor’s process and decision making, not cognitive “short cuts”. Too many choices or too much information can actually cause an investor to withdraw, delay decision making, or take no necessary action at all towards achieving their goals.
THE BASICS OF BEHAVIORAL FINANCE
OVERCONFIDENCE
We tend to overestimate the accuracy of our predictions. For an investor this could mean believing their knowledge of an investment is greater than it actually is.
FAMILIARITY BIAS
We prefer outcomes and patterns we have observed previously. Investors in the midst of a long bull market run may not feel a need to rebalance, as they have become familiar with the direction of the market and forget about corrections and consequences.
HERDING
The concept of herding refers to individual investors finding comfort in following the crowd, or “herd”. This behavioral phenomenon can easily cause an investor to abandon their personal financial goals for fear of missing out on opportunity or making mistakes.
INFORMATION OVERLOAD
Well-rounded financial plans require an advisor’s process and decision making, not cognitive “short cuts”. Too many choices or too much information can actually cause an investor to withdraw, delay decision making, or take no necessary action at all towards achieving their goals.
We tend to overestimate the accuracy of our predictions. For an investor this could mean believing their knowledge of an investment is greater than it actually is.
We prefer outcomes and patterns we have observed previously. Investors in the midst of a long bull market run may not feel a need to rebalance, as they have become familiar with the direction of the market and forget about corrections and consequences.
The concept of herding refers to individual investors finding comfort in following the crowd, or “herd”. This behavioral phenomenon can easily cause an investor to abandon their personal financial goals for fear of missing out on opportunity or making mistakes.
Well-rounded financial plans require an advisor’s process and decision making, not cognitive “short cuts”. Too many choices or too much information can actually cause an investor to withdraw, delay decision making, or take no necessary action at all towards achieving their goals.
ASSET ALLOCATION
One way of reducing risk is proper asset allocation. A 60/40 (equity to fixed income) split isn’t enough anymore as we’ve seen the equity and fixed income markets move in tandem in 2008, and again in 2022.
To add value, a good advisor will take into account many different variables when making an allocation decision.
Some of these variables are strategic, (global positioning, fixed income quality and duration), while some are tactical (equity sector rotation, and asset class shifts). Diversifiers are also important to asset allocation as they are often non-correlated with the other allocations.
ACTIVE REBALANCING
Active rebalancing adds value by preserving the investor’s original asset allocation and reducing volatility. Due to natural market movement, portfolio allocations shift away from their original weightings and need rebalanced.
WHEN ADVISORS DO NOT DISCUSS REBALANCING, IT BECOMES CHALLENGING FOR INVESTORS TO GRASP ITS SIGNIFICANCE.
The drift was most pronounced:
Source: Russell Investments Financial Services LLC. 01.23 Hypothetical analysis provided in the chart and table above is for illustrative purposes only. Not intended to represent any actual investment. Source for both chart & table: U.S. Large Cap Growth: Russell 1000 Growth Index, U.S. Large Cap Value: Russell 1000 Value Index, U.S. Small Cap: Russell 2000® Index, International Developed Equities: MSCI World ex USA Index, Emerging Markets Equity: MSCI Emerging Markets Index; Global Real Estate: FTSE EPRA NAREIT Developed Index, and Fixed Income: Bloomberg Barclays U.S. Aggregate Bond Index.
TAX MANAGEMENT
When it comes to investing, it’s not what you make that counts. It’s what you get to keep.
Advisors, working with accountants and attorneys implement strategies for tax shelters, and smart withdrawal strategies.
The visual shows the potential growth of a hypothetical investment in a tax deferred account vs those in taxable accounts. The cummulative hypothtical drag that taxes can have on savings is significant.
Hypothetical growth of $500,000 over 20 years at 7.5% per year
- *This hypothetical chart does not take into account an investors tax bracket.
TOTAL VALUE QUANTIFIED
According to Russell Investments: https://russellinvestments.com/us/blog/tax-smart-planningvalue-of-advisor
According to Russell Investments: The Value of an Advisor: What we have learned in the past 10 years, 2023.
Research shows that investors who collaborate with a financial advisor are likely to reap the rewards of the advisor’s comprehensive value proposition; which includes active rebalancing, behavioral coaching, tax smart investing, personalized wealth planning for clients and their families across various financial life stages.
Disclaimer: Advisory services provided by The Pacific Financial Group, Inc. (“TPFG”) a Registered Investment Adviser. The information is for informational purposes only and should not be relied on or deemed the provision of tax, legal, accounting or investment advice. Past performance is not a guarantee future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss. Investors should review all offering documents and disclosures and should consult their tax, legal or financial professional before investing.