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Category Archives for "Investments"

What Return Can You Expect on Your Investments?

What Return Can You Expect on Your Investments?

Where you decide to invest your money can significantly affect how fast your funds grow and how much risk you are exposed to. In general, lower risk investments yield lower returns while higher risk investments have the potential for much higher returns but experience more volatility. A well-balanced portfolio will spread your money across different investments to lower risk and maximize gains. Funds that you will need in the short-term should be in relatively safe investments that offer liquidity while money you will not need for many years can be invested in more volatile investments that offer higher return potential. Potential investments to consider include cash & commodities, bonds & securities, stock market investments, and real estate.

Cash & Commodities

Bank products offer very low risk investment options including certificates of deposit (CDs), savings accounts, and money market accounts. When you purchase a CD, you agree to loan the bank a certain amount of money for a predetermined amount of time and interest. Savings accounts offer an annual percentage yield (APY) on your deposited funds. A money market account offers a higher APY than most savings accounts, typically with higher minimum deposit and balance requirements. Your funds deposited into a CD, savings, or money market account are insured by the FDIC up to at least $250,000. However, the downside is that interest rates currently offered on consumer deposit products by banks are low. Too low, in fact, to keep up with inflation. Interest rates are rarely offered above 1% for CDs and money market accounts. For savings accounts, the national average APY is a paltry 0.07%. Some brick-and-mortar banks offer as little as 0.01% on their savings accounts. While bank products are a safe place to stash your emergency fund for easy access, you will want to branch out to invest the rest of your money.

Commodities, such as silver, gold, or crude oil, are often seen as lower risk. By definition, commodities are basic goods that can be transformed into other goods and services. Investing in commodities is one of the more popular ways to hedge against inflation. Commodities tend to be more volatile than other investments. Political actions, environmental changes, and other external factors can suddenly and drastically influence the price of commodities. Many investors like that they can take possession of a physical product when investing in gold in the form of bullion bars or coins. However, just because gold is one of the oldest investment types does not mean it is without risk. Gold pricing is based on scarcity and fear. Prices tend to rise when scarcity and fear is more common and fall as fears reduce. Gold can be a good investment if you think the world will be a more fearful place in the future than at the time of purchase.

Cryptocurrencies

Cryptocurrencies are a newer type of investment in a unique type of digital asset. A cryptocurrency is a virtual currency secured by cryptography, which ensures that the cryptocurrency is nearly impossible to counterfeit or double-spend. Cryptocurrencies have the advantage of being easier to transport and divide than precious metals like gold and of existing outside the direct control of central banks and governments. Stories of overnight Bitcoin millionaires have piqued mass interest in cryptocurrency investment. While there is certainly significant return potential in cryptocurrency investment, there are some drawbacks. Cryptocurrencies are unregulated and come with particular risks: the possibility of future governmental regulation and the risk that a particular cryptocurrency will never gain sufficient acceptance as a form of payment. As cryptocurrencies have only been around for a decade or so, they have an unknown rate of return that makes it harder to make long term predictions. Due to their volatile nature, you may want to delay investing in cryptocurrency until after you have a well-established emergency fund and have built a balanced portfolio of other investments.

Bonds & Securities

Bonds and securities are low risk investments that come with a higher average return than bank products. Bonds are loans to the entity you purchased it from for a set amount of time and interest. Governments and corporations issue bonds to raise capital for projects and operations. Treasury securities, U.S. government bonds that are backed by the “full faith and credit” of the U.S. government, carry minimal risk and correspondingly low interest rates – often below the rate of inflation. Municipal bonds issued by state and city bonds are slightly riskier but offer more competitive interest rates. Current average rates for municipal bonds are somewhere between 2-2.25%. Corporate bonds carry a little more risk for the reward of a higher interest rate. According to Moody's Seasoned Aaa Corporate Bond Yield, the average rate of return was 2.60% as of Feb 09 2021. The long-term average is 6.66% but recent years have seen lower rates. Foreign governmental bonds are also available and carry varying amounts of risk and reward. Bonds are included in most investors’ portfolios to reduce risk. Retirees often include a higher portion of bonds in their portfolios to avoid sudden losses from market fluctuations.

The Stock Market & Investment Funds

When you purchase a stock, you are purchasing a sliver of that company’s earnings and assets. Stock investments allow for fractional ownership of many different companies. The stock market, as captured by the S&P 500, has yielded an average rate of return of about 10% over the last century. Investing in a single company’s stock exposes you to more risk if the company does poorly or goes under. Sears Holding Corp, the parent company of Kmart and Sears, hit their all-time high stock-closing price on April 17, 2007 at $193 a share. Today, shares trade well under $1. On the other hand, investing in Tesla shares at $17 during their IPO in 2010 would have made you a fortune – Tesla trades at over $800 a share today.

To minimize risk and diversify your stock investments, consider mutual funds, index funds, and exchange-traded funds (ETFs). Mutual funds allow you to purchase small shares of a large number of investments in a single transaction. Mutual funds are professionally managed and follow a set strategy to invest in stocks, bonds, or a mix of both. Mutual funds come with an annual fee, called an expense ratio. Index funds are mutual funds that passively track an index, such as the S&P 500, by holding stock of the companies within the target index. Expense ratios for index funds are lower than actively managed mutual funds. ETFs are a type of index fund distinguished by how they are purchased. ETFs are traded on an exchange like a stock, which means you can buy and sell ETFs throughout the day and the ETF’s price will fluctuate throughout the day. Mutual funds and index funds are priced once daily at the end of each trading day. Mutual funds, index funds, and exchange-traded funds may also pay out dividends and interest to investors, depending on the holdings of the fund.

Stock options are a way to limit your losses to the set price of the contract. When you purchase a stock option, you are given the right to buy or sell shares of that company at a predetermined price within a certain timeframe. Options offer flexibility – you can let the contract expire without exercising your right to buy or sell. Most options contracts are for 100 shares of a given stock. When you purchase a stock option, you are buying the contract with the right to buy or sell, not the stock itself. It’s typically used for a stock you expect to increase in value. If you are correct, you can purchase the stock for less than its current price and turn a profit. If you own stock in a company but are worried about losses, you can purchase an options contract that gives you the right to sell a specified number of shares at a set price, which you can exercise if the stock price falls. Options contracts can also be resold to other investors.

Real Estate

Many investors like real estate investing because it is relatively easy to understand. Investing in and managing real estate property comes with a high initial capital outlay in most cases. To make a profitable investment, you will want to find a property that you can purchase with a margin of safety. You can make a profit by buying a property below market rate and selling at full price or by renting or leasing the property to tenants. Managing real estate can come with unexpected expenses and requires a decent amount of time devoted to upkeep or a monetary cost to outsource those tasks.

Real Estate Investment Trusts (REITs) allow you to invest in real estate without having to personally buy, manage, or finance any properties. A REIT is similar to a mutual fund, gathering the funds of many investors and investing them in a collection of income-generating real estate properties. REITs can be bought and sold like stocks on the stock market. The barrier to entry is much lower – if you can purchase a share or fractional share of a REIT, you can become a real estate investor. EITs are required by law to distribute at least 90% of their taxable income to shareholders. Due to this, REITs tend to be among the companies paying the highest dividends.

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Visit our Investing 101 article to learn what to prioritize first as you build your portfolio and your future. The best time to start investing is now. If you already have some investing experience and want to maximize your gains and minimize your time spent worrying about investments, schedule a call with Ridgewood Investments for a free investment review.

High Net Worth Financial Advisor New Jersey

About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.

How Do I Start Investing?

How Do I Start Investing?

Investing your money is the most reliable way to grow your wealth and secure your future. Warren Buffet defines investing as “…the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power — after taxes have been paid on nominal gains — in the future”.  In other words, you are giving up the chance to purchase something now in order to have increased income and security down the line. If you are a first-time investor, the sheer number of investment options can be paralyzing. Specialized language and abbreviations tossed around by investment professionals make it difficult to sort through your options and get started.  Luckily, you don’t need a finance degree or large income to begin investing.

Why Should You Invest?

Investing allows for wealth creation and, depending on the investment vehicle, may include special benefits like building on pre-tax dollars, reducing your taxable income, and qualifying for employer-matching programs. Investing can help you reach financial goals, including saving for college, purchasing a home or vacation home, and of course securing your retirement. One of the most compelling reasons to invest is the financial cost of not doing so.

Money kept in a savings account will lose value over time due to interest rates well below inflation. According to Bankrate, the national average interest rate for savings accounts for the week of December 30, 2020 was a paltry 0.07%. If you parked $10,000 in a savings account with the national average interest rate and made no additional contributions, you would have $10,007 one year later and $10,283.86 after forty years. If you had put that same money in an index fund in the stock market, assuming an average return of 7%, you would have $10,700 after one year and $149.744.58 after forty years. While there is more inherent risk to the stock market, the reward is significantly higher.

Investing in the stock market lets you become a business owner without being an entrepreneur. When you purchase stock, you are purchasing fractional ownership in that company and your wealth can grow as the company does. Imagine having bought Amazon shares at $18 each during their May 15, 1997 IPO. Amazon now trades well over 3k a share. While few companies will be the next Amazon, the overall stock market return has been about 10% a year for the last century. Investing in the stock market lets your money earn money while you do other work.

What Do I Need to Consider First?

Most financial experts recommend establishing an emergency fund prior to investing. An emergency fund will ideally cover 6-9 months of expenses. If you do not have a fund yet, start with a goal of $1000 and increase your goal by 1 month’s expenses each time you reach it. You can consider beginning to invest once you have about 3 months of expenses saved, although you will want to continue increasing your emergency fund until you have at least 6 months of expenses on hand. An emergency fund needs to be easily accessible, such as in a high-interest rate online savings account. Having an emergency fund keeps a job loss, surprise home repair, or medical problem from derailing your financial life.

If you carry high interest debt, such as a personal loan or credit card balance, you should consider paying it off before investing. Even solid stock market returns of 9-10% can’t offset paying 16% interest on a credit card balance. Lower interest debt (typically with 2-6% interest), such as a mortgage, car payment, or student loans, does not need to be paid off before beginning to invest as you will likely get higher returns from your investments than you are paying in interest. If you are paying 2% interest on a mortgage and earning 10% in the stock market, you are essentially losing 8% by directing extra funds towards your mortgage instead of investing.

Once you have decided that you are ready to invest, you will need to decide how much time you have to spend on investing, what your investing style is, and how much risk tolerance you have. Active investing requires large amounts of time dedicated to research and constructing your portfolio. You need plenty of time and investment knowledge to actively craft and manage your investment portfolio. On the other hand, passive investing has historically produced strong returns and allows you to set it and forget it. Investing in investment vehicles managed by someone else, such as mutual funds, is considered passive investing. For the vast majority of new investors, passive investing will make the most sense. 

You can always take more control of your portfolio in the future as you learn more about investing and have the time and knowledge to do so.You will also need to be honest with yourself about your tolerance for risk. A well-crafted portfolio will strike a balance between maximizing the returns on your money and keeping the risk level in a range you are comfortable with. Lower risk investments generally also yield lower returns. For examples, government bonds offer predictable returns with very little risk. However, the current yield for the 10-year U.S. Treasury note is around 1.15%, well below the rate of return available from other, higher-risk investments. The stock market on average returns around 10% per year, a much higher return. Owning individual stocks in a company exposes you to more risk if that company does poorly while index funds spread your investments over a large swath of the stock market, lessening the effect of individual stock fluctuations. You can still lose money if the market declines but keep in mind your investment timeline – if you leave your money in the market, it will likely regain its value and continue growing again within a period of months or years.

Where Should I Start Investing?

Once you have an emergency account funded and have eliminated high-interest debt, you are ready to start investing. You can begin with a small amount – say $100 per month – and contribute more over time as your income increases.

For many people, the best place to begin investing is in an employer-sponsored retirement plan such as a 401(k). Most employer-sponsored plans deduct your contributions from your paycheck before taxes are calculated, reducing your current tax burden. Some employers will match all or a portion of your contributions up to a certain percentage of your salary. Be sure to contribute at least enough to get the full match – otherwise you are passing up free money. If your employer does not offer a sponsored-plan or you are a non-traditional worker, consider opening a traditional IRA or Roth IRA. Self-employed individuals can look into a solo 401(k) or SEP IRA. Regardless of what plan you are using, consider increasing your contribution by 1% each year or each time you get a raise. You will hardly miss the difference and the increased contributions will make a significant difference at retirement time due to the magic of compound interest.

If you have a retirement fund that is well-funded, you may be ready to explore other investment options. Know your investment goals – money you will want to use in the next couple of years to buy a house may need to be more liquid and in less risky investments than money you plan to keep invested for 10 years or longer.  If you are doing it yourself with your investments, you will want to choose an online broker. Shop around and check out broker reviews before deciding where to open an account. Many financial institutions have minimum deposit requirements. If you are beginning with a small initial investment, you will want to seek out an online brokerage with a low (or no) minimum deposit. Look into fees like low balance fees or commissions on trades. If you are trading frequently with relatively low dollar amounts, commission fees can become cost prohibitive. Luckily, it is possible to find zero-commission brokers today.

Certain investments have extra fees. Mutual funds are professionally managed pools of funds that invest in a focused manner, for example in small-cap stocks. One fee charged by mutual funds is the management expense ratio each year – the higher the management expense ratio, the more it will lower the fund’s overall returns.

You can protect and grow your portfolio using two tools: diversification and dollar cost averaging. Diversification is investing a range of assets in order to reduce the risk of one investment’s poor performance hurting your overall investment return. Mutual funds or exchange-traded funds are helpful for diversification, particularly for a beginning investor whose total investments are too low to spread across sufficient assets. Both mutual funds and exchange-traded funds typically invest in a large number of stocks and other investments within the fund.  

Dollar-cost averaging is an investment strategy in which an investor makes periodic purchases of a target asset, dividing the total amount to be invested over a long period to reduce the impact of volatility on the overall purchase. When you invest a set percentage of your salary in predetermined investments in your 401(k) each month, you are taking advantage of dollar cost averaging. Dollar-cost averaging is a simple and effective way for new investors to invest in mutual or index funds.

What if I Need More Help?

Whether you are just beginning to invest or are ready to branch out into other investments, you do not have to go it alone. Robo-advisors are a low-cost option for investors who just need a little help to craft and maintain their portfolio. You typically answer a short questionnaire about your goals and risk-tolerance and, using an algorithm, the robo-advisor recommends a portfolio and asset allocation that’s appropriate for your age and investment time horizon. Robo-advisors will rebalance your portfolio over time and invest your monthly contributions accordingly. However, robo-advisors are limited in scope. A robo-advisor cannot help with issues like forgetting to contribute, not increasing your contributions over time, or avoiding financially ruinous investment decisions like pulling your money out of the market after a crash.

If you want a more personalized, hands on approach, seek out a financial advisor. A financial advisor can provide the experience, broad knowledge, and personalization that an algorithm just can not match. If you have a steady, reliable income and have the ability to save or invest 20% or more of your income, it may be time to consider a financial advisor. The right financial advisor for you will depend on the value of your assets and what you are willing to pay in fees. Some financial advisors specialize in servicing affluent professionals while others prefer to work with middle-class families. Shop around and talk to different financial advisors to find the right person for you. The right financial advisor can be a long-term partner to grow your wealth and achieve your financial goals. 

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Benefits of Working with Ridgewood

  • Expert Advice
    Experienced, Ivy League educated, top credentials.
  • Customization
    Personalized portfolios for your needs, not pre-packaged.
  • 100% Fee-only
    We work with you, and never work for commission

Let Us Help You Grow Your Money

Schedule a call for your
free investment review.

Other Resources You May Be Interested In

For more on how Financial Advisors like our team at Ridgewood Investments are positioning their clients for success, check out my article: "How Great Advisors Are Positioning Clients to Survive and Thrive Through this Crisis".

High Net Worth Financial Advisor New Jersey

About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.

The Gender Investment Gap

The Gender Investment Gap

Women live longer on average than men but make significantly less money over the course of their careers. A May 2020 report from the National Institute for Retirement Security found that women earn roughly $0.80 for every dollar that men earn in wage work. This gender wage gap leads to significant retirement shortfalls for women who will need their retirement savings to stretch for a longer period of time. Closing the gender wage gap is a slow process, one made worse by disproportionately large job losses for women during the coronavirus pandemic. However, there is a second gender gap that also deserves our attention.
 
The gender investment gap is the difference between the amount of money the average woman earns on her investments throughout her lifetime compared to the average man. In some cases, the difference can be close to $1 million by retirement.

What Contributes to the Gender Investment Gap?


The gender wage gap, particularly for women of color, is a major contributor to the gender investment gap. Women need to invest a larger percentage of their income to match the real dollar amount invested by their male counterparts. The wage gap is particularly pronounced for black and Latinx women, who respectively make 21 percent and 31 percent less than white women.

Women are more likely than men to take time out of the workforce or reduce work hours to take on unpaid caregiving responsibilities for children and aging parents. The coronavirus pandemic has acerbated this problem as large numbers of women left the workforce to shoulder caregiving responsibilities. National Women's Law Center reported in September of 2020, 865,000 women left the labor force—more than four times the number of men who exited the workforce that month. Many more women reduced their hours. Overwhelmingly these are women who would otherwise have remained in the workforce had childcare been available. Time off from the paid workforce results in lower career earnings, less chance to accrue funds in employer sponsored retirement accounts, reduced Social Security at retirement, and a difficult time reentering the workforce in the future.

Women are more likely to keep their assets in cash than men. In a 2016 Global Investor Pulse survey from BlackRock, women kept 71 percent of their portfolios in low-return cash savings, compared to 60 percent for men. Cash-holdings are seen as low risk and are insured by the FDIC. However, due to inflation and low savings rate, money kept in cash loses value year over year. When the stock market has returned an average 10% return since 1926, cash holdings represent a loss opportunity of earnings.

The investment industry is predominantly male dominated, which can make investing unappealing to some women. According to 2015 data from Morningstar, fewer than 10% of money managers at mutual funds and exchange-traded funds are women. In comparison, that same year, women made up 37% of doctors, 33% of lawyers, and 63% of auditors and accountants. Financial planning models default to men’s salaries and life experiences and use language geared towards male clients. Financial goals are often discussed using sports, war, and construction metaphors that don’t resonate with female clients or make them feel welcome in the male-dominated industry. The industry often views women as risk-averse and not interested in investing, which is not the case. Women prefer more financial education prior to investing and want to understand the risk involved. Firms that make an effort to cater to female clients can draw on a vast and underserved market. 

What Happens When Women Invest?

In general, women tend to be more successful than men when they do invest. Fidelity Investments found that women outperform men in long-term investing, with women earning on average 0.4 percent higher returns than men in the 2016 calendar year. A 0.4 higher return carried over a long period of time can yield significant gains. For example, if you invested $10,000 per year for 40 years at 7% interest, you would end with just under $2 million. That same $10,000 per year earning 7.4% interest would yield you over $2.2 million at the end of 40 years – an over $200,000 difference from an 0.4% increase in returns. Other studies put the average return for women even higher, including one by Warwick Business School that showed female investors outperforming their male counterparts by an average of 1.8 percent over a three-year period. Despite higher returns, just 9% of women think they are better investors than men.

Female investors are more likely to take a long-term, goal-oriented approach to their investing. Women trade less frequently and hold their investments for a longer term. When the market dips, women are less likely to pull their assets out. In the same 2016 Fidelity survey, men were 35 percent more likely to trade than women. Frequent trading incurs additional trading costs and gains are taxed at a higher rate – the short-term capital gains tax is equivalent to your income tax rate, which is often much higher than the 15 percent long-term capital gains tax rate.  

The Fidelity study also found that women are more likely to invest in target-date funds, which are well diversified and automatically adjusted to an appropriate risk level for the investor’s age. Women are less likely to have all of their retirement savings in stocks, which is an inherently risky asset. 

Merrill, a Bank of America company, found that women’s investing confidence increases significantly as their assets increase. Only 43% of women holding less than 100k in assets expressed confidence in their investing, compared with 65% of women holding 100k-240k in assets and 75% holding 250k or more in assets. The more women invest and see their assets grow, the more comfortable they feel with their investing acumen.

How Can Women Avoid the Gap?

Individual women can avoid the gap by investing early and often. The easiest place to start is often an employer-sponsored 401k or other retirement account like an IRA. Retirement accounts typically offer target-date funds that take care of balancing the portfolio of new investors. Many companies offer matching programs where the employer will contribute additional funds to match employee contributions, up to a certain amount. Retirement accounts typically grow tax free, allowing for increased gains over a long period. Due to the power of compound interest, investing as much as possible early in your career will yield a significantly larger nest egg than investing the same dollar amount later on. For example, investing $100 a month starting at age 25 will result in a nest egg of $265,702 at age 65, assuming a 7% rate of return compounded monthly. Waiting until age 35 to start and investing $200 per month until age 65 will result in a nest egg of $247,079 at the same rate of return – a smaller nest egg despite more money invested.

Women who are ready to expand their investments beyond their retirement accounts will often benefit from working with a financial advisor who shares their philosophy and supports their goals. A financial advisor can help craft a strategy to invest for a home purchase, college education, travel, charitable giving, retirement, or whatever else matters to the individual investor. When choosing a financial advisor, women can look for firms that include women in their teams. Meet with potential advisors to ensure that you feel listened to by the advisor and that the advisor’s investment philosophy lines up with your own.  
The biggest investing mistake one can make is not getting started.

How Can We Close the Gap for Future Generations?

While individual women can close the gap by expanding their own investments, the gender investing gap is a societal problem requiring industry and society-wide solutions.

The financial industry can work to recruit women to the industry through college scholarships, internships, and mentorships. Some – although not all – women prefer to work with a female advisor. Mentoring in particular provides a strong talent pipeline to both recruit and retain talented women to their teams.

Financial service firms can adapt their approach to advertising and recruiting clients. Firms can offer a holistic approach to wealth management and focus on the goals of their female clients within the context of providing for their overall lifestyle. Recognizing that a one-size-fits all approach does not work will help to remove some of the barriers to attracting female clients. Women often seek advisors who offer a personalized experience - educating and empowering women to make their own financial decisions rather than trying to pigeon-hole them into an existing structure. Over three-quarters of women say they see money in terms of what it can do for their families (U.S. Trust. Insights on Wealth and Worth, 2017). For many women, personal goals drive performance. 

At a societal level, encouraging financial literacy programs will help women feel more confident to invest. Recruiting more women to male-dominated, high-pay industries, particularly financial services, will help level the playing field for female investors. Policies that allow women to continue their careers while caregiving can help prevent women from losing out on some of their highest earning years, including robust family leave policies, access to safe, affordable childcare, mentorship programs, flexible hours and remote work opportunities.

According to Pew Research, about 40% of women out-earn their spouses. Due to longer life expectancies, delayed marriage, and divorces, a whopping 90% of women will be the sole financial decision maker for their household at some point. Closing the gender investment gap will ensure a more comfortable future for those families while introducing more capital into the market. Eliminating the gender investment gap isn’t just good for women – it’s good business.

Ready to take control of your investments with the help of a supportive financial advisor? Contact Ridgewood Investments for a free financial review and learn how we can help you reach your goals.
Recent Articles

Benefits of Working with Ridgewood

  • Expert Advice
    Experienced, Ivy League educated, top credentials.
  • Customization
    Personalized portfolios for your needs, not pre-packaged.
  • 100% Fee-only
    We work with you, and never work for commission

Let Us Help You Grow Your Money

Schedule a call for your
free investment review.

Other Resources You May Be Interested In

For more on how Financial Advisors like our team at Ridgewood Investments are positioning their clients for success, check out my article: "How Great Advisors Are Positioning Clients to Survive and Thrive Through this Crisis".

High Net Worth Financial Advisor New Jersey

About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.

How Much Money Do You Need to Retire Comfortably?

How Much Money Do You Need to Retire Comfortably?

    Close your eyes and picture your retirement. You may envision yourself strolling on a tropical beach, working on hobbies around the house, volunteering for a beloved cause, or playing with a grandchild. You probably don’t picture yourself hunched over bills and bank statements, trying to make ends meet. However, without careful planning, your retirement income may not match your desired lifestyle. 

    You may have heard different rules offered by experts: somewhere near $1 million, 10-12 times your pre-retirement salary, or a nest egg that can replace 70-90% of your pre-retirement income. While general rules are a good starting place, arbitrary advice does not account for your unique financial situation and may lead to retirement savings that are too small to meet needs or savings that are larger than needed and come at the expense of your pre-retirement lifestyle.

    Retiring comfortably will mean something different to everyone. Your expenses may be the same, higher, or lower than your current expenses, depending on lifestyle choices and your health. Consider what you expect your life to look like as a retiree.

    Where Do You Plan To Retire?

    Will you remain in your current home or downsize? You may be able to stretch your retirement dollar by moving to a smaller home. Remember that smaller homes typically come with lower utility costs and less expensive home repairs.

    If you plan to move to a different location, make sure you have a realistic understanding of what a home in that area will cost you and what the cost of living will be. The average cost of retirement in different US states can vary by $1 million or more. Coastal beach towns, while appealing to retirees, typically have a high cost of living and a competitive real estate market. If you’re considering moving to an age-restricted community during retirement, look up communities with your desired location and amenities to get a good idea of the monthly fees.

    Some retirees leave the United States entirely, drawn by lower cost of living, beautiful weather, and/or affordable healthcare. However, there are disadvantages to leaving the US for retirement, including distance from family, issues with long-stay visas, and double taxation. If you are interested in expat retirement, careful research and planning can make the transition to your new home smoother. 

    When Do You Plan to Retire?

    Do you envision an early retirement at 55 or plan to work well into your 70s? Your age at retirement will determine your ability to withdraw funds without penalty, your access to federal healthcare coverage, and more. Some key ages to take into account

    • Age 59 1/2: Penalty free withdrawal from most qualified retirement accounts, such as a 401(k) or IRA. Taxes may still be owed, but the 10% early withdrawal penalty no longer applies. 
    • Age 62: Earliest age to claim Social Security. Keep in mind that claiming before full retirement age permanently reduces your benefit amount.
    • Age 65: Medicare eligibility. You can enroll during a 7-month period beginning 3 months prior to turning 65.
    • Age 66-67: Full retirement age for Social Security. Your personal full retirement age is calculated by your birth year.
    • Age 70: Maximized Social Security benefits. Your monthly payment stops increasing if retirement is delayed past age 70.
    • Age 72: Required minimum distribution of tax-deferred retirement accounts.

    If you plan to retire at 62, for example you would need to plan for private health insurance for the first 3 years and may want to rely on other income resources to delay claiming Social Security to full retirement age.

    Do You Plan to Work in Retirement?

    Many retirees today prefer an active retirement compared to retirees of past generations. The average length of retirement is about 18 years. However, a retiree in good health may spend 30 years or more in retirement. Part-time work is popular with retirees looking for a better work-life balance in their golden years. Working during retirement comes with several benefits and downsides to consider. 

    Advantages:
  • Working provides mental stimulation and social interaction. 
  • Better work-life balance with part-time or part-year work.
  • The extra income can fund travel, a grandchild’s education, or social activities. If your retirement savings are lower than desired, part-time work can make up the gap and bolster savings.
  • A chance to explore a favorite interest or hobby not included in your main career, such as working with a historical site, garden center, or non-profit work.
  • Disadvantages:
  • You'll still need to deal with the typical headaches of the workforce like a set schedule, reporting to a boss, and/or dealing with unreasonable clients.
  • Your earnings may push up your income to a point where your Social Security benefits are taxable or may even temporarily lower your Social Security benefits.
  • If you are self-employed, such as a consultant or gig worker, you’ll owe payroll tax.
  • Less time to pursue other goals. Extensive travel or providing child-care for grandchildren may not be possible if you’re still in the workforce.
  • Will You Have Debt or Dependents in Your Golden Years?

    More than half of baby boomers in a Boston College Center for Retirement Research survey intend to enter retirement debt free. However, only one-quarter of retired Boomers are actually debt free. The primary sources of debt in retirement are mortgage debt, student loans, and medical bills. Making debt payments on a fixed income can severely limit your retirement lifestyle.

    Many independent- and assisted-living facilities run credit checks as part of the application process. Retirees carrying large debt loads may have lower credit scores or have trouble making payments. 

    If you are carrying a large debt load and are contemplating retirement, consider making an appointment with a financial advisor to help you plan to pay down debt and bolster savings before leaving the workforce. If you are already retired, part-time employment may provide some financial relief.

    Carrying a low-interest rate fixed mortgage into retirement may make sense in some cases where your nest egg is earning a higher interest than you are paying on the loan.

    If you will be carrying any debt into retirement, your fixed expenses will be higher and you may need to adjust your lifestyle or continue working until the debt is paid off. 

    How Long Do You Expect to Live?

    No one likes to contemplate their own demise. However, a clear-eyed understanding of your realistic life expectancy is essential for retirement planning.  A myriad number of factors influence your life expectancy, including gender, genetics, lifestyle choices, economic status, education, environment, and marital status. While some factors, like your gender and genetics are beyond your control, personal choices like eating healthy foods, exercising, maintaining social connections, and quitting smoking can expand your lifespan. 

    If you (or your spouse) may well live 30 or more years into retirement, you’ll need a much larger nest egg than someone who expects a shorter lifespan. 

    How Much Money Will You Need?

    Your desired lifestyle in retirement will dictate how much of your pre-retirement income you will need to replace. If you plan to maintain your current lifestyle, without adding significant travel or costly hobbies, replacing 80% of your current income may be sufficient. Future retirees who hope to travel significantly or upgrade their lifestyle in retirement may wish to aim to replace 90% or more of their current income. For workers behind in savings who can commit to significantly reducing lifestyle expenses in retirement, a nest-egg that can replace 70% of their pre-retirement income may be sufficient, although not ideal.

    The 4% rule helps get a ballpark figure of what you need to save for retirement. Divide your desired retirement income by 0.4 to determine how large your nest egg should be. For example, if your pre-retirement income was $100,000 per year and you want to replace 80% in retirement, you would need savings/investments of about $2 million by retirement ($80,000 ÷ 0.4). This calculation assumes an average annual return of approximately 5% on your investments (after taxes and inflation). In this scenario, you are withdrawing 4% of your nest egg each year, adjusted for inflation. However, the rule doesn’t account for market conditions or large changes in expenses that could prematurely drain your accounts. 

    Of course, the calculation above does not take into account other retirement income, such as Social Security, pensions, or working during retirement. For an idea of what to expect from Social Security income, see our article Understanding Social Security and When to Take Your Benefits. Treating Social Security income as supplementary to your nest egg can help stretch retirement savings by letting you withdraw less money during downturns in the market and help cover unexpected expenses, like increased medical costs or large home repairs.

    If you’re married, your calculations will need to take into account both of your incomes, desired retirement ages, health, and possible scenarios (like when to claim Social Security). 

    Retirement planning can be stressful as even experts disagree on the right amount to save. After getting a general idea of the lifestyle you plan to lead in retirement, connect with a trusted financial advisor like the team at Ridgewood Investments. Your financial advisors can help you ensure that your savings and investments are on track for your desired nest egg and regularly balance your portfolio to mitigate risk from market conditions. Whether you plan to retire in 40 years or 4 months, now is the best time to start planning. 

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  • Expert Advice
    Experienced, Ivy League educated, top credentials.
  • Customization
    Personalized portfolios for your needs, not pre-packaged.
  • 100% Fee-only
    We work with you, and never work for commission

Let Us Help You Grow Your Money

Schedule a call for your
free investment review.

Other Resources You May Be Interested In

For more on how Financial Advisors like our team at Ridgewood Investments are positioning their clients for success, check out my article: "How Great Advisors Are Positioning Clients to Survive and Thrive Through this Crisis".

High Net Worth Financial Advisor New Jersey

About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.

Why Your Financial Advisor’s Investment Philosophy is Important for Effective Investing

Why Your Financial Advisor's Investment Philosophy is Important for Effective Investing

The right financial advisor can help you achieve your financial goals faster and manage your money more efficiently. However, financial advisors are not one-size-fits-all. The best financial advisor for you may be very different than the best financial advisor for your coworker, neighbor, or even family member. There are financial advisors who specialize in different income levels, estate planning needs, budgeting guidance, and other niche areas. You don’t want to pay for services you don’t need or end up with an advisor without the specific knowledge needed to manage your unique assets.  

Finding a financial advisor whose investment philosophy matches your own is key to a happy relationship. All investment strategies share some common elements – no one has the goal of losing money – but take different approaches to choosing where to invest and why to make those investments. Investment philosophies are coherent ways of thinking about markets, how they work, and the types of mistakes that consistently underlie investor behavior. 

Why Does Your Financial Advisor’s Investment Philosophy Matter? 

“The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.” - Benjamin Graham in The Intelligent Investor 

If all investment philosophies seek positive returns, then why does your financial advisor’s investment philosophy matter? Your personal investment philosophy should take into account your financial goals and capital needs, your risk tolerance, and your timeline. Choosing a financial advisor whose philosophy lines up with your own ensures that your investments will work for you in the ways you need. Most investors who are successful over the long-term refine their investment philosophies over time and do not switch between philosophies in response to market conditions. Common investment philosophies include: 

  • Contrarian investing holds a belief that some crowd behaviors amongst investors lead to mispricings in securities markets that can be exploited by buying and selling in contrast to the prevailing trend of the time.
  • Fundamentals investing focuses on companies with strong earning potential.
  • Growth investing favors companies that show above-average growth, even with high current stock prices.
  • Technical investing examines past market data to uncover patterns on which to base buy and sell decisions.
  • Socially-responsible investing follows a set of moral/ethical business values to invest in companies with social and/or environmental values that align with the investor’s, such as low emissions or no animal testing   
  • Value investing seeks to buy securities that are underpriced by the market that the investor believes will rise in price significantly over time.   

These are broad categories and an individual investor or firm may incorporate elements of different philosophies into their own investment philosophy.  

What is Ridgewood Investments' Investment Philosophy? 

"Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” 
— Warren Buffett in a 2008 letter to Berkshire Hathaway’s shareholders 

At Ridgewood Investments, our investment philosophy draws on the considerable experience of our partners managing investments across market environments on an institutional scale. We seek to help our clients achieve exceptional long-term investment performance through the application of proven principles of a value investing philosophy that can succeed regardless of current market conditions.

  • We treat investing like a businessInvesting requires careful research and understands of past performance, market trends, and what fundamentals you can and cannot control. Our financial advisors apply patience, discipline, and plenty of hard work to hone our investment strategies and practice over time. 
  • We are value investors. We believe that price-paid is important and that a value-based and value-conscious approach to committing a great business can be a poor investment if the price is too high. On the other hand, great investment opportunities can be found in areas that are currently overlooked and therefore offer lower prices with long-term return potential.  
  • We use margin of safety to understand and manage risk. Margin of safety is when an investor only purchases securities when their market price is significantly below their intrinsic value. We design our investment portfolios to compound our investors capital over time while carefully mitigating unnecessary risk. Risk is permanent loss of capital as opposed to temporary market fluctuations. We believe volatility can create opportunities for long-term investors. This is an area in which we differ from the majority of advisors and individual investors. 

What Does Our Investment Philosophy Not Include?

“Understand the nature of the companies you own and the specific reasons for holding the stock. (“It is really going up!” doesn’t count.)” ― Peter Lynch, One Up On Wall Street: How To Use What You Already Know To Make Money In The Market 

Just as important is what our investment philosophy does not include: 

  1. A short-term approach. We emphasize patiently compounding capital over time and focus on the long-term results of our investments. We invest for rolling investment horizons of between 5-10 years in most cases (although shorter/longer horizons may be used if needed). Investment success is built over years of steady compounding and not by forever chasing the hot stock of the moment.   
  2. Investments outside our circle of competence. No one advisor or group of advisors can competently understand every minute investment option available. We limit our investment activities to areas of investment than we think we can understand, also known as sticking to our own circle of competence. Warren Buffet said “Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital." Operating within our circle of competence allows us to capably evaluate potential investments and make effective decisions.  
  3. Focusing solely on historical numbersWhile those who don’t know the past might be doomed to repeat it, those who expect the past to neatly repeat are also in for a rude awakening. Historical numbers are only relevant insofar as they foreshadow future changes. Our advisors also examine qualitative factors such as the nature of the business, company culture, the quality and character of the individuals running the business, and the capital allocation policies the company is likely to implement in the future. We take all these factors into account, along with understanding past performance, to choose investments that will lead to long-term gains for our clients. 

Our investment philosophy draws from successful philosophies, practices and insights of outstanding investors like Warren Buffett, Philip Fisher, Benjamin Graham, Bob Kirby, Peter Lynch and other extraordinary investors. Using the knowledge and experience we’ve collectively gained over years of investing; we seek to provide exceptional long-term performance for our clients. If Ridgewood Investments seems like a good fit for your financial needs, contact us for a free investment review.  

Recent Articles

Benefits of Working with Ridgewood

  • Expert Advice
    Experienced, Ivy League educated, top credentials.
  • Customization
    Personalized portfolios for your needs, not pre-packaged.
  • 100% Fee-only
    We work with you, and never work for commission

Let Us Help You Grow Your Money

Schedule a call for your
free investment review.

Other Resources You May Be Interested In

For more on how Financial Advisors like our team at Ridgewood Investments are positioning their clients for success, check out my article: "How Great Advisors Are Positioning Clients to Survive and Thrive Through this Crisis".

High Net Worth Financial Advisor New Jersey

About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.

The Top 7 Questions You Should Be Able to Answer About Your Finances

The Top 7 Questions You Should be Able to Answer About Your Finances

For many Americans, money is a taboo subject – right up there with sex, politics, or religion as topics to be avoided in polite company. The discomfort surrounding money leads to financial ignorance where grown adults don’t know the basics of their own finances and are afraid to ask. Unfortunately, when it comes to money and your finances, what you don’t know can hurt you.

Ignoring money matters doesn’t make them go away. At best, not knowing your own finances leads to missed opportunities. At worst, financial ignorance can cost you thousands or even lead to ruin.

It's never too late to get a handle on your finances. All you need is a few hours and a spreadsheet or pen and paper to answer these 7 important questions about your finances detailed below.  Doing so will get you well down the path towards a more secure future for you and your family.

1. What is your income after taxes and benefits?

First, you need to know what money you have coming in and how much of that money is actually available for use. How you calculate your income after taxes and benefits will depend on the source:

  • Wages and Salaries (W2): This is income from a traditional employer-employee relationship where you are paid an hourly rate or yearly salary for work completed. You can look at recent paystub to see your income (typically for a 2 week or bimonthly period) after taxes and benefit deductions for health insurance. Multiply this number by 26 (if your pay period is 2-weeks) or 2(if your pay period is bimonthly). Add in post-tax bonuses and reliable overtime not reflected on the paystub to determine your yearly income from this source. Repeat for all wage and salary work you do.
  • Self-Employment (1099) Income: Next, add in income from self-employment income. This can include contract work, freelancing, side hustles, and farm income. For 1099 income, first deduct appropriate business expenses from your gross income from that line of business – office supplies, electronics, travel costs, etc. Then deduct taxes. If you held the same business last year, pull your 1040 Schedule C from last year’s taxes to make the calculation easier. Repeat for all self-employment income sources.
  • Government Transfer Payments: Government transfer payments come from your local, state, or federal government with no goods or services exchanged. In the United States, payments from Social Security, unemployment benefits, and welfare payments are some of the most common government transfer payments. Some government benefits are taxable so use the post-tax number for your calculation.  
  • Investment Income: Investment income  is money earned from an increase in the value of investments, such as stocks, bonds, and funds. The income may also come from interest payments, dividends, or capital gains gained upon the sale of a security or other assets. Subtract any administrative fees paid and taxes due. Investment income can be trickier to calculate. Your Financial Advisor can help you find the right number to use for your income calculation, particularly if you hold a complex portfolio or many different investments.
  • Other Income: Any other income that you have coming in on a regular basis. 

Add all your sources of income together to find your yearly income after taxes and benefits. Divide by 12 to calculate your monthly income.

2. What are your expenses?

Now that you know what you have coming in, it's time to figure out how much is going out. Sit down with recent credit card and bank statements and loan statements for your mortgage, student loans, car payments, or other loans. Create a list of monthly expenses, dividing expenses in to three categories:

  • Fixed expenses: This includes your mortgage or rent, loan payments, and insurance payments that were not deducted from your paycheck in your income calculation.  Fixed expenses are largely set and would take a large lifestyle change to adjust, such as downsizing your house.
  • Flexible expenses: Flexible expenses are necessary expenses that vary from month to month, including utilities, groceries, toiletries, childcare, basic clothing, and healthcare costs. These expenses can often be adjusted somewhat by lifestyle changes like lowering the heat a few degrees.
  • Discretionary expenses: These are nice-to-have but not strictly necessary items such as dining out, entertainment costs, travel, extracurricular activities for children, etc.

Add in irregular expenses like holiday gifts, vehicle maintenance, vet bills, and vacations by dividing the yearly cost by 12 and adding to your monthly expenses.

Ideally, your income from step 1 will be greater than your monthly expenses calculated in step 2. If not, you’ll need to increase your income, reduce your expenses, or a combination of both to get into better balance. 

Regardless of how much your income exceeds your expenses, it’s still very helpful to do an expense check-in once or twice a year to go over expenses that can be reduced (by shopping around for car insurance) or eliminated (by cancelling that subscription service you haven’t used in months).

3. What is your net worth?

Your net worth is simply your total assets minus your liabilities. Assets include:

  • Cash value of liquid accounts such as checking and saving accounts, money market accounts, certificates of deposit, treasury bills, and physical cash.
  • Investments such as annuities, bonds, mutual funds, pensions, retirement accounts (IRA, 401k, 403b), stocks, cash value of life insurance, etc.
  • Real or personal property including real estate owned, vehicles, and household items (antiques, art, furnishings, jewelry, technology, etc.)

Add up all of your assets, using the most realistic values you can find, such as the Kelly Blue Book value for a car.

Liabilities are easier to calculate as there are hard numbers to work with. There are two types of liabilities:

  • Secured debt - Debt held against an asset, such as mortgages, car loans, home equity loans, etc. 
  • Unsecured debt – This includes credit card debt, student or personal loans, medical bills, outstanding taxes or other debt or bills owed

Add the value of your secured and unsecured debt to find your total liabilities.  

Subtract your liabilities from your assets to determine your net worth. If the number is greater than zero, you have a positive net worth. If the number is in the red, you have a negative net worth. Tracking your net worth over time can provide a good big-picture view of your financial trajectory.

4. What are your financial goals?

Where do you see yourself in 2 years? 10? 40? If you don’t know where you want to go, it’s hard to get there. Make a list of personal, big-picture objectives such as:

  • Short term goals: <2 years - Think travel, saving for a vehicle down payment, planning a wedding or other big event, home improvement/renovation, paying down debt, adding an income stream, going back to school, or building an emergency fund.
  • Medium term goals: 2-5 years - Saving for a down payment on a home, purchasing a vehicle in cash, taking a bucket list vacation, paying private school tuition, launching a company, or starting a family.
  • Long term goals: 5+ years - Retirement, putting your kids through college, purchasing a vacation home, etc.

Your goals will be highly personalized to you. Maybe you want to retire in 10 years, splitting your time between homes in Florida and NYC, or maybe you're working towards purchasing your first home where you can raise your family.  No matter what your goals, it is critical to make the effort to think about them in advance, and write them down and revise them from time to time.

5. Are you on track to meet your financial goals?

Now that you’ve articulated what your goals are, you can make an action plan on how to achieve them 

Want to put your child through college? Calculate four years of tuition and room and board at an appropriate school (less any expected financial aid) and make a plan to get to that necessary amount. You may want to open a 529 account or adjust your contributions to an existing plan 

Hoping to retire in 2031? Take a hard look at your investments, retirement accounts, and expected Social Security income to see if you are on track to retire comfortably at that time. Increase your retirement savings and adjust your investments as needed.  

A trusted financial advisor can help make sure you are on track to meet all your goals – big and small. Your financial advisor will work with your goals so that your Bora Bora trip this year doesn’t derail your home purchase down the road.  A great investment person can also help you harness the power of investment compounding so that you can achieve your goals sooner and with less effort than if you were dependent solely on your ability to save the necessary amounts.

6. Are you prepared for a financial emergency? What would happen if something happened to you?

Are you ready if a hurricane damages your house? What if a global pandemic puts you suddenly out of work? If you or your spouse passed away tomorrow, would your family be left wanting?  

A little advance planning can go a long way to mitigate the effects of a financial emergency:

  • Build Your Emergency Fund: Experts recommend having a minimum of 3-6 months of expenses available in a liquid account. If you have a stable, salaried job in a common field, 3 months may be sufficient. If your income is more varied or you work in a specialized field with fewer job openings, 6 months may provide better peace of mind. If your job is even more tenuous, you may want to build up a reserve in excess of 6 months of expenses in the short-term. Having an emergency fund keeps an an unexpected setback to your income or expenses from derailing your finances or causing undue stress.
  • Insurance: Carrying the right kinds and amounts of insurance is essential. Life insurance can ensure a surviving spouse will be able to continue living comfortably in the family home. Disability insurance (short and long term) helps replace income if a breadwinner is injured. Car insurance keeps a negligent driver or careless mistake from being financially devastating. Health insurance helps you get the care you need to live a healthy life.  Home owners insurance protects your home and physical property from damage due to fire, natural disaster or theft.  A risk review looks at whether you have the right amounts and types of insurance in place to protect you against high severity but low probability risks.
  • Living Will and Advance Care Directive: Leave instructions for your medical care in the event that you cannot make decisions for yourself. Having these documents in place saves your loved ones from the heart-wrenching decisions of trying to guess if you would want to be resuscitated or kept on a ventilator.
  • Update (or Create) Your Will: Having a legal will makes the time after your death easier for your family and gives your heirs faster access to needed assets. You can spell out how assets are distributed (including in ways that will reduce taxes for your surviving family members). If you have children or other dependents, your will should include who will care for them so that decision falls to you and not the court system.  If your assets are sufficiently valuable, an estate attorney and your financial advisor can also help you craft your will and your entire estate plan to take advantage of legal strategies to reduce the estate tax and income tax burden on your heirs.
  • Keep Records: Keeping updated records of your assets and liabilities will make it easier to file an insurance claim after something happens that causes damage. Electronic records backed up to the cloud or a fire and water proof box will keep your records accessible if a natural disaster hits your house.

No one can eliminate the possibility of a financial emergency but taking the steps above can make the emergency much easier to handle so that you can move on with your life.

7. How often do you track and review your finances? Are there any steps you should be taking to maximize your options?

Knowing what your current finances are is essential to reach your financial goals. Schedule a routine (minimum yearly) financial review. Update your account records, review your income and expenses, check that your will is still up-to-date, and review your goals and adjust your plans as needed. If you are in a marriage or partnership, both partners should understand the broad picture of what your finances are and what you are working towards. If you experience a major life event like a birth, death, job loss, or new job, take a moment to review your finances and adjust as needed.  

A trusted third-party, like a financial advisor at Ridgewood Investments, can help you choose the right investments to stay on track to reach your financial goals and make sure you aren’t forgetting anything in your financial plan.  As a comprehensive advisor, offering investment guidance and deep financial planning capabilities, Ridgewood Investments has all the skills in house to help you answer the above important questions and take action accordingly.  For our highest wealth clients, we also offer Multi Family Office solutions which enable an even greater level of guidance and outsourcing when appropriate.

When you know where your money is and where it’s going, and have put in the effort to make sure it is optimized as much as possible, you can focus on the parts of life that money can’t buy without financial worries or unpleasant surprises.  The result can be priceless in the form of peace of mind and security for your family and loved ones.

Recent Articles

Benefits of Working with Ridgewood

  • Expert Advice
    Experienced, Ivy League educated, top credentials.
  • Customization
    Personalized portfolios for your needs, not pre-packaged.
  • 100% Fee-only
    We work with you, and never work for commission

Let Us Help You Grow Your Money

Schedule a call for your
free investment review.

Other Resources You May Be Interested In

For more on how Financial Advisors like our team at Ridgewood Investments are positioning their clients for success, check out my article: "How Great Advisors Are Positioning Clients to Survive and Thrive Through this Crisis".

High Net Worth Financial Advisor New Jersey

About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.

Understanding Social Security and When to Take Your Benefits

Understanding Social Security and When to Take Your Benefits

When planning for retirement in the United States, Social Security is the common denominator for the vast majority of workers. After spending your working life paying into the system, being eligible to collect Social Security benefits is one of the hallmarks of American retirement.

Social Security is a federally-run insurance program that provides retirement benefits, survivor benefits, and disability income to provide economic security for millions of Americans each year. As of June 2019, approximately 64 million people received monthly Social Security benefits, about 48 million of whom were retirees and their families.

Retirees can start collecting a reduced benefit at 62. After working forty plus years, it can be tempting to start enjoying guaranteed monthly income as soon as you are eligible. However, there are tradeoffs to collecting early and many workers may benefit by waiting a few years to begin collecting.

Who Can Take Social Security Benefits?

Social Security benefits are available to older Americans, workers who become disabled, and families who experience the loss of a spouse or parent. Rules around collecting benefits for the loss of a parent or for disability are too complicated to address in a short article. If either situation applies to you, I recommend working with your Financial Advisor and/or contacting the appropriate benefit specialists at the Social Security Administration (SSA). For the average retiree, who is the most common beneficiary of Social Security, the rules are much easier to understand.

To qualify for Social Security payments, you or your spouse must have paid the Social Security payroll tax for at least 10 years over your working history. Nonworking spouses can be eligible to collect up to half of the working spouse’s benefit.

Your 35 highest-earning working years, indexed for inflation, are used to calculate your benefits. There is a limit to the amount of annual income that qualifies for the Social Security calculation ($137,700 for 2020). In general, higher earners can expect to receive more in benefits from Social Security.

When Am I Eligible to Collect Benefits? 

Retirees can begin collecting as early as 62 or as late as 70 (even earlier as a survivor of another Social Security claimant or with a disability).

Full retirement age depends on your birth year:

Year of Birth

Full Retirement Age (years)

1943-1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 9 months

1960 or later

67

Early retirement.

Your Social Security monthly benefits are permanently reduced by five-ninths of 1% for every month you start getting benefits up to 36 months before your full retirement age. If you begin claiming more than 36 months before your full retirement age, your benefit is further reduced by five-twelfths of 1% for each additional month. Your benefits do not increase once you reach full retirement age. If your full retirement age is 66 and eight months, and you begin collecting Social Security at age 62, you would only get about 71.7 percent of your full benefit.

Delayed or late retirement.

Delaying beginning your benefits past your full retirement age results in an increase of 2/3 of 1% per month (8% a year) in your monthly benefits for each month you delay until age 70, when benefits cap out. According to the SSA, your monthly benefit will be roughly 24-32% higher than if you began collecting at full retirement age and a whopping 76% higher than if you begin claiming at 70 instead of at 62. You can use the SSA’s Early or Late Retirement? calculator to see the effect on your benefits of retiring at various ages.

When is the Best Time to Start My Benefits?

The decision of when to start collecting Social Security benefits is highly personal. In deciding when to begin taking your Social Security benefits, you should consider:

  • Current employment. Earned income (including self-employment income) can reduce your benefit. If you are working and collecting Social Security benefits prior to full retirement age, $1 in benefits is deducted for every $2 you earn above the annual limit ($18,240 for 2020). The reduction in benefits falls to $1 in benefits for every $3 you earn above a much higher annual limit ($48,600 for 2020) in the year you reach full retirement age.
  • Your healthcare. While you can begin drawing reduced Social Security benefits at 62, Medicare eligibility is set to 65. If you do not have employer-sponsored health insurance through your employer or your spouse’s employer, private health insurance will wipe out a large portion of your Social Security payments each month.
  • Your life expectancy. According to the SSA, average life expectancy for an individual turning 65 years old on April 1, 2020 is about 84 years for males and 86.5 for females. You can use the SSA’s life expectancy calculator to see the average life expectancy for an individual of your gender and date of birth. Of course, the calculator does not take into account your lifestyle, family and personal health history, education, and other factors that can affect your life expectancy. If you are in good health, the higher benefits over 20+ years may outweigh the benefits of early payments. If you are in poor health, immediate access to guaranteed income from Social Security may be the right choice in some circumstances.
  • Your spouse. Married couples live longer on average than single folks and have an above average probability of one or both spouses living to 90. Many couples do the math and find that waiting to have the higher earning spouse claim benefits as long as possible, up to age 70, is the best choice for their situation. The lower income spouse may be able to claim earlier, depending on the couple’s finances. After the death of one spouse, the surviving spouse receives the larger of the two benefits for his or her lifetime. For couples with a large difference in average earnings over the course of their careers, this can make a significant difference in the financial health of the surviving spouse.
  • Current cash needs. Do you have an alternate means of income? Working longer or drawing on other retirement accounts can help you maximize your monthly benefits.

How Can I Maximize My Benefits?

You can increase your monthly benefit amount in two ways:

  • Keep working. If you have less than 35 years of income history, each additional year you work replaces a zero-income year in the calculation for your benefits. If you’ve worked a full 35 years but have moved up the company ladder, another year at your current income can edge out a lower income year from earlier in your career.
  • Collect later. Beginning your benefits at age 62 results in a permanently reduced monthly benefit while delaying to age 70 yields the highest possible monthly benefit. Talk with your financial advisor about what your break-even age is for delaying beginning Social Security benefits. The break-even age will vary depending on what your tax assumptions are and the opportunity cost of waiting. In general, if you think you will beat the average life expectancy or if you are the higher earning spouse and want to maximize survivors benefits for your spouse, waiting to claim benefits may be the better option. If you are in poor health or are the lower income spouse (and your partner can delay beginning benefits), claiming earlier may make more senses for your situation.

Is Social Security Enough for Retirement?

Social Security was never meant to be the sole source of income for retirees. The average monthly benefit as of January 2020 was $1,503. The maximum monthly benefit for someone retiring at full retirement age in 2020 is $3,011. Social Security claimants receive modest cost-of-living adjustments (COLA) based on inflation each year, ranging from 0-3.6% over the past decade. The 2020 COLA was 1.6% and a similar COLA is expected for 2021.

Wondering if Social Security will still be around by the time you retire? You may have heard that Social Security is funded by current workers and the coming retirements of baby boomers could overwhelm the system. As of June 2019, about 177 million people worked and paid Social Security taxes. According to the SSA’s 2020 Annual Report, the Social Security Trust fund has enough resources to cover all promised retirement benefits until 2035 and will cover 79% of scheduled benefits for new retirees after 2035 without changing the current system.

While planning for retirement, it may be best to think of Social Security as a form of insurance, not as a primary income source for your golden years. Most financial advisors recommend that your retirement income needs to replace 70-80% of your pre-retirement income for a comfortable lifestyle throughout your golden years.

The amount of pre-retirement wages that Social Security benefits replace varies based on what your average earnings were and when you chose to begin collecting. The maximum yearly benefit for an individual collecting at the full retirement age in 2010 comes to $36,132. For many retirees, this is too little to support their desired lifestyle.

Don’t leave taxes out of your retirement calculations – about 40% of current Social Security beneficiaries pay taxes on their benefits. Filing as an individual on your federal tax return, you may have to pay taxes on your benefits if your total income exceeds $25,000 ($32,000 for couples filing jointly).

Your retirement plan should take into account your investments, savings, and Social Security benefits to provide the retirement income you need to support you throughout your golden years. A trusted Financial Advisor like our team at Ridgewood Investments will help you prepare your portfolio to provide the income you need in retirement so you can spend less time worrying about Social Security benefits and more time planning the hobbies, travel, or other goals you plan to pursue in retirement.

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For more on how Financial Advisors like our team at Ridgewood Investments are positioning their clients for success, check out my article: "How Great Advisors Are Positioning Clients to Survive and Thrive Through this Crisis".

High Net Worth Financial Advisor New Jersey

About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.

How to Get Back into the Stock Market If You Sold Out Earlier This Year

How to Get Back into the Stock Market If You Sold Out Earlier This Year

The United States officially entered a recession in February 2020, ending the longest economic expansion in American history. The contraction in March 2020 was so severe that the National Bureau of Economic Research declared a recession in June, without waiting for a second complete quarter of negative growth. 

The prevailing wisdom says that investors should hunker down and ride out market declines. In reality, a noteworthy portion of investors sell off their holdings when markets fall, fearing further loss. Earlier this year, I had a family member call me and say “I know you told me not to cash out, but I did. What do I do now?”.

My family member was far from the only one to sell off when the market fell. According to Morningstar, spooked investors pulled a net $326 billion from mutual funds and exchange-traded funds in March. For most of those investors, that money remains out of the market.

If you were one of the investors who sold out earlier this year, you may be wondering why selling out was likely the wrong choice and how and when to get back into the market.

Why Is Selling Out Likely a Bad Idea?

A well-diversified portfolio is designed to handle market volatility while still trending towards long term gains. Whereas a painful short-term loss may be unavoidable in a market-wide crash, diversification works to prevent losses from which your portfolio may not recover.

Moving to cash can seem like a prudent move to stem further losses when the market rapidly drops. However, holding a large portion of your assets in cash may be a poor choice for most investors. Cash can be a difficult allocation because:

  • Interest rates are historically low. The Federal Reserve has kept interest rates low since the last financial crisis in 2009. The current rate is near zero which means that cash holding like bank accounts and short-term money market funds are earning less than the rate of inflation. Anytime your savings grow at less than the rate of inflation, you are effectively losing money. 
  • Holding cash means missing out on market gains. The S&P 500 closed at a record high on August 18, 2020 and surpassed that high on September 2, 2020, erasing the market losses early in the coronavirus pandemic. Investors who pulled their money from the market in March endured the market plunge without the relatively rapid market recovery that followed.
How is the Stock Market Recovering Faster than the General Economy?

The economy and the stock market do not move in tandem, even in normal times. The economy is concerned with what is going on right now and in the recent past – higher unemployment, Main Street small business closures, and ongoing lockdowns to control the spread of the coronavirus. Economists look at historical data from the trailing one to three months to determine economic health.

The stock market is inherently forward-looking. Investors look at current conditions – of the economy at large and of the financial health of the consumer and of corporations – and estimate pricing for stocks today based on predictions for the future (typically three to six months in advance).

The market has benefited from Fed policies of low interest rates and a continuation of its quantitative easing approach of injecting liquidity into the financial system by purchasing treasuries, mortgage-back securities, and, recently, corporate bonds. These policies make holding assets in cash unappealing and are designed to drive investors into the market.

The stocks making the largest gains – big companies like Amazon, Google, Facebook, Netflix, etc. – have been largely protected from the current economic conditions. White collar workers can work effectively from home. Online ordering, video streaming, and social media all benefit from consumers sheltering in place. Companies like these dominate in the stock market, pushing the market up at the same time that small businesses are closing their doors.

Waiting for a full economic recovery before putting your money back into the market will likely mean missing out on significant gains.

When and How Should You Get Back In?

The best time to start investing again is almost always “now” – no matter when now is. The perfect is the enemy of the good. Trying to time the market to put your money back in at a hypothetical perfect time is a fool’s bet for most investors. 

To reenter the market, you have two options:

  • Put all your money back in today. Stocks rise more often than they fall. Putting all of the money you have waiting to invest into the market today offers the greatest possibility of profit. However, this is a higher risk option – if you are unlucky with your timing, the market could theoretically fall again the day after you invest and stay low for a long period of time. Investors who pulled money out of the market in March 2020 are likely to have low risk tolerance and may find this method too emotionally draining to stomach.
  • Reinvest slowly with a dollar-cost averaging strategy. Dollar-cost averaging involves investing a predetermined amount at regular intervals into target assets (regardless of fluctuations in their pricing). If you invest a portion of your paycheck in a 401k plan, you are already utilizing dollar-cost averaging. The same dollar amount is invested in the array of assets you have chosen each month, regardless of the price of any given asset that month. Dollar-cost averaging allows investors to minimize the impact of short-term volatility and avoid the risk of investing a large sum of money at an inopportune time.

Investing in the stock market will always carry some degree of risk. However, as you now know, holding large amounts in cash carries its own risk in losses to inflation and opportunity costs. Before reinvesting your money, make sure you understand that market investing is a long-term game and are prepared not to make the same mistake of selling out should the market fall again. Finding an investment strategy that you can stick to long term, through ups and downs, will allow you to feel good about how your money is working for you no matter how the larger market and economy are doing.

What Should I Do Differently Next Time?

A trusted Financial Advisor can help you re-enter the market and make a plan for the next downturn that focuses on your long-term goals. Having a good Financial Advisor on your side is particularly useful in down markets and times of heightened volatility. Do-it-yourself investing is relatively easy when everything is going up and looks to be going that way for a long time.

When the market is more volatile – say with a global pandemic – a Financial Advisor can help you find the right investment strategy for your financial needs. If you are nearing retirement or will otherwise need to draw down your assets in the short- or medium-term future, a Financial Advisor will help you navigate balancing risk and reward to ensure that you have income available when you need it. 

The best Financial Advisors bring education and experience to the table and are able to review your investments without their judgment being clouded by emotion or fear. It’s undoubtedly scary to see your investments shrink when the market turns down. A Financial Advisor can help you see the opportunities from holding on to an investment long term and can help you find areas to invest that take advantage of the lowered pricing. If you reframe your thinking of a market downturn as a sale on stocks, you are less likely to want to flee the market and more likely to be willing to snap up some bargains.

Recent Articles

Benefits of Working with Ridgewood

  • Expert Advice
    Experienced, Ivy League educated, top credentials.
  • Customization
    Personalized portfolios for your needs, not pre-packaged.
  • 100% Fee-only
    We work with you, and never work for commission

Let Us Help You Grow Your Money

Schedule a call for your
free investment review.

Other Resources You May Be Interested In

For more on how Financial Advisors like our team at Ridgewood Investments are positioning their clients for success, check out my article: "How Great Advisors Are Positioning Clients to Survive and Thrive Through this Crisis".

High Net Worth Financial Advisor New Jersey

About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.

How the 2020 Presidential Election Could Affect Investors and the Stock Market

How the 2020 Presidential Election Could Affect Investors and the Stock Market

In a few short weeks, voters in the United States will choose between Democrat Joe Biden and Republican Donald Trump at the ballot box. A deluge of campaign ads from both Democrats and Republicans offer dire predictions for America if the opposing party wins the next four years of the presidency.

With the global coronavirus pandemic still raging in the United States, and Congress deadlocked on the best course of action to support an economic recovery, the 2020 election feels uniquely important to many Americans. In February 2020, the United States economy entered a recession, ending a record 128-month expansion that began in June 2009. The next president, together with Congress, will decide America’s path forward.  

Stock markets main influences are corporate earnings, interest rates, and economic growth. Business cycles, globalization, and unpredictable major events like terrorist attacks or natural disasters all drive the market up and down.  Political events such as the US presidential election cycle can also have noticeable effects on the market.

Stock markets are more volatile in the months leading up to a major election because markets do not like uncertainty. 2020 has been a year of heightened volatility for the stock market, in part due to the normal election year reprising of the potential future administration’s policies. While we do not know how long a coronavirus vaccine will take to go to market or how many other disasters may arise this year, the question of who will be sworn into the office of the presidency come noon on January 20, 2021 will soon be resolved.

How will the stock market react if Biden wins? What if Trump wins a second term? Looking back at previous election cycles and their effects on the stock market offers us some insight.

How Have Previous Presidential Elections Affected the Stock Market?

Portents of doom regarding political opponents are nothing new. Before each election, both parties do their best to convince voters that the market will do poorly under the other side and thrive under their wiser set of proposed policies. The leader in the White House has many opportunities to influence the economy through fiscal policies, spending, taxation, regulation or deregulation, etc. However, our choice of an individual president has less effect on the economy, and therefore on the market, than one might think.

On average, markets may have shown somewhat of a cycle in regard to the presidency, generally performing below average in the first two years of a president’s term and above average in the last two years. Looking at the Dow Jones Index data dating back to 1896:

  • Year 1: Average return of 2.4%
  • Year 2: Average return of 4.2%
  • Year 3: Average return of 10.4%
  • Year 4 (Election year): Average return of 6%

On average, based on past data, the first two years seems to yield below average returns.  This might perhaps have to do with a new administration implementing a new agenda and change takes some time. The market may also be waiting to see what policies are going to be proposed and passed leading to greater uncertainty in the early years of a new term.

During the latter two years of a presidency, the president’s policies become clearer (less uncertainty for the market). The party in power begins to think about the next election and focus turns to fiscal stimulus. In the fourth year of a president’s term, election year, the added uncertainty of the next election may show reducing gains.

Interestingly, the correlation also seems to work in reverse.  The market’s performance before an election can be a guide to whether the incumbent party will maintain control. With only three exceptions since 1928, the incumbent party has won the presidency when the S&P 500 has risen in the three months leading up to an election and has lost power when the S&P 500 has fallen. The exceptions are Dwight D. Eisenhower, who was reelected in 1956 despite the S&P falling 3.2%. In 1968 and 1980, despite three months of a rising S&P 500, Richard Nixon and Ronald Reagan beat out incumbents Lyndon Johnson and Jimmy Carter, respectively, to take control of the White House. With a nearly 90% prediction rate, it’s not surprising that parties typically focus on improving market performance in the latter part of their terms.

Of course, it's extremely important to keep in mind that the above patterns are just based on the averages – individual presidencies may defy the trend as many other factors also have significant influence on the market.  As just one example, in 2008, an election year and the middle of a financial crisis, the Dow fell 34% as the subprime mortgage crisis brought on the Great Recession (versus the 6% average gain for election years as a whole).

How Will the Market React If Trump Wins Another Term?

Republicans are thought of as the more market friendly party and we can perhaps expect a positive market reaction if Donald Trump wins the 2020 presidential election. On average, stock market gains tend to be higher when an incumbent party retains power versus when a new party takes the White House. In most cases, an incumbent party, and in particular an incumbent president, is considered a known quantity, though 2020 and this President may be an exception to the rule of continuity.

However, surprisingly, the data seems to suggest that the overall gains could potentially be higher under a Biden presidency. Despite Republicans reputation as the more business-friendly party, market gains historically have consistently been higher (on average) under Democratic administrations than Republican ones.

Republican administrations promote growth by cutting taxes, allowing corporate profits to flourish. In 2017, the Trump administration cut the top corporate tax rate from 35 percent to 21 percent, increasing corporate profits. A Trump administration would keep the lower corporate tax rate in place.  This prospect led to a significant market rally once Trump won the election in November of 2016 that continued well into his term.

Financial stocks in particular might rise after a Trump victory. President Trump, in some cases with bipartisan support, scaled back some of the regulations of the Dodd-Frank Wall Street Reform and Consumer Protection Act and has signaled an openness to continuing to remove regulations in the financial sector. Energy stocks are also likely to do better under a second term of the Trump presidency as Trump continues to reduce regulations on fossil fuel production.

Trump has defied conventional wisdom in many arenas, and indeed the market gains during his first term have been far from typical. Average price gains for the S&P 500 in 2017 and 2019 (years 1 & 3 of the Trump presidency) were well above historical averages while 2018 and 2020 to date have fallen below the averages.

What Changes If Biden Wins the White House?

Whenever a new party takes power, it appears that market gains the first year tend to be more muted so if history is a guide, we can perhaps expect a smaller gain the first year of Biden’s presidency. Nonetheless, if Americans elect Democrat Joe Biden as our next president and historic patterns hold, the markets may rise at a greater pace over his four-year term than under a Republican president.

According to InvesTech Research, annualized total returns for the S&P 500 since 1928 have averaged 13.3% under Democratic administrations. Republican administrations averaged 7.7% annualized total returns over the same time period. Recent administrations have continued this trend – average gains under Bill Clinton and Barack Obama exceeded gains under George Bush Sr, George W Bush, and Donald Trump.

This may seem counterintuitive – Biden plans to raise taxes on corporations and the rich, which cuts into corporate profits and possibly spending by those paying higher tax rates. Increased taxes perhaps allow for increased spending (or investments) in certain sectors like healthcare and infrastructure, which may be helping to offset some of the impact of higher taxes. Democrat administrations generally increase taxes but also increase spending.

Biden has promised a significantly more robust fiscal stimulus plan than Trump has to date. The exact size of the stimulus Biden is able to pass will depend on control of Congress. If Democrats manage to hold onto the House of Representatives and flip the Senate, we can expect higher spending. Just like lower taxes, higher spending stimulates the economy and market for different, but similar, reasons that there is more money available to be allocated.

Clean energy stocks could do relatively better under a Biden presidency as renewable energy becomes a greater priority. Utilities and real estate firms did not see as much benefit from Trump’s 2017 tax bill and would be less impacted from the top corporate tax rate increasing to 28% under Biden’s plan. Infrastructure investment has bipartisan support and a large bill could rally industrial and material company stocks. Healthcare may also be poised to rise under a Biden expansion of the Affordable Care Act, although the details of the eventual bill itself will ultimately determine which stocks gain the most.

Is the 2020 Election Unique?

2020 has been a unique year in modern American history. A global pandemic, increasing partisan polarization, social unrest, and several natural disasters have made 2020 a year to remember. An expected record number of mail-in ballots mean we might not know who won the Electoral College until several weeks after Election Day. However, come January 20, the next president will be sworn in and life will go on and markets will adjust either way.

In Sir John Templeton’s wise words: “The four most dangerous words in investing are: this time it's different.” Investing is a long-term game. While it’s tempting to focus closely on the presidential election, doing so can mean you’ll miss the forest (larger market trends) for the trees (the politician du jour). Investors making smart decision can continue to make long-term financial gains regardless of whether the market is rising or falling or who controls the presidency.

Investing for the long term requires a comprehensive understanding of the risk and likely return of potential investments and how those investments correlate to your situation and objectives. Talk to a trusted advisor to make sure that your investments are the right choice for you. A good advisor will keep abreast of potential implications of the election cycle and the political winds on your portfolio so that you can focus on what matters most to you.

Recent Articles

Benefits of Working with Ridgewood

  • Expert Advice
    Experienced, Ivy League educated, top credentials.
  • Customization
    Personalized portfolios for your needs, not pre-packaged.
  • 100% Fee-only
    We work with you, and never work for commission

Let Us Help You Grow Your Money

Schedule a call for your
free investment review.

Other Resources You May Be Interested In

For more on how Financial Advisors like our team at Ridgewood Investments are positioning their clients for success, check out my article: "How Great Advisors Are Positioning Clients to Survive and Thrive Through this Crisis".

High Net Worth Financial Advisor New Jersey

About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.

How Solomon’s Paradox Explains Why We All Need Good Coaches and Advisors

How Solomon’s Paradox Explains Why We All Need Good Coaches and Advisors

High performers in every field share some common attributes.  One of these is that they almost always seek out experienced coaches and advisors who help them achieve high performance in the first place.  Examples of high performers in various areas who work with coaches to reach or maintain high levels of performance includes:

  • Olympic Level Athletes like swimmer Michael Phelps
  • Elite Golfers like Tiger Woods and Rory McIlroy
  • Top Fortune 500 CEOs like Indra Nooyi and Meg Whitman
  • Wealthy founders of companies like Facebook and Google

As an Investment Advisor, one of the most enjoyable parts of my job is in educating and coaching my clients. Beyond the foundational work that we do in managing and growing their investments, we often guide clients through questions or issues related to entrepreneurship and financial or even life and career options.

As a financial coach, I can often see things they have missed, bring perspectives that clarify the choices at hand, and help my clients narrow down the right decision under the circumstances for them by asking diagnostic questions and helping weigh the pros and cons of each choice using the experience we bring to the table.

The American Dream says that anyone can work their way from nothing to become successful.  However, almost no one achieves success by themselves.  Hard work and talent focused in the wrong area will inevitably lead to failure.  The cost of even one error, if it is big enough, can be extremely high and delay the achievement of goals by years or perhaps even place them out of reach forever.  Correspondingly, the ability to sidestep risks and find the most efficient way to achieve objectives can be invaluable.

So why is it that even the most intelligent, best educated, naturally talented, hardworking and driven people still seek out coaches and advisors to succeed?

I recently learned about Solomons Paradox, and it holds the key to explaining why all these high performers and all of us as well can benefit from the right coaches and advisors if we wish to achieve our own goals.

What is Solomon’s Paradox?

King Solomon, the biblical king from the Old Testament, reigned over the consolidated Jewish kingdom from circa 970 to 931 BCE. Solomon was considered the wisest of kings and people would travel from near and far to seek his advice and mediation.

In the biblical tradition, young King Solomon has a dream where the Lord offers him anything. Instead of choosing money or power, Solomon asks for the wisdom to discern between good and evil with integrity. God is pleased with his request and grants him the wisdom to judge for his people.

In one of Solomon’s best-known judgements, two women came before the king to seek his help with a custody dispute of a newborn child. Both women had recently given birth to baby boys, one of whom had died, and both women claimed the living child as their own. Solomon sent for a sword and ordered the child cut in half, so that each woman could have a share. One woman readily agreed while the other begged him not to kill the boy, saying she would rather give the baby to the other woman to save his life. Solomon ruled that the woman willing to give up the child was the true mother and she was reunited with her little boy. The story spread throughout the United Monarchy and was retold as a sign of Solomon’s wisdom and justice.

While many of us know the tale of Solomon’s wisdom in the affairs of others, few realize that he seldom showed good judgement in his own personal life. Some examples of his personal bad judgement include his decisions to hoard vast amounts of wealth and build an extravagant palace on the backs of countless slave laborers. He also had hundreds of wives and concubines, many of them from foreign lands, and allowed his wives to bring the worship of their gods to his home (considered idolatry in ancient Israel).

Perhaps most egregious in his recounted failings, Solomon failed to prepare his son and heir Rehoboam to become a wise king. When Solomon died and Rehoboam took the throne, Rehoboam ignored the advice of his own advisors and dealt harshly with his people. His tyranny led to the end of the United Monarchy, where the Kingdom of Israel broke free of Rehoboam’s rule in the north and Rehoboam ruled the southern Kingdom of Judah alone. The culmination of Solomon’s lifetime of bad personal decisions ruined his once great kingdom.

The contrast between Solomon’s sage public judgements for others and the lack of wisdom in his personal life is Solomon’s paradox. Why was the wise King Solomon unable to apply more of his wisdom to his own personal choices and goals?

Does Solomon’s Paradox Still Apply? 

King Solomon lived nearly 3000 years ago. Entire empires have risen and fallen in the intervening years. Inventions ranging from the printing press to electricity and the Internet have transformed our daily lives. We now have access to the collective knowledge of the human race on a device we carry around in our pocket. With all the available information and advantages of the modern era, it’s might seem that the folly of an ancient king may no longer be relevant.

Igor Grossman, a professor of psychology at the University of Waterloo in Ontario, set up a series of experiments to see if Solomon’s paradox was still a factor today.  He wanted to measure if people were indeed better at giving advice to others than in evaluating and giving themselves the benefit of that same judgement ability.

Grossman’s studies found that:

  • We are able give our friends better advice because of our relative objectivity. Participants imagined that their friend’s long-term romantic partner had committed infidelity. The participants were able to stay clearheaded and give well-reasoned advice.
  • We give ourselves poor advice or don’t follow our own good advice. When those same participants imagined that it was their own long-term romantic partner who had committed infidelity, their responses were clouded by emotion and less reason than when it was a friends circumstances
  • We don’t get wiser with age. Older participants (60-80 years old) fared no better at managing their emotions than young participants (20-40 years old) when dealing with a personal betrayal. Older folks may have more experience and a wider knowledge base but they are just as susceptible to Solomon’s paradox as the rest of us.

As poor Alice noted in Lewis Carroll’s Alice’s Adventures in Wonderland “I give myself very good advice, but I very seldom follow it”. 

Solomon’s paradox is not unique to the ancient era. There are countless examples of historical figures who would have benefited from their own good advice. In an early draft of the Declaration of Independence, Thomas Jefferson denounced slavery as a “cruel war against human nature itself, violating its most sacred rights of life & liberties” yet Jefferson owned hundreds of slaves himself.

Author George Orwell’s 1984 warned of the dangers of Big Brother, yet Orwell compiled a list of what he viewed as problematic writers for the British anti-communist International Research Unit in 1949.

Even today, we can find many examples such as politicians who sabotage their political chances through irresponsible extramarital affairs and many others.

Of course, Solomon’s paradox doesn’t just apply to the rich and famous. Plenty of average people make terrible choices that they would never encourage a friend to make – impulsive relationship decisions, hearsay driven investments, or merely giving up after a temporary setback.

How Can We Avoid Solomon’s Paradox?

Luckily, we are not powerless against Solomon’s paradox. Simply being aware that the paradox exists can help to a degree. Practicing psychological distancing by reframing decisions as if we were deciding for a dear friend can help us to remain more objective.

Instead of asking yourself “Should I have that last slice of cake?”, ask from a third person perspective “Should he have that last slice of cake?”. The simple pronoun change can help you focus on facts - I’m not hungry and am trying to cut back on sugar – versus feelings created by emotions and short-termism.

Wisdom is the quality of having experience, knowledge, and good judgment. Practicing psychological distancing helps us to make more rational judgements but is insufficient in areas where we may not have the right experience or knowledge. If some of the necessary components of wisdom are absent, and especially when the decisions are complicated, your unaided decisions are still likely to yield poor results.

In these cases, finding a good mentor, coach or advisor who has the right education, experience and ability to supply the missing components of wisdom from a more objective third person perspective can help you reach your goals in just about every area of your life far more efficiently.

Very high performers have not just one, but multiple advisors that they rely on to perform even better. A pop star might employ an agent, voice coach, stylist, nutritionist, personal trainer, and dance coach to continue rising in their career.

For those of us not blessed with Shakira’s voice and dancing talent, we can still benefit from advisors in certain areas of our lives:

  • Relationship counselors assist couples with communications and trust issues that would lead to divorce if unchecked
  • Personal trainers and/or nutritionists can help individuals with health challenges that can literally add years or even decades to your lifespan
  • Investment advisors help you multiply your money and freedom without doing any more work yourself
  • Business and career coaches can help you achieve greater growth in income and profitability from your work

As with all the above examples, even in things in which we have a good knowledge base and prior experience, a qualified outside observer can help us more clearly evaluate all the options to make the optimal decision and avoid needless mistakes. This is why top CEOs still employ executive coaches despite their own credentials. The unique vantage point of an outside advisor can help us grow and prevent unnecessary stumbles in whatever arena we employ them.

What Does this Mean for Investing?

Investing, and financial health in general, is one area where almost everyone can benefit from a good advisor. Financial markets are complicated and forever changing. Money decisions are inherently personal and clouded by emotions and past experiences. Loss aversion is deeply embedded in the human psyche, even when a small loss will eventually lead to powerful long-term gains.

As an investment advisor, I often help my clients counterbalance their instincts in the achievement of their financial goals and portfolios.

When seeking a great investment and financial advisor, its important to be thorough and find a worthy coach, so take the time needed to look for someone with:

  • Experience You want an advisor who has a history of achieving the results you want to achieve. I founded Ridgewood Investments in 2002 after seven years on Wall Street and am proud of the transformational results I have achieved for my many clients over the past few decades.
  • Education – As with any field, education is important.  Many advisors work more as salespeople than anything else and their educational backgrounds reflect this focus. I have always been surprised when I run across clients who themselves are far more educated and thoughtful than their current “advisors” whom they turn to help them figure out what to do with their savings and financial decisions.
  • Knowledge – The best advisors are always seeking to expand their knowledge and find new ways to make sure that calculation, not emotion, rules the day.  They write and create content to educate others around the many details and nuances needed to make good decisions.
  • Courtesy and Responsiveness – This should go without saying, but your advisor should always treat you with courtesy and respect.  They should be available and responsive if you have questions or need to reach them.  At Ridgewood Investments, we believe in educating, not selling. Our skilled advisors provide exceptional service and responsiveness.

Being aware of Solomon’s paradox and finding ways to avoid its reach by harnessing great coaches and advisors is a key step in the journey to achieving your personal, financial, and professional goals.

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About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.

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