14 Ways to Get on Track with Your 2018 Financial Goals

School is back in session; football season is in full swing and while most of Arizona does not experience leaves falling we know we are nearing the end of the year and entering the fall season. What a great time to review that you are on track with your financial goals. This can seem like a daunting task, but I believe that with a checklist anything is achievable.

To simplify this task, I am providing a detailed financial planning checklist. The below guidelines provide additional details on the checklist items.

1.  Maximize Retirement Plan Contributions:

If you have a 401(k) or other retirement plan at work, remember to make your allowable 2018 contributions before year-end. In 2018, you can elect to defer up to $18,500 of your compensation to a 401(k). Those aged 50-plus can defer an extra $6,000 for a total of $24,500. Additionally, some plans allow you to make after tax contributions, up to the IRS limit of $55,000.

2.  Fund Non-Deductible IRAs & Convert to Roth:

Although your income may be too high to make a direct contribution to a Roth IRA, you can fund a Roth IRA by making a non-deductible IRA contribution and immediately converting it to a Roth IRA.

3.  Take Required Minimum Distributions:

If you are 70 ½ you must take your Required Minimum Distribution for 2017. If you have several IRA accounts, you may take the distribution from just one, but the distribution must be calculated on the aggregate of your IRA balances. Please note once an RMD is taken, it is irrevocably distributed (and taxable).

4.  Make Deferred Comp Elections:

If applicable you will need to determine ahead of year-end whether to defer a portion of your 2018 compensation. Benefits of deferring include possible tax savings and the opportunity to grow assets at a potentially higher rate of return. As with any investment decision, it is important to weigh out the benefits of deferring with your liquidity needs, time horizon and lifestyle choices. Additionally, you will be required to decide on a distribution election at the time of selection.

5.  Use up Flexible Saving Account (FSA) Money:

Time is running out to spend down the balance in you FSA plan. The IRS allows you to carry over $500 into next year. Anything above and beyond this amount will be lost. You have until December 31st to submit all claims.

6.  Make Charitable Contributions:

All charitable contributions must be made prior to December 31st to be taken as a deduction on this year’s tax return. If you do intend to make gifts, this should be considered along with a review of your portfolio as you may have highly appreciated stock that can be used for additional leverage on your gift. If you do intend to make a gift for 2018, we encourage you to do so by December 1st.

7.  Complete Annual Exclusion Gifts:

In 2018, you can gift $15,000 person ($30,000 per couple, if the election is made to split gifts) to any individual. You should continue to use this annual exemption to help transfer assets and reduce your taxable estate. Please keep in mind contributions to 529 plans are considered gifts as are premiums paid on life insurance policies owned in an Irrevocable Life Insurance Trust. The current lifetime gift exemption is $11,200,000 in 2018 (double from that in 2017).

8.  Fund 529 Plans:

If you plan to contribute to a 529 account this year, be sure to do so by December 31st to take advantage of annual gift exclusions and to qualify for any state tax deductions on your 2018 taxes. If you pay for college directly to the institution, your payment is not considered a gift and there is no limitation on your contributions. (Please remember contributions to 529 plans are considered gifts)

9.  Review Estate Planning Documents:

Maybe you don’t have an estate plan, then now is a good time to get one in place. Without an estate plan, you and your property may end up in a court-supervised guardianship if you become incapacitated, as well as possibly end up in probate court once you die. Perhaps more concerning, if you don’t have a will, the state where you live at the time of your death could essentially create one for you regardless of your desires. If you do have an estate plan in place, it is a good time to review with your attorney in case anything has changed.

10. Review Beneficiary Designations/Communicate with Beneficiaries:

Year-end is a good time to review and update all of your beneficiary designations for your retirement accounts and life insurance policies.

11. Analyze Taxable Accounts for Tax-Loss Harvesting Opportunities:

There may be opportunities in your portfolio to sell out of a down position to book the tax loss. These losses can be used to offset up to $3,000 of ordinary income each year as well as an unlimited amount of capital gains. These losses can also be carried forward to future tax years. When using this strategy, make sure you do not violate the “wash sale” tax rules.

12. Consider Roth IRA Conversion:

Anyone, regardless of income, is now eligible to convert a Traditional IRA to a Roth IRA. The Roth IRA carries significant income tax advantages for both you and your beneficiaries, especially if the conversion is done with reduced asset levels. Please consult with your accountant to discuss potential taxes that could be owed in the same year as the Roth conversion.

13. Review Income Tax Projections:

Year-end is a good time to meet with your accountant to review projections for the year and determine your expected tax status. Consider the following reasons why you may want to review your tax plan now: your living situation may have changed, you want to start saving money now, you still have time to qualify for 2018 tax deductions and credits. Please be sure to consult with your accountant on this.

14. Request Annual Credit Report:

We recommend that you review a full credit report annually to make sure there are no surprises. You are allowed one free copy of your credit report each year. To request, go to https://www.annualcreditreport.com/index.action. For those of you who have not done so already, you may want to consider signing up for a Credit Monitoring service.

This checklist is just one step in ensuring you on track with your financial goals. It is also important to take this time to meet with your financial adviser for a quarterly/year-end financial plan review.

Need help? I would love to speak with you about your personal financial plan. Please request a consultation!

Financial Spring Cleaning – Shred, Go Paperless, Credit Report, Budget, Insurance, and Beneficiaries

The other day a friend of mine posted that she was doing some “spring cleaning” in the dead-heat of the summer. Here in Arizona, and many places around the country these days, the best time to do some cleaning is when you are forced to “hibernate” due to the unbearable heat.

This got me thinking. What a great time to invest some time into Financial Spring Cleaning. The following is a list of tasks you can easily do during the dead-heat of the summer and help you prepare for a more clutter-free fall.

1.Shred Old Financial Paperwork

It’s important to know what to purge and how long to keep the other stuff

  • Copies of tax returns – it is actually recommended to keep these forever. Perhaps you can scan them or store electronically
  • Supporting tax documents/receipts – IRS says to keep as long as you are subject for audit – 6 years a good rule of thumb
  • Documents to support an insurance claim – inquire with your insurance agent for timeframe

2.Go paperless and back it up

It is my recommendation to ensure all your account statements are accessible online before throwing anything away (i.e. bank statements). Any electronic records you do maintain, ensure you back them up on a separate hard drive or cloud storage. It’s also good to have backups to your backups. You can subscribe to a back-up service that will automatically copy the contents on our computer to a secure cloud storage.

3.Review your credit report

Go to – annualcreditreport.com. It has been reported that as much as 70% of your report contains errors. These errors could be negatively impacting your ability to get a low interest rate.

4.Financial Budget

Review your budget and set up automatic bill pay – make sure you include paying yourself first. This is a great time to meet with your financial advisor. A review of your budget and credit report can be a good exercise to ensure you are still on track with meeting your retirement goals.


Inventory all your insurance policies – home, auto, life, long-term care, and disability. Perhaps your home value has increased and your current policy doesn’t support the current value. You should also create a photographic inventory of the items in your house. This is necessary and helpful if you should ever need to file a claim.


Review the beneficiaries on all your accounts and estate planning documents (will, trust). It’s important to review these items to ensure they are consistent, i.e. IRA beneficiary and your will. Make sure your ex-spouse isn’t on your IRA, but your current spouse is identified in your will. Unfortunately, these oversights are seen a lot and can really create unnecessary hardships.


These items may not seem urgent and so it can be easy to procrastinate. However, just as with house spring cleaning the impact of delaying can create a house of chaos and can have significant results. Don’t let that happen to you. Take the dead-heat of summer and organize your financial house.

Need help? I would love to speak with you about your financial spring cleaning. Please request a consultation!

Ways to Fund a College Education – Using student loans, scholarships or college investments (529 Plan)

Summer is quickly coming to an end with school just around the corner. It is never too early to plan for college which includes the big question – how to pay?

Did you know that student loan debt is the second largest type of consumer debt (with mortgages being number one)? About one in nine people have a student loan with an approximate total of 1.3 trillion dollars. Knowing these statistics and working with parents and their kids as they prepare to pay for what can seem like a challenging and overwhelming feat drove me to want to write this blog in my series of Educating Kids About Money. In this final addition, I address the different ways to fund a college education, the idea of deciding which school or what kind of education, and whether school now or later.

Please see my other blogs on children and money here:

GOOD FINANCIAL HABITS: How and when to talk to kids about money

TEACHING CHILDREN ABOUT MONEY: Activities for preschoolers, middle childhood, and teenagers

As I’ve suggested in previous blogs and outlined on my website, there are 5 essential planning steps that can be applied as you help your child in this process. Keep in mind, as with all plans, the earlier you start the better; however, regardless of the timing you need to start! Having a plan can prevent any possible anxiety you and your child may experience just thinking of this subject.

Ways to Fund College Step 1: Assess the situation.

Ask your teenager to describe their goals after high-school. Do they want to go to college, join the military or peace corps, attend a technical school, go on a mission or maybe they are eligible for an internship?  This is a discussion that is best to have as soon as possible so proper planning can occur. Of course, keep in mind your child has every right to change their mind, but just starting the process gets you both thinking.

Ways to Fund College Step 2: Develop a plan.

Determine amount needed to meet their goal. Your financial advisor can assist with calculating as well as numerous tools available online. I like the resources available on Savingforcollege.com. Once you know the amount needed, you and your financial advisor can develop a plan. Again, it’s helpful to start this early so if any preparation required can occur – i.e. as a freshman your child can ensure they are taking the courses required to make them competitive for certain scholarships.

Ways to Fund College Step 3: Identify the tools you can use to meet their goal.

These tools include student loans, scholarships or college investments (529 Plan). This is the step that should be started as soon as possible. Meeting with your Financial Advisor can help before your child is out of pre-school. Check out a couple of these websites:




Ways to Fund College Step 4: Implement the tools that best meet your needs.

Most likely it will be a combination of tools available. If you are properly prepared you may be able to keep your loans at a minimum. The most important aspect is to clearly understand how your tools work. Please reach out to your Financial Advisor and School Guidance Counselor for assistance.

Ways to Fund College Step 5: Finalize the plan and review it often to ensure you and your teenage are on track throughout the year.

Once you and your teenage have a plan, review it quarterly or at least semi-annually (end of each semester) to ensure you are on track. This will help with investments as well as if your child needs to meet any application deadlines for scholarships. It will also keep your child enrolled in the best courses.

If you’re unsure as to where to begin, or you would like to create a financial plan including education planning, consider requesting a consultation with me.

TEACHING CHILDREN ABOUT MONEY: Activities for preschoolers, middle childhood, and teenagers

*Please see my first blog in this series:

GOOD FINANCIAL HABITS: How and When to Talk to Kids About Money

I bet at this time you are well into the ‘heat’ of the summer. Perhaps your kids are telling you, “I’m bored” or “what can I do; there’s nothing to do”. The following blog in my series about kids and money will give you some fun activities by age group to teach your kids various money concepts. These activities will help establish a life-long skill – financial literacy – without feeling like they are at school.

It’s important to remember that children grow and develop at different rates. So, please use this as a general guide. Choose the activities you feel are best given your child’s personal development.

Teaching Preschoolers About Money: Ages 3 to 5

From the Consumer Financial Protection Bureau, it is known that this is the time when children are learning to stay focused, planning, following directions, completing tasks and solving problems. This is also good time to teach patience with regard to money and the idea that you don’t get something right away. These lessons may be simple but long-lasting and beneficial forming important habits and financial foundations.

Money Activities:

  1. Provide a good mix of coins. Practice with your child sorting the coins by type, separating in different stacks. Count how many coins in each stack.
  2. Introduce the different types of coins, practicing their name and value – a different coin each day of the week
  3. Teach patience – offer your child a snack now (i.e. one cookie) or explain that in 15 minutes she could get a snack and a drink (i.e. cookie and milk). Encourage her to wait and be patient so she can get the drink with a treat.
  4. Practice charity – have your child select a toy they would like to give to a child who does not have any toys
  5. Play restaurant using the coins they have been learning; create a menu and let your child order and then pay with the coins
  6. Invest in a “piggy bank”, a clear glass one is best so your child can see the amount increase; encourage your child to put any coins they get in their piggy bank

Teaching Middle Childhood Kids about Money: Ages 6 to 12

This is the time when children begin noticing their family behaviors around money. It is also the time that other children will start influencing your child through peer pressure; however, parents have the strongest impact when it comes to financial attitudes. Use this as a good time to create productive habits that will shape how they save, earn and shop.

Allowance vs no allowance. Some experts recommend starting an allowance based on doing small jobs or daily/weekly chores. Don’t give them money for doing nothing, they need to understand that money is something earned. And, then there are experts who don’t agree with paying your child for doing something. They believe that allowance is a tool to teach how to manage money. Check out the link below for more information on the concept of allowances.


Money Activities:

  1. Use coins to add up to a certain dollar amount – learn there are different combinations available
  2. Put dollar values on plastic cups and have child put correct amount in the cup
  3. Use set of die to learn values of coins/dollars
  4. Assign a coin (or dollar) value to each item that makes up a snowman (i.e. 5 for hat, 2 for eyes) and have your child build a snowman and show you the cost
  5. Have a conversation about what you can buy with a certain dollar amount
  6. Plan a family meal and take your child on a virtual shopping trip – walmart.com, amazon.com
  7. Have your child research different items they would like to buy and make shopping lists – where to buy, what to buy – this teaches the importance of comparison shopping and need vs. wants
  8. Let them watch you pay the monthly bills. This is a good opportunity to teach them the cost of different household items. Its also a good time to talk about debit and credit cards. They’ve already noticed you using them, so might as well explain how they work and the differences.
  9. During this period, I also recommend taking your child to your bank and open a savings account for them. You’ll want to use the money they’ve been able to save at home. Help them continue to save with their allowance and ask them how much they’ve saved. This will encourage them to save and give them confidence as it grows.

Teaching Teenagers About Money: Ages 13 to 18

So much growth can happen during this time frame. This is when your teen will have a chance to make financial choices, realize consequences and then consider if they would make the same decision next time. It is the period in their life when financial habits and standards are strengthened. It is also the time that your teen is granted more freedom so that when it’s time to move out or leave for college, he or she is able to make their own financial decisions. Take this time to prepare your teen for the financial responsibilities they will soon experience.

Money Activities:

  1. Open a checking account – practice balancing a checkbook
  2. Create a budget
  3. Calculate expenses of buying/owning a car
  4. Plan the dream prom – what to wear, where to eat
  5. Pick a publicly traded company and track its stock performance for a specific period of time
  6. Practice with a certain monthly income and expenses – how does your teen spend the income
  7. Start a conversation about their future and research costs/income opportunities– What does it look like? Will they live in an apartment or house? What kind of car with they drive? Do they have pets? What salary will they make?
  8. Compare college prices
  9. Get a summer job


You don’t have to be an expert in finance with a perfect track record to teach your child financial basics. Take this time to get the conversation started and be a positive role model. It may even help you organize your own finances and get you back on the pathway to the financial future you want.

GOOD FINANCIAL HABITS: How and When to Talk to Kids About Money

By now summer vacation has started for most kids and you might be trying to make sure you have plenty of activities planned to keep them busy. Feel free to refer to my upcoming 3 blogs as not only a good summer activity, but also the establishment of a life-long skill: financial literacy and your children.

As a Financial Planner, I often notice that families may not have considered setting good money habits with their children, for one reason or another. However, it’s never too late to start!

Teaching Children Money Issues

As a parent I am sure you spend quality time teaching your child life skills that will help them as they grow into independent, responsible, and respectable adults. Maybe you taught them the importance of treating people how they’d like to be treated or perhaps you taught them to change a tire or even cook. But have you spent any time with them discussing the wide range of money issues, from everyday skills as balancing a checking account to long-term planning for retirement?

Based on the 2018 T. Rowe Price survey, 10th Annual Parents, Kids and Money Survey, 66% of parents have some reluctance to discuss money with their kids. This could be because it is difficult to know what age to start teaching and how best to do it. Every child learns at different rates, but the following is a basic timeline of what and when money topics can be addressed. Also, I will delve more into each age group in my next blog.

Good Financial Habits for Elementary School-Age

  • Ensure there is an understanding of needs and wants
  • Explain how money is earned/acquired
  • Show what household items cost
  • Make them responsible for buying something small (i.e. a favorite snack)
  • Set up an allowance/commission
  • Have them establish a small savings goals (i.e. a toy or flowers for mom/dad)
  • Open a savings account
  • Teach them about the different types of payment methods (i.e. cash, check, credit, debit)

Good Financial Habits for Middle School-Age

  • Make them responsible for some daily expenses (i.e. snacks)
  • Show them how to comparison shop
  • Teach them about advertising and making wise purchases
  • Teach them about savings accounts and earning interest
  • Have them watch you pay monthly bills and explain
  • Introduce investment basics (i.e. what is stock)

Good Financial Habits for High School-Age

  • Make them responsible for most daily expenses and entertainment (i.e. hobby, school clothes, portion of cell phone bill, bus money, some car expenses)
  • Assist them in finding a part-time or summer job (i.e. resume, job search)
  • Teach them about paychecks (i.e. taxes, W-4 form)
  • Open a checking account with a debit card
  • Teach them banking basics (i.e. balancing an account, ATMs, online banking)
  • Introduce credit basics (i.e. credit cards, loans, credit scores)
  • Discuss college costs (i.e. community college vs 4-year university, student loans, scholarships)
  • Interact with stock market – create a list of stocks and track their progress

Take time to teach your children

Money can be an exciting topic and kids want to learn how to earn, spend and save. Keep in mind that positive financial skills are the result of responsible habits. The more you make time to teach your kids and take advantage of teachable moments the easier it will be for your child to become a financially responsible adult.

Stay tuned for the next blogs in the series.

I have a passion for helping families set good, positive examples of how to spend money, how to earn money, and how to save money. All in a responsible manner.

Take a Vacation! 5 Steps to Plan your Vacation Fun and Budget

Now that your taxes are complete, you may feel you are ready for a vacation. Well, it’s actually a good time to start planning if you want a summer getaway.

Vacation budgets mean less stress

Too many people wait to start planning their vacation. Planning without a budget can cause higher costs, more stress, and an overall disappointing experience. If you can start your planning sooner rather than later you will ensure a fun, relaxing retreat.

Below are five categories or steps I recommend considering when planning for a vacation. They don’t necessarily need to be completed in any specific order; however, answers to certain questions may have an impact on your overall plan.

Step One -Vacation Buddies

First, who will be joining you on this getaway? I think this is the most important task. Determine who you will be vacationing with – significant other, kids, college friends, extended family or a mixture. Understanding this will guide you through the other steps in the planning process.

Step Two – What Kind of Vacation?

Second, what are you going to do? What do you want out of your vacation? Perhaps you want to take a “big” trip or maybe several “mini-vacas” makes more sense. You may even decide to do a local vacation, also known as a “staycation”.

Step Three – Where to Go?

Third, specifically where do you want to go? Perhaps it’s a country, city or an event. The answer to this question may lead to additional questions, such as what activities do you want to do. Perhaps you want to travel to a country and go on a long, planned hike or maybe you would prefer going to the coast and lay on the beach.

Step Four – Vacation Time and Accommodations

Fourth, when do you want to travel and for how many days? This is important do determine so you can get a jump on the last question addressing travel and accommodations. It can also prompt you to research the expected weather for the area you want to travel as well as special events/festivities that may be occurring during the time of your vacation.

Step Five – Vacation Budget or Fund

And fifth, how? How much are you willing to spend? How are you going to get to your chosen location? If you are spending the night, what are your accommodations going to be? It’s never too soon to start a “vacation fund”. Create a budget and figure out how much you need to contribute each month to have that amount ready before the vacation date arrives.

Travel and accommodations are the biggest items to address and the sooner you start researching for the best deals the better. Keep in mind you may be able to utilize mile rewards versus paying cash but remember the number of points needed is based on the dollar value of the ticket and ticket prices can go up as the plane fills, so booking early is important.


We all hope vacations are about relaxing and enjoying special time with family and friends. I want you to return from your vacation well rested, with great memories and less stress. Plan today so your retreat tomorrow is exactly how want it to be.

If you’re unsure as to where to begin, or you have not created a financial plan with vacations budgeted into your plan, consider requesting a consultation with me for productive savings ideas and assistance with getting started.

5 Areas to Measure and Check Your Financial Progress

Spring Cleaning? Good Time for a Financial Progress Check

Financial progress and how one measures it can vary between people. And nothing is wrong with that; however, it is important to establish your financial goals and objectives and periodically measure your progress preferably with the assistance of your personal financial advisor. Here are five areas to measure and periodically check:

  1. Net Worth

Keeping track of the growth of your net worth can be a valuable metric as you progress to your goal. Net worth is the total value of your assets minus your liabilities (Assets – Liabilities = Net Worth). Tracking the progress of your net worth shows you the results of reducing your liabilities while you increase your assets.

  1. Savings

It is important to start saving and get in the habit as soon as possible. Maybe you’ve calculated how much you need to save monthly using an online calculator and maybe that number seems too big right now. Not to worry, the point is to start with what you can afford and shoot for the recommended amount to meet your goal. Each year when you do a progress check you can now check to see if it is where it needs to be. Then, see how a 1%, 3% or 5% savings increase could get you closer to your goal.

It is integral to have a retirement savings as well as an emergency fund, which are totally different buckets of money. The recommended amount for an emergency fund is equal to 3 to 6 months’ worth of expenses, but it really depends on your personal lifestyle.

  1. Debt Reduction

Having a large amount of debt can make one feel trapped and not forward moving. For many, financial progress is measured by debt reduction. Being able to pay it down can lead to confidence and a true feeling of financial freedom and success.

There are a number of methods to reduce debt. I subscribe to the debt-snowball method. Simply put, pay the minimum monthly payment for all your debt (excluding your mortgage) with the exception of the one with the smallest balance. Then pay as much as you can on the smallest debt until it is paid in full. Then attack the next smallest balance. As you pay down your debt you will feel a sense of accomplishment.

This method may not work for you, but do not worry. Your financial advisor is a great resource and can help you find the best method for your situation.

  1. Size of Your Portfolio

Many people have a certain number in their minds as to the ideal size of their retirement portfolio. If you are building toward a certain goal, the size of your retirement account can be a great indicator of where you are financially.

Ongoing contributions and ensuring the right diversification of investments helps to balance risk, while giving your money a chance to grow. Periodic reviews with your financial advisor is a good way to check in on your investments to see how you’re doing, and whether anything needs adjusting.

  1. Comparing Yourself to Others

Behavioral finance confirms that one of the age-old measures of financial progress is how you compare, in terms of possessions, to people you know. While I do not recommend this method– in fact, I caution you as this could be the road to unhappiness and a possible goal shortfall — I do recognize it is difficult not to look at what others have (or appear to have) and use it as a measure of success.


If you haven’t already: meet with your financial advisor, take a few minutes to think about what defines financial progress for you, and establish your financial goals and objectives. Once you have a better idea of what financial progress means to you, you can begin to prioritize what you do with your money, helping you to see progress toward your desired financial future.

Behavioral Finance: Does Fear and Emotion Drive Financial Behavior?

Have you ever made a decision based on your emotions even though facts and statistics point you to a different choice? Maybe you offered to buy a house above the advertised price and higher than comparable home values because you believed you would miss out due to competition? Or maybe you have a fear of flying even though flying is far safer than driving? Perhaps you keep cash in a safe at home instead of a bank savings account, because you feel immediate access to your cash is more secure than the bank.

When establishing a personal investment plan, recognizing and understanding various financial theories can help develop the best plan for you. Rational based theories, such as the capital asset pricing model (CAPM) and the efficient market hypothesis (EMH), assume that people, for the most part, make decisions rationally and predictably when all information is available.

However, there is a belief that rational based theories do not address all situations. The behavior finance concept sets out to answer the additional conditions through the following eight key ideas. It is believed that these contribute to irrational financial decisions and impact the financial markets. I’m sure one or more of them are familiar to you.

  1. Anchoring

Anchoring is based on the idea that our decisions are attached or “anchored” to some reference point, regardless of it being logically relevant to that decision.

Behavioral finance example:

A good example is the rule of thumb for buying an engagement ring equal to two months of salary. This has become the “standard” and it was established by the diamond industry and not based on what one can afford or not.

Emotion leads us to believe that love is valuable and therefore “worth” more. Opening a box with an engagement ring that knocks your socks off causes the fiancé to think “He loves me therefore he spent a large amount of money”.

Behavioral finance example:

Another example is investing in a stock whose price recently dropped and believing the anchoring thoughts: “buy low, sell high”, “now’s the time to invest, it will come back up”, when actually the price drop had to do with a recent change in the company’s fundamentals (i.e. loss of a large contract) and could mean that the changes will cause a lower company value.

  1. Mental Accounting

This is the concept that separating accounts based on different goals (i.e. vacations, education) will have a different and more positive effect on spending decisions.

Behavioral finance example:

This can be illustrated better with the following example: having a special “money jar” or fund set aside for a vacation or a new home, while still carrying substantial credit card debt. When actually eliminating the credit card debt will help increase savings for the vacation or new home.

Emotion leads us to believe that the separate accounts will garner success in meeting our goals and working toward something giving a sense of responsibility and self-discipline.

  1. Confirmation and Hindsight Biases

This idea is based on the saying “seeing is believing”. However, this may not always be the case, perhaps our minds allow us to see what we want to see?

Behavioral finance example:

Have you ever been formally introduced to someone after learning another’s opinion of that person and then recognized that your first impression was impacted by a preconceived notion or confirmed? The hindsight bias can be shown by the more recent example in the real estate market in 2008. For those in Arizona and many other markets around the country homeowners experienced home values dropping significantly forcing a record number of foreclosures. Many people now believe it was obvious and they should have seen it coming, however, was it?

Emotion leads us to believe that certain events were predictable or completely obvious at the onset.  We do this in an effort to find order by creating an explanation with links between cause and effect. The problem with this could lead us to erroneous links and incorrect oversimplifications.

  1. Gambler’s Fallacy

The Gambler’s Fallacy is when one erroneously believes that because an event, or series of events, just occurred that the chances for a certain random event to follow is reduced.

Behavioral finance example:

This line of thinking is incorrect as illustrated by a series of 20 coin flips. A person might predict that the next coin flip is more likely to land with the “tails” side up. Understanding probability will tell you that each coin flip is an independent event and has no bearing on future flips. Or, as illustrated with the rise and fall of a stock price, the notion to invest in a stock that has gone down 20 days in a row because the next day it just has to go up regardless of any real fundamental reasoning for the recent price decline.

Emotion leads us to believe we have some control for the next outcome and that it’s going to go our way next.

  1. Herd Behavior

This is the propensity for individuals to follow the actions of a larger group whether rational or irrational. Individually, however, most people would not necessarily make the same choice.

Behavioral finance example:

There are a couple reasons for this behavior. We as people want to be accepted by a group and therefore we are prone to follow the group even though we may make a different decision as an individual. Another, more likely, reason is the common basis that it’s unlikely that such a large group could be wrong especially in situations in which an individual has very little experience. This was seen more recently with the “dotcom” investments. At the time fundamentals were not available to support the large investments; however, because venture capitalists and private investors believed in them as good investments, then they must be, right?

Emotion leads us to believe that the masses are right and since it’s different from what I think, I must be wrong. These beliefs come from self-doubt and insecurity.

  1. Overconfidence

Confidence versus overconfidence. Confidence implies realistically trusting in someone or something, while overconfidence usually suggests an overly optimistic judgement of one’s knowledge or control over a situation. Another way to explain it is by referring to my personal example of bowling. Yes, I’m talking about the sport. First, I should explain that I actually don’t really enjoy the sport, typically the balls are too heavy. But, every time I play I feel that I’m getting better and after a couple rounds I actually believe I could win. This is an example of my unwarranted confidence, i.e. overconfidence.

Behavioral finance example:

Most recently we can look at the 2008 Housing Crisis. There were many variables that caused it; however, the above average increase in home values can be attributed partly to the overconfidence of real estate investors who didn’t normally refer to themselves as real estate investors. Values in their homes were increasing and opportunities to capitalize on that were marketed to them. The value increase had nothing to do with their real estate knowledge; however, it made them feel confident in their ability to invest in another and make money.

Emotion leads us to believe that ultimately, we have control of the outcome. Perhaps it comes from our belief that we are entitled to the positive result.

  1. Overreaction and the Availability Bias

Emotions in the stock market help explain overreaction when new information is presented. Based on the availability bias, people tend to weigh their decisions heavily on more recent information, making their new opinion biased toward that latest news. Perhaps you have experienced this when driving by a car accident? Immediately you slow down and drive with more attention. You may even continue to do so the next couple of times you drive, but then over time you revert back to your normal driving behavior.

Behavioral finance example:

Perhaps we are experiencing an example in today’s market? As a whole, the U.S. economy is performing well and the stock market is at an all-time high. Given this positive news, perhaps more people are investing or more dollars are being invested in the market leading to more new highs.

Emotion leads us to believe that new current information is better and more accurate and we must pay more attention to it than the previous information available. This drives us to action.

  1. Prospect Theory

Prospect Theory believes that people value gains more positively than they value losses negatively, and therefore make decisions based on these perceptions.

Behavioral finance example:

To clarify, winning $50 is better than winning $100 and then losing $50. The end result is the same – $50; however, losses have more emotional impact than an equivalent amount of gain. This theory can also be used to explain the occurrence of the disposition effect. The disposition effect is when an investor holds on to a losing stock too long or selling a winning stock before necessary. Logically it makes more sense to hold on to the winning stocks in hopes of realizing more gains and to liquidate the losing stocks to avoid further losses.

Emotion leads us to believe that losing, regardless of the amount, relative to gains is bad. Additionally, we believe we deserve awards and positive results.


What does this all mean relative to you and your investment risk management? We are emotional creatures and emotional investors, and consciously or subconsciously, this causes our behavior to focus on how winning or losing will make us feel.

With these behavior finance concepts illustrated above, it is no surprise that some investors question their confidence in the financial system and aren’t sure what to do and who to trust. At Maxima Wealth Management we assist our clients in developing a plan that meets their individual needs, we offer a structured, unemotional and highly diversified investment approach addressing risk management.

To learn more about how we can help you, contact us today for a consultation!

Managing Risk – Managing and Capitalizing on One’s Exposure to Risk Factors

Everyday life is the perfect illustration that risk is involved in everything we know and managing it is an action we address with everything we do. In our daily lives we may wonder about things such as: Should I take the umbrella today? Should we drive city streets or freeway to get to the doctor’s appointment? Which water heater should we buy?

Risk and Investment Decisions

Of course, risk is also involved with investments. But as with the examples above, there are steps we can take to manage and capitalize on the risk with which we are comfortable.

Three steps in the overall process of managing risk.

  1. The process of understanding the risk. This is done by gathering information or data to help make an informed decision. With investments we start this process by understanding our personal risk tolerance and time horizon.
  2. Understanding that there is a certain reward with each risk and assume the level of risk consistent with one’s comfort level as discussed in 5 Investment Risks.
  3. Respect history and the research/statistics available when taking action. This step is the act of managing. With the knowledge in the first two steps, one can decide which risks are appropriate to assume and how much one should assume.

Recognize Risk Factors

At Maxima Wealth Management we recognize the following principles that influence our structured approach to managing risk based on compensated risk factors:

  • Markets work—Intense competition drives the market to near-instant efficiency. Securities prices are fair and reflect the best estimate of the company’s actual value. Efforts to identify undervalued stocks or markets are not rewarded consistently.
  • Effective diversification is key—It reduces the impact of individual securities and enables investors to scientifically employ the risk factors that offer higher expected returns.
  • Risk and return are related—Only non-diversifiable risk is systematically rewarded over time. So, differences in the average returns of portfolios are due to differences in average risk. Multifactor investing brings a systematic approach to harnessing these risks to deliver above-market performance over time.
  • Portfolio structure explains performance—Asset allocation, not stock picking or market timing, accounts for most of the performance in a diversified investment strategy.

Research shows that most of the variation in returns among equity portfolios can be explained by the portfolios’ relative exposure to three compensated risk factors:

  • Market Risk—Stocks have higher expected returns than fixed income securities
  • Size Risk—Small cap stocks have higher expected returns than large cap stocks
  • Value/Growth Risk—Lower-priced “value” stocks have higher expected returns than higher-priced “growth” stocks

Structuring a portfolio around compensated risk factors can change priorities in the investment process. The focus shifts from chasing returns (through stock picking or market timing) to diversification across multiple asset classes in a portfolio.

Understand Risk

The key to managing risk is first to clearly understand what risk is, second recognize with every risk there is some level of reward, and third acting on what history has shown and what level of risk/reward you are willing to assume. It is important to stay focused on your investment goals and objectives along with your risk tolerance and time horizon.

Opportunity in the market is sometimes disguised as volatility. This can increase investor emotions and affect decision making. My next blog will address risk management from the behavioral finance perspective.

5 Investment Risks: Is Risk a Necessary Factor of Return?

Those of you who live in Arizona know that October is usually the month that the temperatures start decreasing and people are excited to be outside. I am one of those people. I live in Arizona for the opportunity to hike, bike and just enjoy the beautiful southwest outdoors.

Over the years, I have come to recognize the benefits, but also the hazards, associated with the different types of outdoor activities — and of simply being outdoors. Some of those benefits include: healthy workout, vitamin D, access to beautiful views.

In turn, some hazards associated with those benefits include: spraining an ankle while hiking, sunburn, running out of water. Knowing my desired outcome I am able to gauge my capacity for risk, and plan accordingly.

Risk and investment returns

This is also true with investments. One can get higher returns if they are willing to assume more risk and equally true, the lower their risk, the less they are expected to receive in returns. Historical data shows us that investors are compensated in proportion to the risk they take.

This research identifies five risk factors that explain most of the expected returns associated with different asset classes.

These asset classes are:

I. Stocks

  • Large Capitalization Companies: Growth/Blend/Value
  • Medium Capitalization Companies: Growth/Blend/Value
  • Small Capitalization Companies: Growth/Blend/Value

To differentiate and define risk within each stock asset class below are three factors:

        A. Market Risk —generally, stocks have higher expected returns than fixed income securities

       B. Size Risk—small capitalization stocks have higher expected returns than large company stocks

       C. Value/Growth Risk—lower-priced “value” stocks have higher expected returns than higher-priced “growth” stocks

II. Bonds

  • Long-Term (generally greater than 10 years): High to Low Credit Quality
  • Intermediate-Term (generally 4 to 10 years): High to Low Credit Quality
  • Short-Term (generally 1 to 3 years): High to Low Credit Quality

And then below reflect compensated risk in the bond market:

         A. Maturity Risk—longer-term bonds are riskier than shorter-term instruments

         B. Credit Risk—instruments of lower credit quality are riskier than instruments of higher credit quality

Assessing risk when making investment decisions

Just like we recognize the benefits and hazards associated with the outdoor activities we enjoy (risk/reward concept), we must also go through a similar process with investments. This risk/return concept is one of the essential components when making investment decisions and assessing a portfolio. My next blog, Managing Risk, will address the idea of managing and capitalizing on one’s exposure to risk factors.