- Michelle McKinnon is a certified financial planner at Payne Capital Management, a Registered Investment Advisory firm in New York City.
- McKinnon helps her clients, from millennials to baby boomers, make smart investments.
- One of her best pieces of advice for investors is to stop chasing the highest returns.
At 29 years old, I manage $100 million in assets.
Some may think I'm on the young side to be managing so much money, but with multi-generational clients — everywhere from millennial parents looking to enter the market all the way to boomers trying to secure their savings — my age is one of my strengths.
Thanks to my age, I've adopted many different tools to inform my clients on their finances and improve financial literacy, such as the podcast I host, $mart Women Invest. A podcast where we dive into every day financial questions with female trailblazers.
From what I have picked up from these interviews, and many conversations with my clients, I've developed seven basic rules to help my clients succeed with their financial goals.
1. Embrace the price you get today
Markets continue to march on without showing any signs of stopping, yet there is still a large portion of us sitting in cash waiting for the next big "dip." According to JP Morgan Asset Management, there is $9 trillion dollars in cash and money market alternatives waiting for that same pullback. So if and when the pullback comes, then the so-called "dip" will not last long if $9 trillion dollars has to get invested.
I tell my clients to stop worrying about getting the cheapest price this year, but start worrying about getting a cheap price. The price you get today will be cheaper than the price you'll get in 10 to 20 years from now.
2. Take advantage of compounding
Einstein said compounding interest was the "eighth wonder of the world," but I always find my clients forget this. A well-diversified portfolio of stocks and bonds is paying dividends and interest between 3% and 4% annually. That is 300% and 400% better than the average money market fund at .01%.
Furthermore, when there is a downturn in the markets, you'll still be paid this income. It is similar to your rental property. Even when the value of the home drops, the rent still comes in the mail. However, instead of dealing with annoying tenants and overflowing bathtubs at 3 a.m., you've got the portfolio generating you interest/dividends day in and day out. So maybe there is a free lunch after all.
3. Know why interest rates are your friend
It is no surprise that most economists and financial analysts (and all of my clients) believe that interest rates are going to rise. I've heard phrases like, "I do not want to invest in bonds now because interest rates are going up," practically every day for the past seven years. Guess what? It hasn't happened.
The common assumption is that one day interest rates will move higher and never come back down. Historically, that NEVER happens. For example, if you look at a graph of the 10-year treasury rate from the height of its peak in 1981 at 15.41% to the bottom in June 2016 (during Brexit) at 1.49%, the chart looks more like a roller coaster ride verses a simple straight line down. This gives you plenty of opportunity to capture the appreciation in price and then also the apperception of yield.
The issue is if you're close to retirement or in retirement, you cannot afford to have all your liquidity tied up in the markets because markets are volatile. On the other hand, with cash making 0% and inflation averaging 2% to 3% overtime, retirees and pre-retirees are losing purchasing power by sitting in cash. So it is crucial that you start bonding with your portfolio.
4. Don't base investments on fear of political uncertainty
The media would love to make us believe that the US markets are by far the best performer this year. And the majority of portfolios that I've seen reflect that — with extreme concentration in the US markets. Now it doesn't take a CFP professional to see that the US markets are doing well, but what about the foreign markets? Prospective clients usually give me a blank stare when I ask, or mumble something about the turmoil overseas (i.e. North Korea). To their surprise, the United States is not even at the top of the best performers!
The US is number twenty-one on the Seeking Alpha's Top Country ETFs & ETNs list. The number one performer is Poland (50%) followed by Austria (46%) and then to their big surprise South Korea is number five (38%). Yes, South Korea! It is clear that you cannot base your entire investment philosophy on apparent assumption and/or fear of political uncertainty.
5. Actually be diversified
Warren Buffett has said, "Only when the tide goes out do you discover who has been swimming naked." That means that those who are NOT diversified are going to be vulnerable when the market drops. This means adding exposure to not only the foreign markets but also to the bond market and to alternatives, like commodities. The (dreaded) commodity holding is probably my clients' least favorite position currently. Why? Well commodities have lagged significantly the past five years.
However, commodities often have a negative correlation to equity market downturns and during those times my clients are always reminded of their importance in the strategy. Another great example is 2008, if you were invested in a well diversified 60/40 allocation it only took about 1.5 years to recover your principal meanwhile if you were just invested in the S&P, it took you closer to five years to recover.
6. Do not fall in love with your investments
Surprisingly, the ones that will love you are the ones that you've hated for years: the foreign markets this year. At Payne Capital, we encouraged our clients to buy the foreign and emerging markets for the past few years, which was a struggle. From 2011 to 2015, emerging markets had an average return of negative 6%. That is a tough sell. However, as illustrated above in the top performing countries, that purchase has paid off handsomely.
7. Control your greed
I know it sounds simple but instead of chasing those triple digit returns, "settle" for consistent 6% to 7% returns. This is achieved through low-cost indexing and a conservative bond portfolio. The average investor only makes roughly 2.5% annually overtime. Meanwhile, a modest diversified portfolio averages about 6% to 7%. You too can chose the path of simplicity but you must learn to control your human emotions — easier said than done.
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