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At Planning Solutions Group, we help many small businesses with the operation, dueJoeB - croppedcompressed 2012AGAIN diligence, vendor selection, and employee education necessary for their company sponsored retirement plans. At a recent education meeting, I was having a conversation with a new manufacturing company employee, Judy. We were discussing the “target-date” investment funds in her company’s plan when she asked a great question:

“Before I sign up for one of these target-date funds, how many of my co-workers have made money in them over the past 5 years?”

I responded, “Although past performance is no guarantee of future results, every one of the available target-date funds has shown positive returns over the past 5 years. However, not every one of your co-workers has ‘made money’ over the last 5 years.”

My response was straightforward, yet I could tell it confused Judy. How could the investments have positive returns yet some of her co-workers may have lost money over the previous 5 years?

The answer is investor behavior. Participants in the plan were moving in and out of their investments as they tried to time the market. The below slide from Oppenheimer Funds shows the amount of money added to global equity (stock) mutual funds and global fixed income (bond) mutual funds over the last 20 years.

2016.04.15 Participant Return graphic - blog Breslin

With the advantage of hindsight, we now know that the worst time to add to stocks over the past 20 years was probably 2000. This is precisely the time when investors were adding the most money to stocks. Oppenheimer refers to this period as the “tech boom.”

We also now know that perhaps the best time to have added to stocks over the past 20 years was 2009-2013. This is precisely the time when investors were adding the most to bonds and withdrawing the most from stocks. Oppenheimer refers to this period as the “fear trade.”

These examples illustrate that the herd is usually wrong, and that even our own instincts can be wrong. When stocks drop in value, our instinct is to get out of the market and protect what we have left. History has shown this to be a mistake. The final pictures on the Oppenheimer slide draw an analogy between a department store sale and stock market fluctuations/declines. When clothes are on sale we rush in; when stocks are on sale we rush out. When investors “follow the herd” or try to time the market, it tends to lead to regret and missed opportunities.

The solution for Judy is to choose the investment plan that is right for her based upon her own tolerance for risk and goals for her money. If she wants growth, she can take more risk. If she wants security, she can take less risk. Target-date funds, which I discussed with Judy, offer a balance of both growth and security based on the age of the participant in the plan. After choosing an investment plan, I encouraged her to avoid making emotional investment decisions and chances are good that her returns will match her investment’s returns 5 years down the road.

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As a Family Wealth Advisor, Joe assists business owners, executives, and affluent families in the areas of estate planning, business succession planning, and wealth management. Joe takes pride in identifying a variety of planning options and opportunities followed by clear guidance to be sure his clients make the best possible decisions for their business and family. Through speaking engagements, Joe has addressed multiple trade associations to include the Restaurant Association of Maryland (RAM) and the National Automobile Dealers Association (NADA) Academy.

Joe holds the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation and is a Chartered Retirement Planning Counselor (CRPC®). He is a member of the Financial Planning Association (FPA) and Financial Services Institute (FSI). While earning his bachelor degree at Washington College, he was awarded the Department of Business Management Award given to a graduate who shows outstanding qualities of scholarship, character, and leadership. Joe holds his Series 7, 66, and Life and Health Insurance license. He has also been recognized for a second year as a Five Star Wealth Manager,as featured in Baltimore Magazine.  Joe can be reached at: