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Fear Leads to 3 Costly Mistakes

By | 2014, Money Moxie, Newsletter | No Comments

To hear bad news, all you have to do is turn on the TV. Every other day another story appears about how we are in a bubble and stocks are going to crash, especially if you listen to the eternal pessimists. On the flip side if you listen to the eternal optimists, stocks have a lot of room to run. So, to which side should you listen?

You can usually find opinions at both extremes. The truth, however, usually falls in the middle. So, the next time you are ready to make a knee jerk reaction to some bad news, think through these mistakes to make sure you are making the right decision.

Trying to time the market and go into cash – It’s hard not to react to bad news because it is in our emotional makeup to protect ourselves. The next time you hear a pundit or a co-worker saying there is a bubble and stocks are headed down, try not to jump on that emotional roller coaster.

Just remember, “When you sell, you have to be right twice.”1 Not only do you have to time it right when you get out, you also have to time it right when you get back in. That leads to the next mistake.

Holding on to cash and not reinvesting – If you have sold some investments into cash, it is hard to figure out when to reinvest. You have heard the adage, “Buy low, sell high,” but implementing it is very hard to do.
Mark Yusko said, “Investing is the only business I know that when things go on sale, people run out of the store.”2

Don’t just sit on cash that is earning hardly anything. Look at market volatility as an opportunity and redeploy your cash into investments with at least a little growth potential.

Short-term thinking – The most common mistake people make is to change their entire portfolio structure based on what is happening right now.

One example is a retiree moving all of his investments into cash because of a conflict on the other side of the world. That is like boarding up your house to protect against a hurricane when the forecast is for an afternoon thunderstorm.

A properly designed investment plan should be able to weather the storms on the horizon. Don’t short circuit your plan by making a knee jerk reaction to the news of the day. Make sure that your investment plan is driven by your goals and values, and stick with it.

 

1. Fearing a bubble can lead to 5 costly mistakes, CNBC 11/10/14. http://finance.yahoo.com/news/fearing-bubble-lead-5-costly-140000840.html
2. http://mebfaber.com/2011/03/12/when-things-go-on-sale-people-run-out-of-the-store/#sthash.3bJmQucQ.dpuf

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Need Help Allocating Your 401(k)?

By | 2014, Money Moxie, Newsletter | No Comments

One of the most common questions we get at SFS is “How should I invest my 401(k)?” This is a critical question, especially considering that 18% of retirement assets are tied up in these accounts (source: Investment Company Institute). Managing your 401(k) may be the most important place to place your financial focus after managing your spending.

First things first—start saving now. Starting early is the best way to get compounding rates of return to work in your favor. Remember, Albert Einstein called compounding rates of return the “8th wonder of the world.”

Next, take advantage of free money by getting the full match your employer offers. Not all 401(k) plans include a match, but if yours does, then make sure you get the full benefit. The rate at which you save is far more important than the rate of return you get. So, keep saving for the future.

Now let’s get into the investing nitty-gritty. Every person must decide how much risk to take in his or her savings. Your risk tolerance should be based on your ability, willingness, and possibly your need to take risk. It will be different than that of your friends and coworkers. It may even be different than that of your spouse.

Your ability to take risk includes factors like your overall financial situation and your time horizon. The more savings you have, the more risk you can take. The longer you plan to invest, the more risk you can take. Why? Your chances of positive returns in stocks go up the longer you invest.

Willingness to take risk is more difficult to determine. The essential question is how well will you be able to handle a drop in the value of your investments? If you view a fall in the stock market as an opportunity to buy more then you may have a high tolerance for risk.

When it comes to picking investments, the easiest route is to find an investment that approximates your retirement date. These all-in-one solutions provide some diversification. While diversification is far from a guarantee, it is still a good way to help manage risk. The pitfall of the retirement date choices is that these don’t take into account your personal situation (health, income, assets, debt, etc.) and they may not even disclose exactly how they are invested.

If you choose to select your own mix, be careful. Selecting the hottest performer last year can get you in a lot of trouble. Distributing your account balance evenly into each option is certainly not the way to go either.

This is where a little research and help from a professional can help. Give us a call. We can help you navigate the 401(k) maze.

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3 Myths of the Market

By | 2014, Viewpoint | No Comments

Every year we find reasons to question the future prosperity of America. We wonder whether investors’ prospects are dimming. Last year, our minds were occupied with government slowdowns and shutdowns. This year, we are more focused on the question, “Has the stock market come too far too fast?” While the problems are real, they should not derail us from our plans. Most difficulties are overcome and the myths of the market are not true. Keeping proper perspective will help us make better financial decisions.

Myth #1: Investing is rigged
The U.S. stock markets are the most efficient in the world. All investors have the potential to build their wealth as they participate in it. The longer we invest in a diversified portfolio, the more likely we are to have success.

There is a related question, “Is investing like gambling?” The clear answer is no. When we invest we purchase part of a company (stock) or a promissory note (bond). We become owners of these and we have rights to future cash flows that may come from them. The risks and outcomes are determined by the free market. If a company is successful then all investors that own it have the potential to benefit.

This does not mean that markets are perfect. There have always been some who try to take advantage of others. However, investors become their own worst enemies when they make poor financial decisions. Saving too little and trading too often are two of the most common mistakes. Save sufficiently and invest wisely to attain your goals.

American Manufacturing

Myth #2: America is broke
The United States is in better shape now than it has been for many years. The unemployment rate is down to 6.3 percent and consumer confidence is up. Workers are expecting raises, and according to surveys of executives it looks like it may actually happen this year. Household debt is at record-low levels and corporations have more cash than ever.

Some people may argue that we don’t make anything in this country. This is false. U.S. manufacturing is up 22 percent since 2009 and near record levels. We have an abundance of natural resources, educated workers, and innovation. We have laws to protect and promote business.

Worries over ballooning government debt (over $17 trillion) are diminishing for now. The expanding U.S. economy has led to greater tax revenue (up 8 percent) and a lower deficit ($306 billion). These numbers may not sound great. We still have a long way to go to reach a surplus so we can pay off some debt, but these are the best numbers since 2007. The future appears brighter.

Myth #3: A market crash is imminent
Herbert Stein famously said, “If something cannot go on forever it will stop.” We all know that when the market stops climbing, it can be painful. Two stock-market crashes in the last 15 years are still vivid in our memories. However, just because stock prices have increased doesn’t mean a crash is coming this year.

What can we expect?
The Dow Jones index had double-digit increases in 2012 and 2013. This has happened more frequently than one might think. In the last 99 years, returns of this magnitude have occurred back to back 22 times. What happens in the year that follows two positive, double-digit years? The average return is a positive 5 percent. That would be a reasonable expectation for 2014.

When we examine critical factors for a healthy market, we see more positives than negatives right now. Of course, there are no guarantees.

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Women and Investing – Defining Your Future

By | 2014, Money Moxie, Newsletter | No Comments

Understanding money – how to make it work for you – is important to everyone. But, it is of utmost importance to women. Why women you ask? Women face some staggering statistics when it comes to money.

Women live longer than men.

This well-known fact has a significant impact on women and their finances. Of the people living to age 90 today, 72 percent are women.* This requires them to have more money than men if they want to maintain the same lifestyle throughout their retirement years.

one_woman

Women earn less money.

Women earn less for many reasons. They often put their work lives on hold to care for others; raising a family or helping aging parents. They seek careers that offer more flexibility, often for lower salaries. Unfortunately, sometimes women make less because they are women.

As a result women save less money for retirement. This is compounded by the realization that only 33 percent of workers today have a company pension plan.* As a whole, the burden to pay for our golden years has been shifted to us.

three_women

Women sidestep long-term finances.

Women often handle the household budget and leave the long-term financial decisions to a spouse. At some point in time, whether because they are single, widowed, divorced, or their spouse is disabled, women will be responsible for making all of the financial decisions. For many women this is like being thrown into the fire. They must take on a new role in handling the finances at a time when they are likely facing emotional strains.

senior woman

Be proactive, not reactive.

If you get involved now you’ll have little to fear if you are forced to take charge of your family’s finances in the future. To make it simple, compare your financial life to taking a journey across the country. Here are some steps to consider for your financial journey.

Step One: Where are you going to go?
No one shows up at the airport without a ticket. You start with a vacation plan. Knowing where you want to end up is the first step of the process. This requires some real thought on your part.
Ask yourself, “What is important about money to me?” Determine what you want to accomplish financially throughout your life and write it down. These are your financial goals.

Step Two: What will you need to take?
When packing for a trip, most people make a list so nothing is forgotten. Breaking your goals into small steps will help you find ways to accomplish them.

If your goal is to get your children through college, determine what it will take. When you know the answer, decide how much of your monthly cash flow can be allocated to reaching this goal. The same can be said of retirement. While you have longer to plan, the cost will be much greater and the planning more crucial. These decisions are your financial plan.

Step Three: How much is it going to cost?
Leaving for a vacation not knowing how much it will cost or if you’ll have enough money once you reach your destination seems crazy. But it’s surprising how many people look forward to retiring without knowing how much money they will need to replace their monthly income or what the real costs may be.

Running out of money during retirement is a legitimate fear for many. Having an income plan prior to retiring can mean the difference between living the lifestyle you want and just getting by.

If you’re feeling a little overwhelmed thinking about making a plan, you’re not alone. Both women and men find putting together a reliable financial plan to be intimidating. Not because they are not smart enough to make it happen, but rather because of the depth of knowledge required to address all of the sophisticated intricacies of the plan.

Engage an experienced professional. Rely on our years of experience and knowledge to help you design a plan specific to your unique situation and goals. We can help you define your goals and increase the likelihood of reaching them. It’s never too late to get started.

 

*Source: U.S. Department of Commerce and Employee Benefit Research Institute

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Shutdown Showdown Can’t Sink Stocks

By | 2013, Money Moxie, Newsletter, Viewpoint | No Comments

In October, the U.S. Government operated under a partial shutdown for 16 days. During that time only those federal employees determined to be essential were working. Up to 850,000 federal workers were sent home to wait for an agreement between Democrats and Republicans. National parks were closed. Economic reports were delayed. Consumers were worried. Investors were . . . optimistic?

From October 1st – October 16th, the time period when the federal government was shutdown, the S&P 500 gained 2.38 percent. This was a shockingly positive outcome in what might have been viewed as a dire financial situation. Let’s put the number in perspective. If it were somehow possible for the stock market to continue at that 2.38 percent rate for an entire year, the annual return would be 63 percent. We all know that would be absolutely crazy and it raises some questions.

Why is it important to look at the impact now that the shutdown is over? The current law, passed on October 16th, only keeps the government running until January 15, 2014. In other words, another shutdown could be right around the corner. (The debt limit is expected to be reached on February 7, 2014.)

Why were investors feeling so good during the shutdown? The main reason is likely to be that Wall Street always assumed that the shutdown would be temporary. Eventually politicians would come to an agreement. According to the Washington Post there were similar halts in government services in 1995, 1990, 1987, 1986, 1984, 1983, 1982, and 1981.

Did the shutdown save the government money? This one is simple: no. In fact, it cost extra. Furloughed workers were given pay for every day they did not work. That added up to around $2 billion. For example, national park employees were paid even though there was no revenue from visitors. Zions National Park in Utah missed out on approximately 72,000 visitors during the first ten days of closure.

Local governments also took a hit, Utah in particular. The state agreed to send $1.67 million to the federal government to reopen national parks inside the state. It was worth it since the local communities estimated revenue of over $100 million in areas around these parks. As of the time this article was written, the federal government had not paid back the state.

How did consumers react to the halt? Consumer confidence dropped significantly during the shutdown. However, they did not put their money where their mouth was. According to Thomson Reuters, retail sales increased by 3.7 percent in October (compared to October 2012). That would normally be considered good. In light of the shutdown, 3.7 percent seems strong.

Did the shutdown hurt the economy? The overall cost of the shutdown to the U.S. economy has been estimated at $24 billion (source: Standard & Poor’s). How bad is that? It is a little more than one tenth of one percent of GDP—just enough to show up in the numbers when quarterly annualized numbers get reported. However, the long term impact on economic opportunity seems muted. The energy renaissance in the United States continues. Consumers kept spending in October on homes, cars, iPhones, and whatever else they needed. They are likely to do the same in November and on into the future. All these will help job creation to continue just as it has all year.

Will we have another shutdown? The most likely answer is yes. Hopefully it does not happen in 2014. The political fallout alone may be incentive enough to avoid a February shutdown. Recent history tells us that the market will expect a deal and consumers will keep spending no matter what. Therefore, it is safe to conclude that while the possibility of another
shutdown is scary, a short shutdown may not be as negative in the long term to investors. Of course, there is no guarantee.

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College Education – A New Path

By | 2013, Money Moxie, Newsletter | No Comments

What’s happening to the college experience in America? It’s changing. Not because of the campus environment, but rather because of the financial burden that faces today’s students.

The cost of obtaining a college degree continues to grow at a rapid pace. So, does college still pay off? The answer is yes! However, the path taken to obtain a degree has changed from the traditional route.

Students are getting savvy about spending more for their degree. Reducing costs is a major concern. As a result, many high school graduates are starting their college experience at the local community college. They receive the same level of basic education at a fraction of the cost compared to a private institution. Once the basics are covered, they transfer to their college of choice.

Why pay more to go out of state or to attend an Ivy League? In-state colleges offer a wide variety of academic majors and activities to create a great campus experience. The in-state tuition advantage makes going to these colleges a great investment. In addition, cost conscious students are willing to live at home while going to college. This way they can save on room and board as well as the cost of food.

Technology has had a major impact on college education—not only in the classroom but also as an educational avenue. Some students are opting to take college courses online. Recorded lectures and study materials permit them to attend class at their convenience. This flexibility offers students the opportunity to work and attend college at the same time. For many, technology makes what used to seem impossible, possible.

Many have given up on the traditional college education and are looking for a trade specific education, something that requires less time, a lower financial outlay, and the opportunity to get started in a career while completing required courses.

It’s safe to say that when it comes to education, that students are making the rules based on their individual needs and financial resources.

The focus on various degrees is also changing. Choosing a degree has a significant impact on one’s lifetime earning ability. Those obtaining engineering degrees have the potential to secure higher paying jobs throughout their lifetime than those with literature or education degrees. This being said, it’s important to note that just having a four-year degree, regardless of the field of study, gives students an upper hand when it comes to lifetime earnings. Many employers are not fixated on a specific degree. They believe they can train an employee in the areas they need. However, employers view a college degree as a definite advantage. Typically, these employees know how to manage their time and resources, research information, and solve problems, making them valuable employees.

Regardless of the form of education, the payoff in lifetime earning ability is huge and increasing.

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What is the Riskiest Part of Your 401(k)?

By | 2013, Money Moxie, Newsletter | No Comments

You have control over the most important factors that determine successful retirement savings in your 401(k). You control the contributions, investments, and withdrawals. You are the riskiest part of your 401(k)!

Inherent risk does not exist in a 401(k). Why? A 401(k), 403(b), IRA, or Roth IRA is not an actual investment. These are merely vehicles or accounts that allow us to save money for the future in a tax-preferred environment.

The risks come in other areas, most of which we have the ability to control. This article will discuss four of the most misunderstood risks: investment risk, active user risk, savings rate risk, and self-plundering risk.Investment Risk

Within the 401(k) or qualified retirement account, there is generally a wide variety of investment options. These include different sectors of the market and ranges of risk, as measured by volatility. These options can be conservative, aggressive, or anywhere in between.
We cannot control what the world stock and bond markets do, but we do have some control over how our money is invested and how much risk we are going to take.  As participants, we choose which of the investment options we will use. This requires us to know which mix of the options will meet our investment risk tolerance, emotional needs, and time-frame.

Active User Risk

We drive the level of risk. If we choose investment options that are too aggressive, we increase our risk. If we do not diversify among the options, we increase our risk. If we change investment options in response to information we hear or read, we may increase our risk.

The chart to the left shows how volatility in the market changes from year to year. Investors evaluate each year based on the ending market price. Was it positive or negative? Participants tend to forget that even though a year may have ended positive, we could have experienced significant volatility mid-term. Take for instance 2009. The market ended up 23.5 percent by year end. Looking back, it’s easy to forget that during that year the market was down 27.6 percent.

These periods of volatility can cause investors to get sidetracked. They forget their long-term plans. They try to outguess the market by moving in and out. These decisions are often based on emotion, and it is generally to their financial detriment.

On the flip side, some participants remember the volatility and become risk averse. They forget that over time they have experienced more positive years than negative. They forget their long-term objectives and become too conservative.

Savings Rate Risk

We have seen a significant decline in the personal saving rate among Americans. While a 401(k) allows contributions up to $17,500 each year ($23,000 for those 50 and older), many make minimal contributions. Just like investing too conservatively, saving too little will leave many far short of living a desired lifestyle at retirement.

One of the benefits of a 401(k) is that you can make systematic investments directly from your paycheck. You don’t have to sit down and write a check each month. It happens automatically. Not only that, the company may offer a matching contribution. That’s free money! Our clients experience greater success when their savings plan is set on autopilot.

At any time, investors have the ability to increase their investment amount. Unfortunately, as raises and bonuses come, rather than increase their contributions, investors often allow the raise or bonus to be absorbed into their cash flow.

Self-plundering Risk

Participants who view their 401(k) as a savings account or emergency fund fall prey to this particular risk. They access their money by taking loans or withdrawals, diminishing the opportunity for long-term growth. Even if a participant takes a loan and pays it back, they will experience opportunity loss. This is the difference between the interest rate they paid themselves through the loan and the market returns they missed out on. The difference becomes more significant when you compound the missed opportunities over their working years and throughout retirement. Taking early withdrawals is even more damaging. Participants not only miss out on long-term savings and compounding returns, but they will also pay taxes and penalties. The taxes are based on marginal tax rates, but the 10 percent early withdrawal penalty is exact.

For example, say that a participant has a 25 percent federal tax rate and a 5 percent state tax rate. If they were to take a $20,000 withdrawal from their 401(k), they would lose $8,000 (40 percent) to taxes and penalties, netting a meager $12,000. Suddenly that withdrawal doesn’t sound so enticing.

There are many misconceptions regarding risk when it comes to 401(k)s. We want to make sure you are well informed about the benefits and risks in these accounts.

As we see it, a 401(k) is an ideal vehicle that provides us with a tax-preferred way to save for the future. Will a 401(k) be enough to support someone in retirement? Probably not. While most companies offer a company-match to 401(k) participants, many no longer offer pension plans. This makes it paramount that we save more on our own for retirement.

Our investment decisions, savings habits, and our willingness to stick to a plan can prevent us from increasing our risks. Working with one of our wealth consultants can help you make the most of your 401(k) opportunities and avoid some of these risks. Having a plan and making educated choices is just the beginning.

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A visit to the NYSE!

By | 2013, Travel | No Comments

SFS’s Vice President, Sharla Jessop, had the opportunity to visit the New York Stock Exchange yesterday while attending a national peer to peer study group in New York City, NY. During her stay, she will discuss strategies and ideas to better serve SFS’s clients.

Sharla Jessop at the NYSE

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Top Concern for Small Business Owners: Rising Health Insurance Costs

By | 2013, Money Moxie, Newsletter | No Comments

A recent study by the National Federation of Independent Business ranked “Cost of Health Insurance” the number one concern for small business owners.1 This comes as no surprise as there has been much uncertainty over the impact of the Affordable Care Act, AKA “ObamaCare.”

The Wall Street Journal reports that “while ObamaCare won’t take full effect until 2014, health insurance premiums in the individual market are already rising, and not just because of routine increases in medical costs. Insurers are adjusting premiums now in anticipation of the guaranteed-issue and community-rating mandates starting next year.”2 The largest impact will be for individual coverage, where health care costs in Utah are expected to increase somewhere between 65% and 100%.3 Small employers are also expected to feel a disparate impact. Large employers will be impacted the least.

Whether you supply health insurance for your small business employees or you get alone with individual coverage, you can expect premiums to increase.

While understanding that costs will most likely increase, we also need to remember that one of the benefits of ObamaCare is that many small business owners, employees, and individuals can gain access to healthcare where they didn’t have access before.

For small business owners, there are specific rules governing how your business will be impacted next year based on the number of employees you have. For example, if you have less than 25 employees, you may actually qualify for a tax credit if you contribute 50 percent or more toward employee health insurance. Employers with 25-50 employees will have access to SHOP, the Small Business Health Options Program,
where employers can go to find coverage from a selection of providers in the marketplace. Open enrollment begins October 1, 2013.

It isn’t until you have 50 full-time equivalent employees or more that you may be subject to an “employer shared responsibility payment” beginning in 2014. It is important to understand how all of these rules may impact you. For greater detail please visit SBA.gov and IRS.gov and search for the Affordable Care Act.

So, what should you be doing as a small business owner? First, make sure you understand all of the changes and how they will impact you going forward. Then, if you feel like the cost of your insurance is increasing dramatically, shop around. Smedley Financial Services has access to individual and small business health insurance plans. We can give you a second opinion to see if you can save money or if there is a different type of plan that is more suited to your business structure.

There are so many changes happening in health care that it is hard to keep up. However, with a little research and some expert advice you can remove some of the uncertainty in your life.

1. “Uncertainty Dominates Top 5 Small Business Concerns,” National Federation of Independent Business, http://www.nfib.com/research-foundation/priorities.
2. Merrill Mathews and Mark E. Litow, “ObamaCare’s Health Insurance Sticker Shock,” Wall Street Journal, January 13, 2013.
3. Merrill Mathews and Mark E. Litow, “ObamaCare’s Health Insurance Sticker Shock,” Wall Street Journal, January 13, 2013.

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Patience is a Rewarding Virtue

By | 2013, Money Moxie, Newsletter, Viewpoint | No Comments

What 50 Years of New Highs Looks Like

We have all been taught that the way to make money investing is to “buy low and sell high.” This makes perfect sense, but it is so much easier said than done. The danger in “buy low and sell high” is that it encourages investors to take active risk that may be contrary to their long-term goals. Most investors would do better following a more patient mantra.

Consider the recent highs in the market. On March 5th, 2013, the Dow index closed at a record level: 14,253. The S&P 500 index hit its high on March 28th, 2013, with a close at 1,569. These highs are only exciting to those participating in the growth of the market.

Some may see new highs as a signal to increase risk, others as a reason to decrease it. Keeping in mind that past performance does not guarantee future results, here are some answers to questions asked by the media when such events occur.

Do the new highs matter?
Yes! How else will investors make money? Making new highs is exactly what the market is supposed to do. Sure it doesn’t happen every day or even every year. It took these stock indexes 5½ years to reach their previous highs set on October 9, 2007.

Over the last 50 years, the S&P 500 hit new highs 714 times. It falls frequently, but the long-term trend is up and that is the way it should be.

Can we say that what goes up must come down?
There is always a reason for a rising market, and so a new high is often followed by more highs. The positive momentum and good news often have continued. The average return following a new high is positive for 1, 2, 3, 6, and even 12 months following the high.

Is this time different?
The current bull market is celebrating a birthday this month. (The current bull market began on March 9th, 2009.) It is turning four, which is a long time for a bull to run on Wall Street without interruption.

What could stop the bull?
Consumers are once again financing spending through debt. Their savings have fallen to just 2.6 percent of their income. (See cover story for details.)

Low savings equate to high spending. This is only good over short periods of time. A market rise that goes with it cannot be sustained forever. Eventually, consumers will reach a limit on how much they can borrow and spend.

Human nature is also a constant in the investment world, and it often leads to an over-inflated market as investors become overly optimistic. If it leads to inflation, the Federal Reserve may choose to send interest rates higher on debt.

Are there signs of overheating?
Consumer spending trends may be headed in the wrong direction right now, but they seem far from overextended. In fact, household debt is at historically good levels—the best in over 25 years.

Inflation could become a major concern, but it isn’t right now. North America is on its way to energy independence, possibly by 2020. Take a look at the price of natural gas on your winter heating bills. Prices have been low for energy.

Everyone is beginning to love stocks again. This is a good sign and a reason for caution. Just remember, patience is a rare virtue in the market, and if you have it then you should expect to do better than average. Of course, there are no guarantees.

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