Erman Civelek of Beacon Trust Company: “Don’t be afraid of volatility”

Don’t be afraid of volatility. Financial assets fluctuate in value every day; it’s part of investing. Keeping your money in cash will lose out to inflation and your real purchasing power will decline. As a part of my series about the The 5 Essentials of Smart Investing, I had the pleasure of interviewing Erman Civelek, CFA, […]

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Don’t be afraid of volatility. Financial assets fluctuate in value every day; it’s part of investing. Keeping your money in cash will lose out to inflation and your real purchasing power will decline.

As a part of my series about the The 5 Essentials of Smart Investing, I had the pleasure of interviewing Erman Civelek, CFA, CAIA, CFP® — Senior Vice President, Investment Strategist for Beacon Trust Company.

Erman is responsible for portfolio management, risk analysis, asset allocation, ETF strategies and third-party manager evaluation at Beacon Trust. He is also responsible for managing the in-house risk-controlled investment strategies that offer enhancement, income, and hedging solutions using ETFs and index options. He leads Beacon Investment Advisory Services’ investment committee meetings and his particular area of expertise is alternative asset class strategies.

Prior to joining Beacon, Erman served as a lead portfolio manager at Acertus Capital, where he managed three long-short equity strategies using a systematic, rules-based process designed to control risk and deliver predictable returns. He also worked at MDE Group, where he carried out fundamental and technical analysis with respect to investment strategies and the financial markets. He developed and maintained MDE’s quantitative and qualitative due diligence process used to evaluate external investment managers.

Erman graduated summa cum laude with a B.A. in economics from Rutgers College, where he was a member of Phi Beta Kappa and Golden Key National Honor Society beginning in his junior year. He is also a Chartered Financial Analyst (CFA) charter holder. He also holds the Chartered Alternative Investment Analyst (CAIA) degree and is a CERTIFIED FINANCIAL PLANNER™, having received that designation from the College for Financial Planning in Denver, CO.

Erman is a contributing author of the book titled “Hedge Fund Alpha, a Framework for Generating and Understanding Investment Performance.” He has also been featured in public media globally on various investment topics and speaks frequently in industry events.

Thank you for doing this with us! Our readers would like to learn a bit more about you. Can you tell us the “backstory” about what brought you to the finance industry?

I took an unusual route to finance. Growing up as a kid, I was always interested in technology and understanding how things are built. At the same time, finance and accounting have been in my DNA, as my father was an accountant. Hence, I chose to major in Industrial Engineering in college, which is an area that combines technology and finance. However, I quickly realized in my first semester that I could not apply what I learned in class to real life immediately. I was looking for instant gratification, not abstract concepts, so I switched my major to Economics, which allowed me to take my academic knowledge and validate it in real time, on the newspaper, on TV, and in different social settings, right after I walked out of that classroom. And the rest is history!

Can you share with our readers the most interesting or amusing story that occurred to you in your career so far? Can you share the lesson or take away you took out of that story?

Back in 1998, two years out of college at my first job on a hot August day, a few young associates and I had to go to a local public storage facility in New Jersey that did not have air conditioning. We were wearing business suits and we had to dig through hundreds of piles of old dusty files for hours to find an important investment document that we needed for a client meeting. I did not know at the time that electronic data storage would take over the world soon, but I knew that there had to be a better way of organizing and extracting data. Fast forward 23 years, everything is in the cloud now and I don’t have to break a sweat to find data.

Are you working on any exciting new projects now? How do you think that will help people?

We constantly strive to enhance our service offerings. Financial markets evolve continuously and so do we as a holistic wealth management organization. While traditional investment strategies have served our clients well over the years and will continue to be at the core of our investment offerings, I have been a proponent of diversifying portfolios beyond just stocks and bonds to also include alternatives. Diversification is one of the few so-called free lunches available to investors. A typical investor may not care too much about the downside risk in rising markets, but just like you have a homeowners policy before a physical damage to your house occurs and an automobile policy before you get into any accident, you need some type of portfolio protection before a bear market arrives. Alternatives expand the investment opportunity set and improve the risk-adjusted portfolio results. My latest project is to continue to expand into diversifying asset classes and incorporate some of the exciting investment strategies such as private equity, real assets, defined outcome investing, and inflation protected securities into our client portfolios.

Ok. Thanks for all that. Let’s now jump to the main core of our interview. According to this report in Fortune, nearly two-thirds of Americans can’t pass a basic test of financial literacy. In your opinion or experience what is the cause of these unfortunate numbers?

True. And almost 40% of Americans have less than 1,000 dollars saved for financial emergencies. It’s heartbreaking. People are too busy with other things and may not appreciate the importance of having a sound financial plan. They are nervous about money. Can I clean my own gutters to protect my house? Sure I can. I just need a long ladder to hang against my house, climb up to the roof, pick up the debris and flush all the downspouts. But, do I care to do that? No, I just hire a professional to take care of it for me. When it comes to financial matters, Americans need help too. They are too busy at work and too busy caring for their families. That’s why wealth management is such an important industry to serve Americans of all walks of life and guide them to financial stability.

If you had the power to make a change, what 3 things would you recommend to improve these numbers?

Education, education, and last but not the least, education! I would expand corporate training in basic financial topics for those who work for a company. At Beacon Trust, we are lucky to have a wide range of classes available at our disposal. For self-employed people, I would increase online resources available to them to enhance financial education. Once the underlying technology is established, the marginal cost of providing online education to an additional individual is essentially zero. I would enhance school curriculum to include more classes on various financial topics. It’s as important, if not more, than math and science. I would encourage all families to start giving their children valuable financial lessons at a young age. I would also run ads on national media to raise awareness for financial literacy.

You are a “finance insider”. If you had to advise your adult child about 5 non-intuitive essentials for smart investing what would you say? Can you please give a story or an example for each?

There are just too many important ones to fit into 5 essentials.

  1. Develop an investment philosophy. Create a sound investment plan. Invest only in what you can understand.
  2. Put all of your emotions in a dark closet, perhaps up in the attic, lock it up, and never open it again. Instead, use your logic and reasoning to make smart investment decision.
  3. Start early and always have a long-term time horizon. Unlike cooking competitions, when it comes to investing, time is your friend. Patience is a virtue.
  4. Ignore the short-term noise that you hear in the news. It will only derail your train and prevent you from reaching your destination.
  5. Don’t be afraid of volatility. Financial assets fluctuate in value every day; it’s part of investing. Keeping your money in cash will lose out to inflation and your real purchasing power will decline.
  6. Manage your portfolio risks and diversify across uncorrelated asset classes. Understand how much risk you can tolerate before you invest. Set your asset allocation at the proper target level.
  7. Differentiate between a good company and a good stock. Have a price discipline. Set investing rules for yourself and stick to your discipline. If you set a target of 100 dollars on an investment that is trading at 50 dollars today, start thinking about trimming the position if it doubles in value over a short period.
  8. Realize that borrowing is a double-edged sword. Leverage can amplify your returns, but also exacerbate your losses.
  9. Establish a strong savings program through retirement accounts as well as after-tax dollars. The extra cushion of financial safety will allow you sleep comfortably at night.
  10. Keep your costs low. Every investment dollar that you pay in fees is an investment dollar that is not available for growth.

What are your thoughts about investing in cryptocurrency? Can you explain what you mean?

Digitization of money is a theme that is here to stay. We have to embrace change and adopt to new way of exchanging money and paying for products and services. Cryptocurrencies will continue to face a high level of uncertainty due to regulation, cyber theft, etc., but that is part of the growth story of this emerging industry. We are still in the very early innings of the growth cycle and there will be many different ways of taking advantage of the increased usage and adaptation of digital currencies around the world.

What are your thoughts about day trading, using apps like Robinhood? Can you explain what you mean?

I believe in free markets and unrestricted competition. Anybody and everybody can buy, sell, or sell short any security in the world. They can base their decisions on earnings, technicals, sentiment, or even the direction the wind is blowing on any particular day. However, over the long-run, financial markets have a very powerful pull towards the underlying fundamentals, thus the short-term noise, while it can create a lot of volatility, will wash out over time. It is a good thing that there are arbitrageurs that will instantly eliminate any perceived inefficiencies in the financial markets. Inefficiencies can lead to investors overpaying for a stock that they buy or receiving lower proceeds than the true value of a stock when they sell. All that being said, Robinhood and other day trading programs have to be completely transparent to their customers and regulators as to how they make money and how they ensure safety of the assets on their platform. They should also discourage investors from using Robinhood as a gamification tool and encourage them to use it for true investing.

None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?

That is an easy one. My father taught me the investment discipline that I apply every single day of my life. As I said earlier, he was an accountant. He followed financial rules, he set his own personal bylaws, and he never got off the track. He stayed within his boundaries. By having a high level of discipline in his life, he had a pleasant journey without too many surprises. He instilled the same discipline in me, which allowed me to advance in my career and achieve success in life.

Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?

Failure is a lesson learned. Success is a lesson applied. I strive for excellence in everything that I do, but I am never afraid of failure. The best lessons I have learned in life came from my failures and my aspiration to not repeat past mistakes.

You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the greatest amount of people, what would that be?

I’m certainly not the first or the last person to say this, but Environmental, Social and Governance (ESG) investing has the potential to bring the most amount of good to the greatest amount of people if every individual, every company, and every government around the world make decisions taking the impact of their decisions on the environment, society, and governance into account. The integration of ESG factors into economic and political decisions is not only the right thing to do, but it also leads to better outcomes.

Thank you for the interview. We wish you continued success!

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