Half-Full or Half-Empty?

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I’ve said time and time again on this blog that I can only speculate about how the stock market is going to perform in the short term. I can use my education, I can use my training, I can use my experience, and I can read, watch, and listen to what a lot of other much-smarter people are thinking and saying, but the truth is, I can only rationally speculate. However, as far as long-term performance, I’m much more convicted in my beliefs as to where the market will end up, and if you don’t share my confidence, I’d urge you to look up where the Dow Jones Industrial Average (DJIA) was on your date of birth versus today.

Look, I’m not here to beat an optimistic drum about how the stock market is going to do in the short term. I’m writing this post to remind you to be careful about how you act on what you hear about predicted changes in the stock market. We’re exposed to so much conflicting “noise” out there today from the television, radio, and various forms of social media that it’s hard for anyone to keep their head on straight, myself included. But what has become clear to me through the contradictory chaos is that some people are actually investing based on the “noise.” Why else would some intelligent people seem to want to bet wildly on a market rally in the very near future, while at the exact same time, some other intelligent people are heading for the hills and diving headfirst into precious metals, treasury bonds, and cash? To answer that question, let me show you how portions of one chart can be manipulated to make all kinds of different “noise” that might entice an individual to make very different portfolio decisions.

Chart 1- DJIA 5 Year Chart as of 2/22/13 from Yahoo Finance:

What’s your gut reaction to the chart above? Are you imagining an anxious guy in a disheveled suit screaming “The end is near!” at you? Are you envisioning those sign-twirling, “We Buy Gold” people on street corners? I can certainly see how this chart might make someone buy into a “what goes up must come down” investing approach in the short term as it appears the blue line might be overdue for a fairly severe pullback based on the time frame shown.

Chart 2- DJIA 3 Month Chart as of 2/22/13 from Yahoo Finance:

What about this one? It kind of looks like a never-ending version of the Price is Right’s “Cliff Hangers” game to me. I can certainly see how this chart might make someone start looking underneath seat cushions for additional funds to invest in the short term. It does appear the sky could be the limit for the blue line based on the time frame shown.

Chart 3- DJIA 1900-Present Chart as of 2/22/13 from stockcharts.com:

Finally, take a look at this chart. Remember what I said about my being more convinced about where the market will end up long term? This one shows why.

Look, I don’t know what the market is going to do in the short term, and neither does anyone else. Hopefully, as my very simple charts have shown, you can always look at the stock market as a whole, or almost any individual investable asset, as a glass half-full or a glass half-empty. Even on Wall Street, professional investors differentiate many credible people’s very different viewpoints and forecasts by calling some bulls and some bears.

There’s a lot more to successful investing than looking at historical charts, but I believe doing so shows why everyone needs to beware of the “noise” out there. Quite frankly, there are a lot of people who don’t know what they’re talking about. There are also a lot of people with polar opposite positions who do know what they are talking about. I hear the same “noise” you do, but I stay grounded when I think about a long-term outlook with a diversified approach, and good ol’ chart number three.

If you’re prudently invested, ask questions and follow up on what you hear, but please don’t let one, random piece of “noise” cause you great emotional distress. Worse yet, please don’t let one, random piece of uninvestigated “noise” cause you to have a knee-jerk reaction and potentially jeopardize your financial situation. Remember, the guy on the television might just be showing part of the chart.

-Tom

Checkout Fees

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On January 27, 2013, retailers gained the option of charging a “checkout fee” to customers who pay with a credit card. The fee can only be charged to credit card users (not debit card users), and it is typically between 1.5% and 3% of the total purchase price. Say what? Now that I have your attention, let me give you a little background…

A group of retailers have long been in a legal battle with Visa and MasterCard over “swipe fees.” (Swipe fees are the costs a retailer must pay to a credit card company every time a customer uses a credit card.) The group of retailers alleged that the credit card companies were colluding and fixing the amount of swipe fees and that this was anti-competitive behavior. As part of the $7.25 billion settlement that was reached in July 2012 between Visa and MasterCard, the group of retailers, and nine major banks, retailers now have the option of passing these “swipe fees” on to credit card-using consumers as “checkout fees.” I know this sounds bad, but please don’t panic. I didn’t immediately sound the alarm on these potential checkout fees because I’m not that worried, and I don’t think you should be either.

I’m not that worried for three reasons:

1. Many retailers like Wal-Mart, Macy’s, JCPenny, Limited Brands, and Gap Inc. have raised their objections to the settlement through the National Retail Foundation. Why would a retailer raise an objection to the ability to pass on a cost to the consumer? Because they know that if they add the surcharge to their customers, but their competitors do not, they will likely lose many of their customers. I also believe many retailers suspect that if they are the first to add the surcharge to their customers they will likely still lose customers, even if their competitors later add on the surcharge, because they were the initial bearers of bad news. Remember, retailers have the option to charge a checkout fee; they are not required to.
2. According to Consumer Action, should retailers decide to charge the new fee to credit card users, they are required to clearly disclose it by using signs at the store entrance or notifications at the point of sale (whether at a store or online). Retailers must also provide details on the customer’s receipt clearly stating that the merchant is imposing the checkout fee and that it is not greater than the swipe fee being imposed on the retailer. If consumers pay attention, they shouldn’t be surprised by a retailer charging this fee, and if they realize the retailer is charging a checkout fee, I bet they will take their business to another retailer that isn’t passing the cost to the consumer.
3. Checkout fees are already illegal in ten states: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. Many of these are some of the more populous states in the U.S., and if other states’ constituents get mad enough because they start seeing checkout fees, I would bet the list of states banning checkout fees will grow.

In conclusion, I’d be very surprised to see most large retailers implement checkout fees. Smaller retailers that could really benefit from cutting a significant expense, or retailers that have clearly differentiated or valued products compared to their competitors’ products or services, might have some incentive to implement the surcharge, but I really think retailers’ fears of upsetting their customers will minimize the implementation of this new fee.

If I’m wrong, I give you fair warning: I will be the guy at the grocery store writing a check!

-Tom

The Top 10 Keys to Financial Success

If you’re one of those people who reads subject lines, but not emails, this post is for you. If you’re one of those people who reads Cliff Notes, but not literary masterpieces, this post is for you. If you’re like Joe Friday and want “Just the facts, ma’am," this post is for you. Here are my Top 10 Keys to Financial Success, David Letterman-style:

Credit: Stuart Miles

10. Ignore the noise- the world is not coming to an end (because if it is, what are you going to do?), a pyramid scheme still won’t work, and if everyone is talking about investing in “it,” you’re probably already too late

9. Have sufficient insurance and proper legal documents (Will, Power of Attorney, etc.) in place- make sure an unfortunate event or death won’t leave you or your family’s finances in a pile of ruin

8. Keep good and updated records- good documentation lets you analyze trends, prevents errors, and allows you to make sure you are staying on track to achieve your financial and life goals

7. Get out of long-term debt- don’t just make your car or house payments; throw as much extra towards the remaining balance(s) as you can

6. Invest prudently- time horizons and risk tolerances may change, but a long-term, diversified strategy is the best way to go

5. Maximize IRA contributions- a dollar saved now could be worth many more dollars years from now, so always make those annual contributions

4. Maximize 401(k) plan matching contributions- put in at least whatever it takes to maximize your employer’s match, but also put in as much as you can so you can retire sooner and in style

3. Stay out of long-term credit card debt- if you’ve spent more than you can pay off at the end of the month, you’ve likely spent too much

2. Have a sufficient rainy day fund- you need the greater of three to twelve months’ worth of living expenses or whatever magic number it takes for you to sleep comfortably

And the number one key to financial success in my book is...

1. Live BELOW your means- put in more than you take out (almost all the time)

I’ll keep working on my Jay Leno monologues, Conan O’Brien “State of the Shows,” and Jimmy Fallon thank you notes, but I thought a David Letterman-esque top ten might be short, sweet, and useful. Don't worry though, I won't quit my day job! 

-Tom

The Others

Credit: marin

There is insurance for almost everything. Ugly Betty’s smile, Troy Polamalu’s hair, Heidi Klum’s legs, and many other wacky animate and inanimate objects are all insured. Smelling abilities, nonrefundable wedding expenses, and even the Loch Ness Monster can all be tied to improbable and unusual insurance policies. Life insurance frequently comes up in this blog, and in an earlier post, “Surviving Mayhem,” we covered several common types of insurance like car insurance, homeowners insurance, and umbrella policies, but there are still a few types of insurance policies that I have been relatively quiet on. Today, I’d like to offer a few thoughts on “the others:” Short Term Disability Insurance, Long Term Disability Insurance, and Long Term Care Insurance. I know insurance is not always the most exciting topic, but I implore you to read on - I have some tips that I think could be pretty valuable if something unfortunate were to happen to you or someone you care for.

Short Term Disability Insurance
Short Term Disability Insurance is insurance designed to pay benefits for a brief period of time (usually a few months) while someone is disabled. The benefits are usually only a portion of your monthly income, and Short Term Disability Insurance is designed to kick in after a shorter waiting period than Long Term Disability Insurance, usually after just a couple of weeks of being disabled. The value of benefits, the numbers of days before the benefits begin, and the length of time the benefits will last all depend on the specific type of policy you have, but the overall purpose of most Short Term Disability Policies is to get you and your family through a brief period of time when your income is drastically reduced due to illness or injury.

If you end up getting hurt, having a policy is likely best, but as they say, hindsight is 20/20. If you have a highly specialized occupation that would require you to take a substantial reduction in salary to work in a different role, or if you have a very dangerous job (like logging, roofing, or Alaskan King Crab fishing), making sure you have sufficient Short Term Disability Insurance is probably a good idea. That being said, for the Average Joe like me whose greatest daily dangers are my miniature dachshund’s teeth and tripping over my own desk chair, you probably should consider passing on Short Term Disability Insurance IF you have a sufficient rainy day fund. As you may recall, a rainy day fund is supposed to be between at least three and six months’ worth of living expenses that you have set aside in case an emergency occurs or you lose your job… or you are temporarily disabled. A sufficient rainy day fund essentially allows you to self-insure. As you will see below, I’m a much bigger fan of Long Term Disability Insurance than I am of Short Term Disability Insurance, and that is due in large part to how much more comfortable and satisfied many of my clients and I are that they have a sufficient rainy day fund versus relying on (and having to wait for) the insurance company to come through in the event of a temporary injury or sickness. Building up a rainy day fund may not be that much fun or even the easiest thing to do, but after you’ve done it, it won’t be long before it beats paying those Short Term Disability Insurance premiums over and over and over again.

Long Term Disability Insurance
As you might expect, Long Term Disability Insurance is insurance designed to pay benefits for an extended period of time should someone become totally or permanently disabled (or at least disabled for more than a few months). In a nutshell, Long Term Disability Insurance is supposed to pick up where Short Term Disability Insurance (or your rainy day fund) leaves off and get you to where Social Security begins. Because Long Term Disability Insurance could be the only thing protecting you and your family from financial ruin should you become disabled for an extended period of time, it is crucial to make sure you are adequately insured.

There are way too many types of Long Term Disability Insurance policies out there for me to try to cover today, and the truth is, the type of Long Term Disability Insurance you need, if any, will be very specific to you, your job, and your overall financial situation. The key thing I can tell you is that you need to make sure that the benefits of any Long Term Disability Insurance coverage you may have individually or through your employer equates to a standard of living that you are willing to accept should you become disabled for an extended period of time. I can also tell you that if you only have enough money to put towards one type of disability insurance, Long Term Disability Insurance is the way to go. You can get through a few months someway, somehow; getting through a few years or a lifetime with little or no income would be a lot harder.

One final tidbit I can add is directed towards those workers who have the opportunity to choose whether they or their employer pays the Long Term Disability Insurance premiums. Pay the premiums yourself! I know that sounds crazy, but if you end up utilizing your Long Term Disability Insurance and you have paid the premiums, the benefits you receive will be tax-free! If you let your employer pay those same premiums, the benefits you receive will be taxed as ordinary income. Please don’t allow taxes to make your situation worse.

Long Term Care Insurance
Long Term Care Insurance is just like disability insurance in the sense that you might really need it if you somehow know you are going to require health care services for a long period of time, but it can be a complete and utter waste of money if you go out with a bang or quickly and peacefully in your sleep. If you can tell me your “exit strategy,” I can tell you whether or not you need Long Term Care Insurance. You may laugh, but I promise you I’ve had a client look me dead in the eyes and with no hesitation tell me he was going to die in his 84th year. (I’ll let you know how that turns out in 2015!)

Once again, there are all sorts of Long Term Care Insurance policies out there for all sorts of people with different needs, different concerns, and different amounts of money available to throw towards these types of policies, but I can offer a few thoughts.

First, I advise clients who are considering Long Term Care Insurance to think about a baseball bat. Anyone who has ever hit a line drive will tell you that a baseball bat has a sweet spot, and so does Long Term Care Insurance. What I mean is that if the premiums for a Long Term Care Insurance policy would cause substantial strain on your financial situation, you might want to consider passing on coverage that you may never use. If you have a lot of assets and believe you could cover all of your prolonged health care expenses in most all situations, you might want to consider passing on this usually pricey coverage and going with the self-insured approach. If you are at a place where paying premiums won’t be a strain, but you have some concerns about your and your family’s ability to be able to handle the costs of your future health care needs, then you are the sweet spot; you should probably consider Long Term Care Insurance. (Please know that should you or someone you care for need health care services for a long period of time, having a policy is likely best, but you probably already knew that.)

Second, if you are pretty bent on getting this type of coverage, the younger you are the better. You can get more favorable policies at better rates. If you wait until later in life to consider these policies, you will find the cost can be like life insurance - almost unaffordable.

Finally, if you have an annuity and a Long Term Care Insurance policy, there may be a tax savings opportunity for you. If you pay your premiums directly out of your annuity, the distribution could be considered tax-free thanks to the Pension Protection Act of 2006. Please reach out to your investment advisor or CPA if you have any specific questions about this tax break.


I know Short Term Disability Insurance, Long Term Disability Insurance, and Long Term Care Insurance are not fun to think about, but you’ve got to admit, they are at least worth considering. It is my hope that anyone reading this will never have the opportunity to utilize any of the benefits related to these types of policies. I also hope the few thoughts I have shared above will be of assistance.

-Tom