What a Year!

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This time last year, my wife and I were trying to decide whether to move or not. This time last year, I was just beginning to actually think about being a dad. This time last year, I was a senior financial planner still learning the ropes.

Now, my wife and I’ve sold our first home and bought our second home. Now, I’m not quite “Superdad,” but I can change diapers faster than a locomotive and I’m able to soothe my teething son in a single bound (well most of the time…). Now, I’m a wealth advisor, and finally doing what I’ve always wanted to do, yet I still learn something new almost every day!

2015 has been a year of change, and for the most part, a year of blessings. There have been a lot of peaks, but there have also been some valleys. Overall, I consider myself pretty lucky. What a year!

During the course of this mania, I learned several financial and life lessons first hand:

• The emotions, stress, and time consumption associated with a real estate transaction is insane. It’s a second job! However much you budget for a move, you’re going to be low. There’s a financial advisor joke out there that goes something to the effect of “What do you call downsizing? Half the house for just about as much money!” I used to laugh, but now I don’t. We weren’t downsizing. We were upsizing to our first house big enough for a family with a yard, and moving ended up costing us significantly more than we expected. All I can say is buy less than you think you can handle and maybe have more than one inspector or buy a home warranty!
• Baby furniture, car seats, strollers, clothes, formula, diapers, toys, and doctor visits can really add up! Remember that old game show Supermarket Sweep? Those people grabbing the expensive turkeys were crazy! Give me a cart on the baby formula and diaper aisle next to the greeting cards and I bet I’d be pretty hard to beat! Adding another mouth to feed does not financially benefit many households (despite the tax deduction), but being a parent is more miraculously wonderful and fulfilling than I ever imagined! In happier financial news, the “going out” expenses and vacation expenses do seem to naturally tick down, partially compensating for the costs associated with the mountains of diapers!
• Earlier in 2015 I was promoted from a senior financial planner to a wealth advisor. That meant that the firm I work for was ready to take off my training wheels and entrust me with working with clients on my own. That is a trust from my employer, and the clients I serve, that I do not take lightly. I continue to encounter new situations, I continue adding experiences, and I continue to learn new techniques and strategies to help people grow and preserve their nest eggs, save a little on taxes, give a little more to their favorite charities, and achieve personal goals. This year I got to be the anchored beacon to clients experiencing their first market correction in almost six years, I got to help a number of people who were in emotional and financial pain from suddenly being laid off, and I got to help a number of widows and children walk through the grieving process and the financial distribution and redeployment process of bequeathed and inherited assets. Money should not be anyone’s life, but money is part of everyone’s life. My job is not always easy and it’s not always fun, but being able to help people when they need it most is what motivates me to do what I do.

 

In 2016, my wife and I are going to go on the offensive against our mortgage and pay a little more than we have to so we can be debt-free a little sooner. In 2016, my wife and I are going to contribute a little more to our 401(k)s and continue to make our annual Roth IRA contributions so we can build up a reasonable retirement nest egg as soon as we can. In 2016, we’re going to save week after week and finish furnishing our new home. Those are our financial goals. What are your financial resolutions?

 

If you’re one of my loyal readers, you probably noticed that I didn’t post quite as much as I have in previous years. If you wondered why, now you know (move, baby, job responsibilities, etc.). Still, 28 posts in 2015 isn’t too bad, and I promise you, I have just as much energy and excitement about 2MuchCents as I ever have. Life happens, but I’m going to try to average at least two posts every month. And as always, if you have a question or an issue that you think I could help you with, please reach out to me. I’ll make time for you!

 

2016 posts will include why you should unplug from work, some things you need to consider if you or a loved one are considering a move to a retirement center, how to live in harmony if you and your spouse have very different incomes, some suggestions on what you need to teach children about money, a look at some financial mistakes we all make, and how to make sure you don’t face any tax penalties by hitting a “safe harbor.” I hope you’ll check them out!

 

Merry Christmas to all, and to all, a good 2016!

 

-Tom

Normal Investors – Status Quo

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Think back to Thanksgiving. Remember the turkey, the dressing, the delicious side dishes, and the waiting on Aunt Ethel to finish warming her green bean casserole? Think about where you were sitting. Was this where you always sit? If you typically celebrate Thanksgiving in the same way, at the same place, with the same people, I bet you were sitting in your usual place. Given the chance, would you have chosen a different seat? Unless you’re still stuck at the “kid’s table,” you’re over an air vent, or that really smelly cousin is next to you, I bet you would prefer not to change seats.

Where do you bank? If it’s with a big, national bank, I bet there’s a pretty good chance it’s where your parents banked or where you have banked for a long time. Why do you still bank there? Is the interest rate spectacular? Is the customer service spectacular?

Why do many people sit at the same spot every year at Thanksgiving? Why do many people bank with the same bank for all of their lives? I think it’s because it’s easier to stay with what you know. It’s easier to stay with what you have. It’s easier to keep the status quo. An inherent desire to keep the status quo is a fifth tendency I believe many normal investors have.

In my line of work people usually come to me for one of two things. Some people want me to analyze how they’re doing financially and to let them know if they’re forgetting anything major or if they’re doing anything blatantly wrong, but a majority of people want me to analyze their financial situation and make recommendations as to how they can improve or enhance their financial standing. In both cases, I often end up trying to get people to tweak their financial status quos. From my experience I’ve found that trying to convince someone to diversify out of a particular stock they’ve always had can be like trying to convince a teenager they can’t keep dating someone, trying to tell someone they need to reduce their lifestyle a little can be like trying to tell a sports fanatic they can’t watch all of their team’s games, and trying to get someone to change their insurance coverage can be like trying to get someone to change an ingredient in grandma’s legendary potato salad recipe. Even if people concur with my recommendations, achieving the implementation of those recommendations, can be another thing entirely.

This status quo tendency to stay with what you know and are used to negatively impacts many investors. It can cause someone not to prudently diversify their investments. It can cause someone not to reallocate/rebalance their portfolio at the top of a bull market or at the bottom of a cyclical pullback. It can even cause someone to never invest at all!

Another part of the status quo tendency is that many people, like myself, don’t enjoy making difficult or complicated decisions. Consider organ donation. Are you an organ donor? Are you not? Don’t you want to help others? Don’t you want every chance to live before your organs are “harvested?” Let’s consider organ donation in Europe. Look at the chart below showing the percentage of citizens in certain European countries who are organ donors.

 

Why are there so many less organ donors in Denmark, the Netherlands, the United Kingdom, and Germany? It’s because in Denmark, the Netherlands, the United Kingdom, and Germany, you have to opt-in to be an organ donor. If you go with the default, you are not an organ donor. In the other countries illustrated in blue, the opposite holds true. You have to opt-out to not be an organ donor. If you go with the default, you are an organ donor. I find this pretty convincing that many people feel it’s easier to go with the status quo than really spend the time and energy considering and implementing a difficult decision like whether to be an organ donor or not; or whether to diversify investments, cut spending, or adjust insurance.

Change can be good, but change is not always better. It’s my job to give people confidence when they have a good thing going, and to give people questions to ponder and recommendations to consider when I believe the status quo can be improved upon. Don’t just be a normal investor. I encourage you to really consider your status quo, and to tweak it if necessary.

-Tom

Normal Investors – Overconfidence

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There I was at the starting line of the famous Peachtree Road Race. I was finally old enough to be a part of the 4th of July tradition I’d watched my dad do every year of my life. I was stoked. I was a soccer player and I ran after the ball for a full hour without stopping every Tuesday, Thursday, and Saturday, so this so called “10-k” was going to be a piece of cake! When our wave started, I took off. My dad stayed with me for the first bit and then he started telling me we needed to slow down to save some of our energy for the finish. What did he know? Besides, a few runners were actually passing us! I think that first mile may have been my only career eight minute mile, but boy, by the fifth mile of the race, twelve-year-old Tom knew his dad was right.

I like to think I was a pretty cool guy in high school. In some ways I was. In some ways I was probably not. Being an avid ultimate Frisbee player with some of my band buddies was probably not my coolest hour, but we sure did have fun. We were good, too. So good that word travelled and some friends on the cross country team challenged us to a game one Saturday. Cross country whatever! I was in great shape! For a solid week my band friends and I went over and over how bad we were going to destroy our cross country friends. I think that was the last day I enjoyed running…

Of course there was that accounting test my junior year in college. I was tired. I wanted to do something other than study. Besides, I had things under control. I usually did well on tests. My scholarly roommate and fellow accounting major urged me to go over that small little bit the professor glossed over about a couple of terrible things called deferred tax assets and deferred tax liabilities. I actually remember saying, “If he asks me about that on the exam, he can have it!” I cannot tell you how much I ate those words. Literally, my roommate waited for me to look up and make eye contact across the room so he could give me that told you so look. Yes, yes he did.

I like to think I’m a pretty self-effacing guy, but from time to time in my life, I’ve been overconfident. Most of the times when I’ve been overconfident, it hasn’t worked out too well. Most of the time when investors are overconfident, it doesn’t work out too well, either. Humble pie doesn’t taste so good!

What? You don’t think you’re ever overconfident? Well let’s see about that. Do you consider yourself an above-average driver? You might be, you might not be, but studies suggest as many as 95% of people think they are above-average drivers, and that’s just impossible. Statistically, 50% have to be above-average drivers and 50% have to be below-average drivers. In the Atlanta metro area, I dare say a lot of people are the latter! Either way, overconfidence is the fourth tendency that I would suggest many normal investors have.

I think overconfidence is a pretty natural thing. I think that people tend to value their own judgments and opinions over those of others, even if other people are “experts.” Think home projects, grilling, sports, parenting, politics, etc. In the investment management world I believe this is why many investors have a little trouble letting someone else professionally manage their portfolio. They value their own judgments and opinions, they want to be in control, and they want to see action in their portfolios. This leads to many "do-it-yourselfers" trading more in their portfolios than I would typically recommend, and that usually means more trading fees and expenses, more taxes, and a lower investment return over the long-term. Consider this chart presented by Saturna Capital that assumes a 7% annual return for ten years and a 23.8% tax rate:

Lower turnover (aka less trading) typically means higher portfolio values. Be an investor, not a trader!

Finally, I wanted to share an interesting study that I came upon done in 2001 by the Quarterly Journal of Economics. They studied portfolio turnover and the investments of male and female households and they found that single men trade the most, married men trade second most, married women trade the third most, and single women trade the least. Guys, based on what we learned from the chart above, I think that means the women are right again!

If you enjoy investing and you like the rush of trading, I encourage you to carve away a small portion of your assets and make it a hobby. It’s one thing to open a box with a zillion pieces, not completely read the instructions, watch a video online, and tell your wife you’ve got it under control - maybe you do, maybe you don’t. It’s another to be overconfident when it comes to your family’s nest egg!

-Tom

Next up: status quo

Normal Investors - Familiarity

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Imagine you are just getting home after a very busy and stressful day at work. You just closed the door to the garage, dropped your bag on the couch, and are making your way up the stairs towards something you value deeply - comfortable clothes. Yep, there’s that old pair of jeans you wore yesterday. You know the ones with the slightly worn knee and the stretched out belt loop from where you like to rest your thumb? Best of all, they’re everso slightly stretched out from your wearing them yesterday. Don’t worry, I won’t tell anyone!

Of course there’s a similar feeling when you return home after travelling, whether for business or for pleasure. That moment after you’ve filled the laundry bin, returned your toothbrush to its normal spot, and have finally put up the suitcase. Oh it’s nice to see your shower, your couch, and most of all, your pillow! Wouldn’t you agree?

As you’ve undoubtedly gathered, I’m talking about familiarity. Whether a pair of comfortably worn jeans or your old friend of a pillow, familiarity feels good. It’s what you know. It’s what feels right. It’s what feels safe. Familiarity is also the third tendency that I present to you as a trait many normal investors have.

I would offer that many people go with what they know, especially when they are unsure of what is best. Consider some research done by Vanguard back in 2010 that found that Canadian investors were 65% invested in Canadian stocks, U.S. investors were 72% invested in U.S. stocks, and Australian investors were 74% invested in Australian stocks. Canadians, Americans, and Australians certainly have their differences, but do you really think the before mentioned investment allocations coincidentally showed that degree of “home bias?” I don’t. Investors were investing in what they felt they knew.

To take this a step further, let’s spend a moment on company stock. Regardless of the company, most people I come in contact with who work for publicly traded companies tend to own stock in their employers. Why? Do they think their company’s stock is going to really pop? Sometimes. And sometimes, they’re right, but sometimes they’re not. I’ve met many successful employees and successful investors who have a significant portion of their wealth in “their” company stock, and they desire to continue holding that stock even when they are no longer actively working for the company. Why? I think it’s because it’s easier for someone to feel safe investing in a company that they know a little about rather than the broader market which they may not know as well. Employers are aware of this, too, and that’s one reason employees are often incentivized with company stock in an attempt to align the employee’s financial success with the company’s future financial success and encourage hard and good work from employees.

(As an aside, I attended a lecture given by a professor from the Wharton Business School earlier this year, and he shared that a study was currently being done on what stocks were the hardest to get investors to diversify out of based on their location. #2 was supposedly getting a Seattle resident to sell some Microsoft stock (Microsoft is based in Seattle). Guess what #1 was? Getting stock in The Coca-Cola Company out of an Atlanta resident’s hands! Do any of my local readers here have any Coca-Cola stock? If you don’t, I bet you have friends and family who do!)

Familiarity feels good. Investing in companies that are based in your country is normal. Investing in the company you work for is normal. Investing in companies that are near and dear to your city or state is normal. However, you have to be careful when considering the investment risks of being overly concentrated in a single stock, a single sector, a single asset class, or a single country’s stocks. The risk-adjusted returns of a diversified portfolio are often still king. Going with what you know, what feels right, and what feels safe can be a crutch and a safety blanket, but what if your crutch was named Enron? What if you’re a Greek citizen and Greek companies are what you know? What if your paycheck was coming from Lehman Brothers, the pension benefit you were working for was guaranteed by Lehman Brothers, and most of the stock you owned was invested in Lehman Brothers stock? It’s normal to invest based on familiarity, but that may not always be best.

There’s nothing I hate more than when a grocery store I frequently visit decides to remodel. It’s frustrating. It doesn’t feel like it used to, I don’t understand the layout, and I don’t know where anything is, but I will get used to it. Eventually the new layout will feel familiar. Sort of like an investment portfolio that has recently been adequately and prudently diversified, eventually the new layout will feel familiar.

-Tom

Next up: overconfidence

Normal Investors – Overreaction and Underreaction

The second tendency that I would suggest many normal investors have would be the tendency to overreact and underreact. (If you missed out on the first part of my behavioral finance series on five of the characteristics most “normal” investors seem to have, you can catch up right here!) Of course, before I dive into how investors can, and often do, overreact, I must consider my own behavior this past weekend…

As many of you know, my wife and I are fairly avid UGA fans. Fine, fine, we’re full-fledged Georgia Bulldog fanatics! I mean I got up at 3:30 a.m., left my home at 4:00 a.m., and arrived in Athens at 5:38 a.m. to claim a small piece of generally lucky land between two curbs that my family, friends, and I have tailgated at for the last six years for a game that kicked off at 3:30 p.m. Who would do that? Well evidently me and several thousand more of my closest Georgia brethren considering “our spot” was already taken by someone even crazier than me! Oh the genuine rage I felt as my low beams displayed his silhouette on my very own game day island! That didn’t keep my group down though as we continued with our pregame festivities in the middle of what must have been a monsoon; festivities that included steak, seafood, a houndstooth cake and elephant ears (so we could eat the opposing mascot), and a crimson punch (so we could drink the opposing mascot). Then there was the wretched game where our beloved and favored Bulldogs were supposed to avenge our painful championship game defeat a few years ago only to be shellacked, annihilated, and otherwise dismantled by one of our hated rivals from the West.

A lot of pretty normal people are college football fans, but there is a good portion of that last paragraph that might lead you to believe that I'm a little bonkers. My point is that sports fans often overreact. They react with way more pride and celebration after victories and way more dismay and disgust after losses than they probably should. Many investors do the same thing. Investors can have a good experience with a product or service, and then they suddenly want to buy some stock in the company that made the product or delivered the service based solely on their positive experience. Investors can enjoy some decent growth and gains in a stock they have previously bought a little bit of, and they can develop an insatiable and blind appetite for more and more of that very same (and already appreciated) stock. Investors can get more and more excited about a roaring bull market (think the Dotcom Bubble) and want more and more stock exposure in their portfolios even though the investment return party has been going on quite a while. Of course, investors can also panic more than a Southerner in a snowstorm and completely sell out of a position based on the rampage of some talk show host who is trying to get ratings. A chain email about tax rates going up or a presidential or congressional proposal can also get an investor to sell out of everything just as if they’d seen a mouse, snake, or spider.

Overreacting as an investor can be dangerous. It can lead to one-way bets. It can lead to frequent trades which are costly and tax-inefficient. It can lead to dangerous concentration in one stock. It can lead to dangerous concentration in cash. There are certainly times as an investor where swift and substantial action is needed, but if you are investing prudently, that shouldn’t be very often. Part of my job is being the voice of reason, being the voice that isn’t that worried about the scary financial spider that man on the radio was yelling about, and being the voice that isn’t so sure that someone has really found that Fountain of Youth your neighbor confided in you about. Overreacting about football is one thing - it’s a game. Overreacting as an investor is another - it costs real dollars and cents.

The second part about normal investors reacting is actually underreacting. I like to illustrate this by considering Western Union’s lack of interest in Mr. Bell’s telephone patent, IBM’s lack of interest in the Xerox machine, and Kodak’s lack of concern with digital technology. In my own experience, I have found that investors rarely underreact when it comes to their investment portfolios, but instead they underreact when it comes to their own financial trajectory. I stand by that spending all that you are making is not a terribly successful retirement strategy, going into retirement with a large mortgage remaining is not a positive for your retirement cash flow, and that recurring credit card debt is one of the worst things since Brussels sprouts, but not everyone adequately reacts to those messages. Similar to ignoring a scratchy throat a few mornings in a row or that ant you saw in your kitchen the other day, underreacting to financial matters that could be nipped in the bud now can lead to some real serious financial problems in the future.

It’s normal and human to not always react in the optimum way, but financially, it’s important to try to. Maybe it’s all the children’s books I find myself reading now, but I kind of think of Goldilocks. Don’t overreact, don’t underreact, try to react juuuuuust right!

-Tom

Next up: familiarity

Normal Investors - Loss Aversion

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As I mentioned a couple of weeks ago, I'm now going to do a series of posts on what makes normal investors “normal.” You see, a vast majority of traditional investment theory is based on the assumption that all investors are always rational. Essentially the people who completely believe in the Efficient Market Hypothesis believe that if investors have access to enough information, they will always act rationally and choose the investment portfolio best suited to their needs. They also believe that if investors always act rationally, then the market will always behave rationally. Maybe it’s me, but I don’t feel like the market always behaves rationally, and neither do some other very smart people.

In 1956, Mr. Vernon Smith introduced the concept of behavioral finance. In the 1960s, psychologist Mr. Peter Slovic began analyzing investor’s behavioral biases. In 1974, psychologists Mr. Amos Tversky and Mr. Daniel Kahneman introduced heuristics - the study of how people make decisions or solve problems, often using their experiences and biases. Since then, academics, brokers, and financial advisors have continued to try to understand the difference between a “completely rational investor” and the actions a lot of people take when investing their own money. Behavioral finance attempts to explain the difference between what traditional investment theory says should happen in the market and actual market behavior. Please don’t get me wrong, behavioral finance does not assume that investors are irrational; it assumes investors are normal human beings. I find behavioral finance to be a fascinating field of study that helps me better understand my clients, and that’s why I’d like to share five biases many normal investors seem to have, beginning with loss aversion.

1. Let’s pretend you’re on a game show, and I’m the host. I’ve given you $1,000. You have two choices: A) you can choose to walk away with a sure gain of an additional $500, or B) you can choose to take your chances with the flip of a coin. Heads, you’ll gain another $1,000. Tails, you’ll gain nothing. What do you choose A or B?
2. Alright, let’s once again pretend you’re on a game show, and I’m the host. I’ve given you $2,000 this time. You have two choices: A) you can chose to walk away with a sure loss of $500, or B) you can choose to take your chances with the flip of a coin. Heads, you’ll lose nothing. Tails, you’ll lose $1,000. What do you choose A or B?

Now if you are a completely rational person trying to do what is in your best interest, wouldn’t you choose A both times and walk away with $1,500? I mean, if you choose B in either example, you could end up walking away with only $1,000 when you could have had $1,500 by simply choosing A with no coin flip involved whatsoever. What if I told you these two questions were real questions from a study written by Tversky and Kahneman, and the results of the study showed most people chose A for the first example, but most people chose B for the second one? Why would anyone do that? Because of the way the questions are worded! I, and many people who have conducted similar studies, would submit because people are willing to do anything to avoid the pain of loss. Some call this phenomenon the Prospect Theory and quantitatively suggest that losses are twice as painful to investors as gains are pleasurable. Shown on a graph, this might look like:

 

 

 

This loss aversion associated with many investors is financially dangerous because it can lead people to sell profitable investments too early (because they don’t want to lose their modest gains) and unprofitable investments too late (because they don’t want to actually recognize their losses, and they’d rather keep hoping they can regain their initial investment than acknowledge what has happened). Coupled with our nation’s unfavorable capital gain taxes on profitable investments that are sold that were held for less than a year, and you could have a double whammy!

 

I can tell you from my experiences fielding calls and replying to emails over the past couple of volatile weeks in the market, a 2% daily loss is not equal to a 2% daily gain in the eyes of some investors. Maybe it should be, but it’s not. I even had a gentleman on one of those days where the market was down a few percentage points apologetically acknowledge that he knew he didn’t call me when the market was up 2% in one day. We shared a laugh, and I told him I’d call him the next time it was up 2%. I can’t blame him though, he’s just being a normal investor who has a double aversion for loss.

 

-Tom

 

Next up: overreaction and underreaction.

The Lightning Round: Round 4

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Thanks to all of you who submitted a question. Now, without further ado, here are my responses to five of your questions...

1.) I am looking at getting a new car, but I can’t decide how much I should spend. Do you have any tips?                                                                                                       
                                                                                                                                           - Hayley

How much to spend on a car or how much not to spend on a car, that is your question, and it’s a good one! Strictly financially speaking, I’d recommend you take a close look at your monthly income and your monthly expenses, and see how much extra cash flow you usually have on hand at the end of each month. Let’s say you find that number to be around $500. Then I would recommend you make sure you buy a car that allows you to have a monthly loan payment of less than $500. You should talk to the dealership or your local bank to see what kind of car loans and interest rates you could qualify for. That will help you calculate how much car you can probably afford to buy and still make financial progress month to month. If you are one of those people who saves up to buy a car and doesn’t need a loan, I’d recommend that you make sure you will have enough cash in the bank after your purchase to cover somewhere around three to six months’ worth of your living expenses.

 

Outside of the financial nuts and bolts, I would like to share a couple of other thoughts. First, it may not make sense to get a certain brand or a certain model if it costs a lot more than a very similar brand’s equivalent or the next best model. For example, my Jeep is a souped-up less expensive model that has almost everything the more expensive model has on it except the model name. Second, it may not make sense to go with a lesser brand or lesser model than you really want if you can afford it and the savings are only a few thousand dollars. A few thousand dollars is nothing to sneeze at, but if you will be driving your car for the next 10 years (like most people are these days) it might be nice to drive something you are excited about and proud of!

 

Please let me know if you would like to discuss this further or talk about your specific situation.

 

2. Other than a will, what are some other things someone can do to be prepared if they pass away?
                                                                                                                                        - M. Tyler

So often when someone passes away they leave behind a very large and time-consuming mess for their loved ones. This is not intentional, but throw in a few surprise accounts or insurance policies, a few calls to Social Security, and a house full of possessions, and a monumental task is often what heirs, and certainly the executor, inherit first!

Outside of a current and well-drafted will, there are a few things you can do. One, you can make sure you have your primary and contingent beneficiaries in place for any insurance policies, annuities, and retirement accounts you may have. Remember, this is critical, as beneficiary designations trump a will, and if there is no beneficiary designation in place, assets might not be distributed how you want or intend. Second, you can give away special possessions/heirlooms that are below the annual gift exemption ($14,000 for 2015) while you’re still alive to make sure they end up where you want them. You could also potentially direct the distribution of certain special possessions in writing after death as long as your will allows it (consult with your estate attorney to make sure you have the proper language). This can help reduce the chance that two sisters will be fighting over a plate “mother wanted them to have.” Third, having a list of who you want as pallbearers, who you want to officiate your services, what hymns you want sung, and what you would like your obituary to say can also be of great benefit and relief to your grieving survivors. Fourth, having a list of important people to contact in the event of your death with their applicable information can really help your family, too. Finally, selecting and prepaying for your burial/cremation arrangements can also ensure that you get what you want and you don’t create an immediate financial burden on your loved ones at the time of your passing.

I hope this is what you were looking for. Not a happy topic, but certainly one worth considering.

3. What do you think about what’s going on in Greece? Will the European Union last?
                                                                                                                                               - John

I’ll be happy to share some thoughts on this, but this is obviously just my opinion.

I forget exactly what I was reading or where I was, but someone once explained the Eurozone problems to me with a very powerful example that I’d like to now share with you. Essentially think about the United States, a union of states, versus the European Union (EU), a union of nations. If you were to stop and ask a stranger from Georgia and a stranger from North Carolina what they are, what would they tell you? They would probably both say they were Americans; not Georgians or North Carolinians. If you were to stop and ask a stranger from Germany and a stranger from France what they are, what would they tell you? The German would tell you he is a German, and the Frenchman would tell you he is French. See the difference? This is why I think the EU may always have some serious problems.

I think the situation with Greece is too far gone to be worked out unless the rest of the Eurozone just flat out forgives their debts. The Greeks are tired of the austerity measures, and the Germans are tired of loaning money to the Greeks. Greek and German politicians know this. They keep kicking the can down the road and putting band aid after band aid on the problem, but eventually I think there will be a “Grexit,” a humorous and witty term that many have already come up with for Greece’s eventual exit from the EU. I guess we'll have to wait and see what this next round of called Greek elections holds.

As far as the EU, there are a lot of powerful people and countries that really want this to work, so it may continue to exist for quite a while. Personally, as I read about the unemployment and economic contractions going on in other counties such as Spain, Italy, and Portugal, Greece looks a little like the first domino to me. I think Great Britain may have been very wise to have joined the political union, but to have stayed out of the currency union when they joined the EU. There are simply too many little economies and country-specific industries in play. That said, there are still high-quality and thriving companies in Europe, and some countries such as Germany are still doing very well. My best guess, however, is more political, economic, and currency storms are on the horizon. Stay tuned!

4. Are you worried about robo-advisors?               
                                                                                                                                   - Anonymous

A timely question, and one being discussed by many in my industry. For those of you not familiar with the term “robo-advisor,” a robo-advisor is an investment platform that allows an investor to have their portfolio managed online with little to no human intervention. Robo-advisor platforms, such as Betterment or Wealthfront, have made a splash in the brokerage industry by being less expensive, more user-friendly, and more interactive than most of the traditional investment management platforms offered by human advisors.

Am I worried about robo-advisors? Not really. I think their popularity may cause human advisors to step up their game, but as braggadocios as this may sound, I really don’t think a computer can do all that I do. Investment allocation is just a piece of what I help clients with (there’s also tax planning, cash flow planning, estate planning, insurance planning, scenario analysis, and lots of decisions where both finances and emotions both need to be considered), so I really don’t feel that threatened. I’m also very curious to see how robo-advisors do when we get a cyclical market downturn, and investors want to be reassured that the sky is not falling. I want to see what robo-advisors say when a client needs to decide whether to save for their children’s education or retirement. I want to see what robo-advisors say to a son trying to gain control of his late father’s account. If the robo-advisors’ support staffs start taking client calls – and I think they will have to – they will have to raise their prices, and suddenly, they won’t be so robo anymore!

I am also skeptical of robo-advisors because I’ve already seen some of their shortfalls first hand. For example, I had an individual bring me an account that they had elected to rebalance after every deposit. Well, with a little bit from each paycheck going into their account, that meant they rebalanced 24 times in a year, resulting in a lot of tiny, annoying, and tax-inefficient short-term capital gains having to be recognized at ordinary income tax rates. By selecting a friendly looking box to rebalance offered by the robo-advisor, this investor incurred additional trading fees, higher taxes, and a much more complicated tax return than was likely necessary. The investor meant well and knew it was prudent to rebalance his portfolio periodically, but any decent human advisor wouldn’t have allowed a portfolio to be rebalanced twice a month!

I may be in the minority of financial advisors out there who think this, but I’m sort of excited about robo-advisors. I think they can be a helpful tool so people invest sooner rather than later. I think they can make basic analytics more available to more people. I think their gadgets and apps will help modernize some of the ancient and confusing monthly statements being generated by large investment custodians. As a CPA who lived in the world of Turbo Tax and now a CFP in the world of robo-advisors, I welcome the technology and I encourage you to carefully try it, but my caring, easy-to-understand, and customized-to-working-with-you human self will still be ready to take your call when you need me!

5. What about you? What are you most worried about as far as your finances?                
                                                                                                                                    -Kristin

Hey now! I’ll be the one asking questions around here. Just kidding! Thanks for the question!

I’m worried about a lot of things. I’m worried about the new expenses my son just brought into my monthly budget. I’m worried about the mortgage my wife and I took on when we moved. I’m worried if we’re saving enough for retirement considering neither one of us has a job that offers a pension, and I’m less than bullish on the chance of us receiving any meaningful Social Security income by the time we qualify.

How do I sleep with those worries? We spend less than we make. We save as much as we can. By growing our family and buying a house we’ve made a bet on ourselves, and I have faith we can do it.
Sure, there will be hard times and bumps in the road, but I believe we can do it. And I might or might not have a pretty sophisticated financial progress spreadsheet somewhere...

If you build up an adequate rainy day fund, you adequately insure your family should there be an unexpected death, disability, long-term illness, or liability, and you have an adequate estate plan in place to execute your wishes and desires, there’s really not much left to do. Do the best you can, live below (or at least within) your means while still making memories and enjoying experiences, and carry on. Monitor your progress and adjust your strategy as necessary. That’s what I tell clients, and that’s what I do myself.

Still, I do savor diaper coupons, I can’t wait to be debt-free, and I’m not above picking up pennies in the parking lot (heads or tails).

Thanks again for all the questions. Remember, our series on “Normal Investors” starts next week. I hope you’ll check it out because I’d be willing to bet that there is a pretty good chance you aren’t as normal as you might think. Just saying!

-Tom

2 Much Cents Update

 

It’s been quite a year. We’ve moved, we’ve had a baby, and so much more. I’d originally planned on doing another Lightning Round about half way through the year, but what can I say? Time flies when you are having fun, you’re busy, and sleep is a bit of a luxury! I still can’t believe it’s already August, so before we get any closer to 2016, it’s time for The Lighting Round: Round 4. Many of you probably remember past “Lightning Rounds,” but let me take a moment to back up for newer readers.

The Lightning Round is designed to be an interactive post where I ask you to submit any financial question you may have. Between now and midnight, August 16th, I will accept questions, and I promise that I will eventually answer every single one of them. However, the first five topics that I receive (that I think would be of interest to a large portion of my readers) I will answer publicly as my next post!

If you’re fine with me using your first name and you want to be a part of a 2MuchCents post, go ahead and submit your question. If you’d prefer to use an alias or to be listed as “anonymous,” or if you would prefer I just get back to you privately, please let me know that as well. Please feel free to contact me via Facebook, email, LinkedIn, my cell, or by asking a question directly on this post.

After The Lightning Round, I will begin a series called “Normal Investors.” My plan is to ask you questions about yourself, how you think about money, financial choices you have made, and your investment strategy. Then, I’ll share with you what I’ve learned about that particular fact pattern or scenario from studying behavioral finance. You, like I was, may be surprised to find out that a normal investor may not always be a rational investor. That’s fine. Actually, it’s a good thing because if you know how most normal investors are going to act, you can sometimes adjust your behavior and benefit financially. If you are also aware of some situations where individuals may be prone to act irrationally when it comes to their finances, you may be able to save yourself should you ever face one of those scenarios. I find the evolving field of behavioral finance very interesting and incredibly useful. It is my hope you will as well.

The phone lines are now open. I want to hear from you!

-Tom

Stumped!

It was slightly more than a routine trip to the vet, but it was not supposed to be a big deal. Our dachshund, Miss Lucy Bristow, was going in for her five-year dental cleaning and some X-rays. Sure, it wasn’t a “normal” visit, but I wasn’t ready for what was coming my way. I wasn’t prepared for the financial question on page two of the obligatory paperwork. It read something to the effect of:

Should your pet experience a life-threatening injury or illness, every effort will be made to reach you. However, if you are unable to be reached, you authorize $__________ worth of treatment/services/materials to be performed/used by the veterinary practice in an effort to save your pet’s life.

Woah! What a question! I may help people with their finances for a living, but I’ll be honest with you, at that moment, with an unexpected question like that, I didn’t have a clue. I was stumped! To make matters worse, I knew my wife was tied up in a client presentation. This decision would be mine and mine alone.

In my efforts to stall so I could regain some composure, do some soul searching, crunch a few numbers, and consider what my wife might do to me if something were to happen to Lucy and I didn’t put quite a big enough number in that giant blank space, I asked one of the nurses what people usually put. She laughed and said, “It’s a tough question, isn’t it?” I nodded. She said she had seen everything from $0 to $15,000! Woah again! Still, I was relieved to hear her words as the number I was considering was definitely between the two she offered.

I tell you this story for two reasons: 1) So if you are a pet owner you can go ahead and be thinking of your answer should you ever be asked that question and 2) To make the point that there are some really hard financial questions out there that you need to be able to tackle. Questions such as:

• Can you afford that bigger house?
• Can you afford for one of you to quit working?
• How much auto, home, life, disability, long-term care, and liability insurance do you need?
• Are you saving enough for retirement?
• Can you retire?
• How much can you afford to spend?
• Who should be your Power of Attorney?
• How would your assets be distributed if you passed away tomorrow?

Sometimes life throws you a financial surprise (like a blank space on a veterinary form), and it’s okay to be temporarily stumped. Take a deep breath, think through your options, talk to a clear-headed, neutral third party if need be, and figure it out. Other tough financial questions are the “five-hundred-pound gorillas in the room” until they are answered. I’d suggest you go ahead, bite the bullet, and answer those. Knowing how you are doing is important. Knowing what you can afford to do and not do is important. Knowing all would be financially okay for your loved ones if something happened to you is important. Those questions can and should be answered.

I finally gave the nurse a number. Later, when I was telling this story to my wife and asking her what she would have put, I found out that our numbers were actually really close, but mine was a little higher. Whew! Either way, I’m happy to report Lucy came out just fine, and that’s what matters!

-Tom

12 Simple Things You Can Do to Pay Down Debt

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One of the key requirements to making it financially is to work towards paying down your debt and becoming debt-free. It’s a marathon process, not a sprint, and it’s not very much fun, but it is oftentimes critical in order to really achieve financial success. Financial author Dave Ramsey has a quote related to this that I like a lot: “If you will live like no one else, later you can live like no one else.” With that goal in mind, here are twelve simple things you can do to give yourself more cash to put towards paying down your debt.

1. Request rate reductions. At least once every couple of years, call your auto and home insurance provider, your television provider, your security system provider, and anyone else who is sending you a bill and see if they can give you a better rate. Ask them if there is anything they can do to lower your costs as you are looking at your monthly expenses. Look at it this way, there’s no harm in asking!
2. Plan before you go to the grocery store. This works for any store, but especially the grocery store. Buy what you came to get, and unless it’s truly the deal of the century, nothing else. If you want to take a few minutes and look through the coupons before you go, that could lead to additional savings, too.
3. Unplug the home phone. Other than telemarketers and maybe a family member or two, who calls you at home? This is a real easy way to save some cash every month, so go ahead and call the phone company if you haven’t already. Besides, you’re probably already paying more than enough for your cell phone!
4. Sell your unused items. If you have a possession that has dust on it or you’ve forgotten you own it, you probably don’t need it. If paying off debt means more to you than those types of objects, it’s time for a garage sale and some online listings. Put the cash proceeds towards something you do need; less debt!
5. Grow a small garden. If I had $3 for every time I buy a squash or a zucchini. What? My wife likes squash and zucchini (and now I do, too). Seriously, have you seen how expensive fresh produce can be? I’m not talking about growing your own farmer’s market, but a few berries, a few vegetables, or even some herbs could go a long way towards reducing your grocery bill. Besides, I could use a little sunshine on the back of my neck!
6. Lower your cable package. So many channels, so little time. So many channels, so much cost. So many unused channels. Need I say more?
7. Bye bye magazines. The next time you’re over at someone’s house look at their magazines. More often than not, I’ve observed that they will be in mint condition. Lots of people pay for lots of magazines they don’t read. The savings may not be substantial, but by cancelling unused subscriptions, you save cash, you save clutter, and you save your mailman. Win, win, win!
8. Read a book. I’m serious. It may be the year 2015, but you can’t forget the enjoyment of one of the original entertainment devices. Books are relatively inexpensive, can offer hours of pleasure, and are a lot of fun.
9. When you go out to eat, get two hydrogens and an oxygen on the rocks (just ask Jennifer Lawrence…). Seriously, iced tea, soda, lemonade, beer, wine, and cocktails are all delicious, but they aren’t free. Improve your personal health and your wallet’s health and consider going with delicious, usually free water.
10. Eat at home. In line with my beverage comment, the food from eating out can be expensive, too! Sure, go on those date nights and celebrate the weekend, but if you’re trying to save cash, having a reservation at home is often the frugal way to go.
11. Make bigger meals. Oh I can hear the super health-conscious people screaming already, but please hear me out. If you are making a salad with lots of vegetables and balsamic vinaigrette for dinner, why not make enough for lunch the next day? It is probably cheaper to add another tomato, another bag of spinach, and use a little bit more off that cucumber you’re going to throw away at the end of the week than if you make a totally different meal for your lunch. Yes, you’re eating the same meal twice in rapid succession, but you’re working towards paying off your debt in rapid succession, too!
12. Make your coffee at home. I see so many lattes and chai teas in elevators. They are delicious, there’s no doubt about it, but they’re expensive, too. I once wrote about one expensive cup of coffee turning into a sports car as some of you may recall. Right now we’re focused on debt, not a sports car, but the principle holds true. Like other frequent pleasures and splurges, daily cups of expensive Joe can slow your financial progress.

 

I didn’t title today’s post “12 Easy Things” or “12 Ideal Things” because they may not be easy for you or sound highly desirable. That’s okay. These 12 things are just relatively simple to implement, and they can be good “medicine” for your financial health. It’s not quite Mary Poppins, but a few spoonfuls of these medicines might just help your debt go down.

 

-Tom

Switching to a Single Salary

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I’ve had a number of friends and blog readers ask me about switching from a two-income household to a one-income household over the past few weeks, so I can’t help but wonder if this is a topic many more of you may be interested in. Sure, this post is going to be primarily directed towards a family where one spouse has decided to stay at home, but many of the thoughts and tips I’m about to offer can also be applied by a family if one person thinks they are about to be laid off, a family if one of the breadwinners’ health is failing, or even an individual who is going from two jobs to one. Here are some suggestions:

• If you can, experiment before you try it. If Mom is considering staying at home to look after the newborn, agree to stop spending Mom’s current take-home pay for several months to see what it’s like. Except for an absolute emergency, I’d really urge you to hold true to not spending Mom’s take-home pay because lessons you may learn such as not being comfortable with your remaining emergency fund when you had to unexpectedly pay for that new HVAC unit are important lessons that may affect the overall decision and/or timing of going from two incomes to one income.
• Make a painfully detailed budget and see if you can make one income work. If Jane’s career is soaring and John’s career is painful, Jane and John should take a look at what would happen before John tells them to take the job and…, well take the job. There are going to be relatively fixed expenses such as mortgage payments and utility bills, and family revenue will be going down if John quits, so unless Jane makes enough to cover all of the fixed expenses and the discretionary expenses, it’s likely some of the discretionary expenses are going to have to go or at least be trimmed in order to make ends meet. Look to things like shopping, golfing, massages, lattes, unused gym memberships, vacations, and eating out. In happier news, if income is going down, it’s quite possible your taxes will naturally go down, too, so that will at least help a little! This is also a time where it could be beneficial to finish off debts such as student loans or car loans to reduce your fixed expenses and help the math work.
• In some ways, realize up front that you cannot keep up with two-income families. That being said, realize that they cannot keep up with you, either. What I mean is that if one spouse quits working in Family A, it’s possible that Family A’s financial trajectory and spending power may go down when compared to two-income Family B. However, when it comes to the percentage of the family’s time taken up by work, the flexibility of the family, and the amount of time on the weekends the spouses have to spend doing chores around the house, Family B may be a little jealous of single-income Family A. I’m certainly not saying one approach is better than the other. What I am saying is that from the onset, you need to realize there are often pros and cons that can make you different from other families you are close to.
• Put it all out there with your spouse. Going from a two-income household to a one-income household temporarily or permanently is far more than a financial decision. Why are you doing this? Do both of you want this? What if it doesn’t work for the stay-at-home spouse emotionally? What if it ends up not working for the family financially? Do the household chores/responsibilities change? Should they? What will the stay-at-home spouse do for entertainment and social interaction in light of the loss of friendly co-workers? Will the new entertainment and social interactions add to the family expenses? Should they? These are deep questions, and only you and your spouse can hack through them. The hacking does need to be done, though, as I’ve seen some serious resentment and jealousy fester from the employed spouse vs. the non-employed spouse and vice versa.
• Make sure the working spouse is properly insured. There are many careers where once you leave the working world, you become a little “stale” and lose some of your ability to become gainfully employed in the future. With this in mind, the breadwinner’s income stream usually becomes a little more valuable and, accordingly, needs a little more protection. I’d suggest you take a long, hard look at the employed spouse’s life insurance, short-term disability insurance, and long-term disability insurance. Don’t go crazy, just make sure you are adequately protecting the non-employed spouse’s financial well-being should the employed spouse become disabled or meet the proverbial fatal bread truck. If the stay-at-home spouse is providing a service such as looking after children that would still be needed if they were to become disabled or unexpectedly pass away, some additional insurance may also be needed on that spouse to protect the-income generating spouse's financial well-being!

Thank you to those of you who asked me about this topic. I’m always happy to help, but sometimes I can only help if you ask.

 

-Tom

Why You Need to Rebalance



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Suppose you invested $100,000 on January 1st, 1995. You invested $50,000 in the Barclays U.S. Aggregate Bond Index and $50,000 in the S&P 500 (U.S. stocks). Between January 1st, 1995 and December 31st, 2002, you were in for quite a ride as the Dotcom Bubble expanded and eventually popped. Your bonds would have offered annual returns of 18.46%, 3.64%, 9.64%, 8.70%, -0.82%, 11.63%, 8.43%, and 10.26%. Your stocks would have offered annual returns of 37.58%, 22.96%, 33.36%, 28.58%, 21.04%, -9.11%, -11.89%, and -22.10%. Declining interest rates and the mania surrounding Internet-based companies fueled some really good returns during that period. In fact, if you didn’t touch your $100,000 portfolio at all during that period, I’d estimate you would have had around $206,000 by the end of 2002.

Do you notice how the last three years of S&P 500 returns from 2000 – 2002 were negative as the bubble popped and a recession began? Wouldn’t it have been nice to have liquidated your portfolio on December 31, 1999 and missed the stock market pullback? If you had, your portfolio would have been around $248,000 on December 31, 1999; $42,000 better than it would have been worth three years later!

By now I hope you know me well enough to know I’m not the type to ever advise you going all in or all out of the market. When it comes to market timing like that, I’m just not that smart, and I don’t think anyone else is, either. I believe in calculated tactical adjustments to a portfolio if you see a medium to long-term trend, but I do not believe in ultra-short-term trading and all-in / all-out investing. There's just too much uncertainty!

Some of you that were investing back in the late 1990s and early 2000s may be able to remember how hard it would have been to sell out of your high-flying stock portfolio on December 31, 1999. That was a time (like many times before) where the sky felt like the limit.

Great, Tom. You’ve told me this story about how I would have been better off selling my January 1st, 1995 portfolio on December 31st, 1999 versus holding it until December 31st, 2002, but then you told me no one can know exactly what the future holds and not to invest all-in or all-out. What can I do? You can rebalance.

Rebalancing your portfolio is something you should periodically do to bring your portfolio strategy back in line with your initial investment strategy. Sure, it can be a hassle, it can generate some capital gains taxes, and it can generate some trading fees, but oftentimes, it’s worth it. Hopping back to our 50% bonds and 50% stocks January 1st, 1995 portfolio example, did you know that by December 31st, 1999 your portfolio would have only had 29% bonds and would have swelled to 71% stocks? Would you be happy if the portfolio strategy you agreed to in 1995 drifted that much? I don’t know many investors who would be pleased with a divergence from their investment strategy of that magnitude. That’s why in the spirit of trying to more closely maintain your investment strategy and hedge your bets on the markets continuing to roar upward vs. correct downward, periodically rebalancing your portfolio is the way to go. Excluding taxes and fees, if you would have rebalanced your January 1st, 1995 portfolio at the end of every year back to a 50% bonds and 50% stocks portfolio, your portfolio would have had around $216,000 by then end of 2002; $10,000 better than if you had done nothing at all. Rebalancing your portfolio can generate taxes and transaction costs, but it also, and more importantly, allows you to not drift too far from your investment strategy. Rebalancing is a prudent way to hedge your bets on the market going up or down in the future.

I don’t often trade a portfolio, but when I do, I prefer to rebalance. Does that make me the most interesting wealth advisor in the world?

-Tom

Diversifying Your Life

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Do you know what I do when I’ve had a crappy day at work? I smile as I drive home.

Do you know what I do when one of my friends rubs me the wrong way? I get together with another one of my buddies.

Do you know what I do when my golf swing starts launching balls further to the right than straight ahead? I pick up my tennis racquet.

Why am I telling you all of this? Because since I’ve been in the financial services industry I’ve noticed a surprising and profound pattern. Diversification is good for your portfolio, and it is also good for you.

Unless you’re luckier than I am, it’s pretty rare for everything to be going well at once. I mean I’ve been very blessed, and compared to many in this world, I have absolutely nothing to complain about, but, even so, there is usually at least one area of my life that could be a little bit better. I think many of you feel the same way. From what I’ve heard from countless friends, family members, and clients, I think it’s pretty common for a spouse to occasionally get under your skin, a friendship to cool off, or a family member to make you seriously consider DNA testing. It’s fairly normal for a boss to act like a “Michael Scott,” a co-worker to make you over-utilize a stress ball, or to occasionally have a bad day at work due to your own actions or lack thereof. There are times when the beach is more fun than the mountains, when you are more excited about learning to play the guitar than your softball league, and when Atlanta Hawks games are more entertaining to you than Atlanta Braves games. None of these occurrences should make or break your life if they are part of your life. What is important is that they are part of your life.

Most investors diversify their portfolios because it reduces the overall risk of their portfolio. Everyday translation: by having your eggs in more than one basket, there’s less of a chance of them all breaking at once. By not being frighteningly obsessed with your job, by having friends outside of your spouse and kids, and by having more hobbies and interests than your weekly poker game with the same foursome, there’s less of a chance that all parts of your life will be going poorly at the same time! If you’re not happy at work, maybe you’re happy at home. If you’re not happy at home, maybe you’re happy at work. If you’re married to your job and are more of a father figure to your subordinates than your own children, and you don’t have a good day at work, what could possibly make you happy at home? If 100% of your friends seem to hang out with you Monday through Friday from about 9:00 – 5:00, who will your friends be when you or they stop working at the same company? If your hobbies are answering work e-mails after work or leaving voicemails at strange hours, what are you going to do when you retire? You know that most companies take your computer and disconnect your phone number when they take your key card, right?

As good as diversification can be for improving an investment portfolio’s risk-adjusted performance, diversification also follows the law of diminishing returns. What I mean is there comes a point after your portfolio is diversified where adding another position or fund in the mix really doesn’t add that much value anymore. To some extent, your investments can become so spread out that you can’t really be in something enough for a gain or loss to significantly move the needle. I think this holds true for life, too. You can be involved in too much. There can come a point where you are spread so thin with your own activities and social obligations that you really can’t take the time to excel in the activity or enjoy the obligation before you have to move on to the next one. Having too many acquaintances can prevent you from having genuine friends. Having too many time-consuming hobbies can hurt your family.

In the investment advisory arena there is a document called an Investment Policy Statement (IPS) that is often drafted between an advisor and a client. In essence, this document provides the general goals and objectives of a client and specifically states ranges of acceptable investment allocation (ex: % allowed in stocks vs. bonds). This allows the advisor to know how much he or she can change the makeup of the portfolio and gives the client the comfort of knowing there are limits to how much the makeup of a portfolio can be changed. Here again, based on my experiences as a normal, everyday person, I think it might be a good idea to apply the IPS mindset to our families, friends, and careers. If you have a busy week ahead at work and you need to rebalance your time to spend more hours at work than usual, that’s fine, but don’t adjust the allocation of work/life balance beyond the amount that is acceptable to your family. If your family is keeping you busy and you need to disappear from your friends for several weeks to do what you have to do, that’s fine, but don’t leave the allocation to your friends below what they expect for too long. If your new stamp collecting hobby has encroached on some of the allocation of your time normally set aside for your wife, that may be fine for a while, but it might not be the best long-term strategic allocation if you know what I mean.

Earlier in this post I said that there was usually at least one area of my life that could be a little better. That’s still true. However, it’s also true that there is usually at least one area or my life that is going pretty well. By diversifying my life, I can focus on what’s going well in the midst of whatever could be a little bit better, and I believe that makes me an overall happier person. On a given day I may not be as happy as an obsessed bird watcher who finally spots some sort of rare finch, but I also won’t ever be quite as sad as a total workaholic whose proposal wasn’t well received. Diversification can help your long term investment returns, but it can also help your return on life!

-Tom

Your Sunny Day Fund

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One of the terms you have most frequently seen in my 146 (now 147) blog posts since 2012 is “rainy day fund.” It’s an unhappy term, but a necessary pillar of financial security. Cars break, houses fall apart, people get sick, and people lose their jobs. If people don’t have enough money saved up to get them through their unique personal thunderstorms, things don’t usually go so well. You need enough cash to be able to get through dark financial times. It’s as simple as that. I haven’t met many people who disagree with me on that premise, and I can tell you from experience that it usually doesn’t take very long for someone who is serious about financial security to build up a reasonable rainy day fund.

After someone has a rainy day fund, I frequently recommend that they work on saving more and investing more for things like the next car, the second home, and most importantly, retirement. I’ve found that there are some highly motivated, goal-driven people who go after hitting their savings and investing goals with the same vigor with which they built a rainy day fund, but I’ve also observed that a lot of people seem to lose “steam” or momentum. Why is that? I think it may be because saving for future wants and needs requires a little more self-control. It also lacks a catchy name.

So today, I’d like to throw out a happier term that I first heard on the radio as part of an advertisement for a national bank. I’d like to start calling the brokerage accounts, 401(k)s, and IRAs that you are saving into for your future your “sunny day fund.” Doesn’t that have a nice, warm glow to it? Doesn’t it have a better ring than some of the hideous titles bestowed upon employee savings vehicles? I think so!

As I’ve often said, my greatest concern for current workers, and particularly those of my generation and younger, is that the rules of the game are changing. Retirees once had pensions, Social Security benefits, and their savings to get them through the rest of their lives, but today’s workers will have to rely much more heavily, if not entirely, on their savings to get them through the rest of their lives. Sadly, I believe this means the days of being able to save very little and still retire with a reasonable income are numbered.

Saving and investing for your future are critical. It’s more fun to spend now, there’s no question, but I hear it’s also nice not to have to work until the day you die. Working towards that dream car, that vacation home, and those annual family trips by saving and investing now can be fun, too! Maybe it doesn’t feel as fun in a brokerage account, 401(k), IRA, or another type of account, but I really think it can be fun if you tweak your perspective just a little bit and decide that you are saving and investing to accumulate enough assets to propel yourself through the golden years. The bigger your sunny day fund becomes, the brighter your future could be.

-Tom

My Best and Worst Financial Decisions

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If you regularly read my blog you probably know that I normally try to provide you with personal financial tips and advice. Sometimes I share an experience. Sometimes I just throw something out there that I’m thinking about for you to think about. Today, I offer no answers. I offer two questions; two very interesting questions someone asked me last week.

• What is the best financial decision you’ve ever made?

• What is the worst financial decision you’ve ever made?

Since being asked these questions, I’ve asked many of my peers, clients, and friends those very same questions. I’ve gotten some really interesting answers, too. Some people have cited a particularly amazing (or horrible) investment, some have mentioned a business they started (or tried to start), and others have mentioned a really successful (or unsuccessful) real estate transaction. Some “spicier” answers I’ve gotten have to do with a spouse (or ex-spouse), investing in a select company opportunity (or deciding not to), and choosing a highly financially lucrative career (or not so much).

I’m still deciding on mine...

On the positive side, starting a Roth IRA as a dry cleaning clerk in high school was a great decision. My wife and I putting extra towards our first mortgage most every month allowed us to build up some equity that just came in handy with our recent move. Holding on to that local bank stock I inherited from a distant aunt that was eventually acquired by a much larger, national bank was pretty sweet. Staying in-state for college wasn’t the worst thing I’ve ever done, either.

On the negative side, not putting more into my 401(k) the first several years I worked has hurt as the markets have really roared, but like most people, I needed/wanted the cash. By putting more towards our first mortgage (one of my “best” decisions) rather than investing, my wife and I also missed out on some of the significant investment returns in recent years, but paying down debt just felt too good. I so almost made an investment in Bank of America stock in 2009 when it was at $4 (now it’s at almost $17). Grrr…

What about you? What do your decisions tell you about yourself? What can you learn from your decisions? What did you learn from your decisions?

I’ll return to offering you some financial “answers” next week!

-Tom

A Variation on Buying Low and Selling High

Credit: Stuart Miles at FreeDigitalPhotos.net

There are a lot of people out there who will tell you that the key to success in the stock market is buying low and selling high. From a strictly value investing strategy standpoint, I tend to agree. From an overall investment strategy standpoint, however, College GameDay’s Lee Corso comes to mind; "Not so fast my friend!"

The reason I’m a little cautious to blindly endorse buying low and selling high is because it can teeter right on the brink of an evil term called market timing. I say evil because market timing is often what gets investors in trouble when they repeatedly or completely buy into and sell out of the stock market. The problem with someone trying to time the market is that they are assuming that they know what direction the market is going in the short term, and, to be honest, I haven’t met many people who do. To make matters worse, if someone is going to buy low and sell high successfully and not leave any possible gains on the table, they will need to successfully time the market twice. Twice because they will need to know when a particular stock has gone as low as it is going to so they can buy it, and again when that same stock has hit its near-term peak so they can sell it. If a market timer is wrong, they can miss out on income and market movement, but they are also punished by incurring unnecessary transaction fees, expenses, and possibly taxes. Please believe me when I tell you that correct market timing is really hard once; it’s darn near impossible twice!

As I alluded to earlier, I really do like the idea of buying low and selling high, but within reason. So instead of making one-way, all-or-nothing bets that can be largely influenced by chance, I would propose you consider two, subtle but profound variations:

1. Stay invested and just periodically rebalance your investments by selling parts of your “winners” and reallocating the proceeds to other areas to bring your portfolio back in line with your long-term investment strategy.
2. Go ahead and try to time your withdrawals and deposits as best you can. In essence, deposit when the market is low and withdraw when the market is high.

Some of you may disagree with my tips, and that’s fine. There are times when there are tactical opportunities when it may make sense to totally enter and exit particular stocks, industries, and asset classes, but I believe that is more of an exception than a rule. I personally find comfort in thinking that I have about 60 – 70 years left in this crazy world, and I expect the stock market will be higher then, than it is now. Something about these historical stock market charts just gives me comfort…

 

A lot of investment managers I’m familiar with make money by buying low and selling high, but they do it by trimming their exposure as their holdings have gone up, not by timing the market. A lot of investors I know have made good financial decisions by sticking with their long-term, prudently diversified investment strategies and periodically rebalancing, not by timing the market.

 

Don’t try to time the market. Try to make your deposits and take your withdrawals strategically.

 

-Tom