investing

What to do with $1,000

One Thousand Dollars! (Photo credit: The Consumerist)

I occasionally get this question – especially around the time of tax refunds. When someone comes up with an additional $1,000 dollars, they want to know how to best use that money to help out their overall financial condition.

Of course this question has different answers for different situations. I’ll run through several different sets of conditions that a person might find him or herself in, and some suggestions for how you might use that $1,000 to best improve your financial standing. It’s important to note that you don’t have to have an extra $1,000 lying around to use this advice – you could have an extra ten or twenty or fifty bucks a week and put it to work with the same principles. The point is to find money that isn’t being spent on something critical, and put it to work for you! Even small steps amount to wonders.

Debt

If you have consumer debt, including credit card debt, auto loans, student loans and the like, it makes the most sense to use this money to bring down your overall debt balance or eliminate it if you can.

If the interest rate on your debt (or a portion of your debt) is greater than about 3% or 4%, you aren’t likely to find a better way to “invest” than to eliminate some of your interest costs. This is because debt is a negative investment – when you have debt that carries an interest rate of 8%, year over year while the debt balance is there, you are “earning” a –8% return on that money.

Some folks recommend eliminating all debt, but that’s a bit impractical in today’s world. Low-cost mortgage debt and auto loans can be good uses of leverage – especially mortgage debt at the rates we’ve seen of late. I suggest that you focus on the highest rate consumer debt first and foremost, eliminating this drag on your financial state. Once you’ve eliminated every debt except for mortgage debt, you can move on to other pursuits. Eliminating consumer debt at high interest rates is the best move you can make to improve your financial self.

Emergency Fund

An emergency fund is an amount of money set aside that can be used to cover all of the unexpected expenses that come up and surprise you: new tires for the car, roof replacement, or medical expenses not covered by insurance, for example. The other thing that an emergency fund is for is to give you some “cushion” if you find yourself unemployed for an extended period of time. It’s for this reason that an emergency fund is typically referred to as a certain number of months’ worth of expenses – such as 3-6 months’ worth of expenses. You should have an emergency fund of an amount that would provide for your living expenses for several months should you be unexpectedly laid off.

If you don’t have an emergency fund, or if your emergency fund is smaller than you should have set aside, this is another great place to put your extra $1,000. Typically an emergency fund is in a place that’s a bit difficult to get at – such as a bank savings account without debit card or ATM access. This way you’re not tempted to invade this money for non-emergency purposes. Sometimes folks use a Roth IRA as a dual-purpose account until they can establish separate accounts for retirement and emergency funds.

A Roth IRA could be used as your emergency fund, since you can withdraw your contributions to your Roth IRA at any time for any purpose without tax or penalty. I don’t recommend this option for your long-term use, because if you have to get at the funds for an emergency purpose and you’re not able to replace them in the account within 60 days, you’ll lose the Roth treatment of those contributions forever. You can always put more into the Roth IRA at a later time, but once you’ve got the money in there, you shouldn’t take it out before retirement without a very, very good reason.

Knowledge

The most important tool for achieving financial success is knowledge. For this reason, I suggest that you use some of your new-found riches to improve your financial knowledge. There are many good books out there (I’ve reviewed quite a few of them, click this link for a list of financial books I’ve reviewed) that will help you to better understand your finances and how you can improve things.

I wouldn’t suggest spending all $1,000 on education – maybe as much as $50 or $100 for several good books. This will help you to make good decisions with your remaining money.

Retirement Savings

If you haven’t maxed out all of your retirement savings for the year, such as 401(k) plans and IRAs, this is another good place to put your $1,000 to work. For an IRA or Roth IRA (if you’re eligible by your income level) it’s simply a matter of making the contribution to the account and investing it appropriately.

If on the other hand you haven’t maxed out your 401(k) plan, you can defer this additional $1,000 by your paychecks throughout the remainder of the year and earmark this additional $1,000 to make up the difference in reduced take-home pay. If you started in July and you have 13 more pays left in the year, you’d set aside around $75 per paycheck (if paid every two weeks) and your income will be reduced by a little less than that, since the money you deferred isn’t taxed.

Who Does Each Option Work Best For?

Folks who are just starting out in improving your financial situation quite often need to focus on all of the options I mentioned above – debt reduction, emergency fund, knowledge and retirement savings. The list was put together in priority order, so you should focus on debt reduction first, then emergency funds, and so on.

If you’re a little farther down the timeline and have eliminated all consumer debt and have established an emergency fund, improve your knowledge first, and then add more to your retirement savings. I mentioned before that the most important tool that you have is your knowledge. The most important action you can take to improve your financial standing is to increase your bottom line. We did this first when we eliminated all debt. The next step is to add to savings. Both moves will increase your net worth – your assets (savings and possessions) minus your liabilities (loans and other debts) equals your net worth. The key to financial success is to make moves that will have a positive impact on your net worth.

Students who don’t have any debt accumulated should focus first on the emergency fund, and then on retirement savings. In some cases it makes good sense here to put the money into a Roth IRA, since money in a Roth IRA won’t be counted on your financial aid forms, since it’s a retirement account.

The Crystal Ball

May 31st, 2013

by sraskie.

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Every so often we get asked by our clients or prospective clients which direction the market is going to go. This is always and entertaining question to get – and some of our “regulars” already know the answer.

Having a bit of a sense of humor (albeit dry sometimes) I’ll joke with clients and tell them that the day they handed out crystal balls in my investment class, it was the one time I called in sick – and you only get one chance at the coveted crystal ball. Thus, I forever lost the opportunity to predict the future of the markets. Darn.

Inevitably, clients laugh and understand the joke – and take away the underlying theme of the jocularity – that we can’t predict the future, especially in securities markets. But this doesn’t mean we can’t plan ahead.

So why do we invest? Why do we save for retirement? Why do we plan for the future? The reason is this: while we can’t predict the future, we can certainly have a great idea of where we are going and where we want to be. We understand that over the long run, it’s likely that our nest egg and the contributions to it over the years will grow, so that when it comes time to retire and actually live the future that we planned for; it’s livable and enjoyable. This is why we plan ahead and this is why people seek out financial planners.

Of course, there are always the worriers and naysayers that say, “What if the market crashes?” “I don’t want to lose all of my money.” “What happens if the market dips next week?” To which the answer is, “Well…what if it does? So what?” A good planner would never put immediate or near-term money at substantial risk.

An appropriate plan and an appropriate planner will take the time to discuss your strategy, goals and based on your aptitude for risk – will properly allocate your investment assets so that fluctuations won’t wipe out your savings.

We can tell you that the market will tank, and the market will recover. And that’s why based on an individual’s plan we allocate and manage accordingly. So, technically we can predict the future (as could anyone in this case), we just can’t tell you the exact dates crashes and recoveries happen (if that were the case, there’d be no need for financial planners).

Another way to think about it is this: your doctor may tell you to eat right, exercise, don’t smoke or abuse alcohol to preserve longevity. The plan is for you to live longer. That being said, you’re still going to get a cold or the flu (analogous to small market dips) or you may get seriously injured in an accident (analogous to a market crash – pun intended). But you (and the market) will recover. We can’t predict when you’ll get a cold or be in an accident or how long recovery will take, but we can plan accordingly.

In an absolute worst case scenario, you could die prematurely (analogous to the financial markets collapsing like a dying star). But overall, we take our doctor’s advice because we’re planning to live a long and happy life. The same is true with professional financial advice. Anything can happen, but we plan for the future.

Book Review: Think, Act, and Invest Like Warren Buffett

May 13th, 2013

by jblankenship.

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This book, by Larry Swedroe, is a must read for individual investors that are looking for the answer to the age-old question – How should I invest?

Warren Buffett certainly makes any list of “best investment minds” of our era, no matter who you are. Author Larry Swedroe would likely make any such list as well, given his many books that he has written on the subject, such as “The Only Guide to a Winning Investment Strategy You’ll Ever Need”, “Investment Mistakes Even Smart Investors Make”, and just as well, the subject of this review.

Mr. Swedroe starts out with the basics of Mr. Buffett’s advice, with the sage’s commentary backed by the facts behind them. For example, regarding market timing: “Our favorite holding period is forever.” Swedroe follows this advice with evidence of why it pays off for the individual investor in the long run, due to the fact that the only time most individual investors want to sell is at exactly the wrong time, when markets are tanking. After developing a sound investment strategy, using low-cost index mutual funds as the foundation, it’s best to stick to your strategy through thick and thin.

Another example is offered in these words of wisdom from Buffett: “The most important quality for an investor is temperament, not intellect.” This comment is particularly useful when considering whether or not you should pay attention to the likes of CNBC, Investor’s Business Daily, or other “noise” going on in the media. Instead, having a sound investment policy that you stick to, maintaining your temperament (don’t let your emotions drive your decisions, in other words), is the way to success in investing.

Throughout the book, Mr. Swedroe provides additional tools and insights that can easily be put into play immediately. There is an example of a personal Investment Policy Statement (the guide you’ll need to help you through the “tough times”), as well as a basic strategy for developing an investment allocation plan that is diversified, low-cost, and will provide you with stable investment returns throughout your life. In addition, Mr. Swedroe covers the topic of how and why you might choose to hire a financial advisor, along with advice on the type of advisor you should choose (and here’s a clue, Dave Ramsey fans: it’s not commissioned advisors, it’s fee-only advisors) because it’s not always about finding the lowest up-front cost, it’s more about finding someone who will work in your best interests.

In addition to investing, Mr. Swedroe takes time to point out that the “activity” of investing should not be a focus for the individual investor – that the time spent on researching, managing, and monitoring any type of investment aside from the index-type of investments that he recommends, is lost time. Think about it: if you spent two hours a day on these investment activities (which is nowhere near enough time, in my opinion) in addition to your “regular” job, that’s 730 hours a year that you could be coaching your kid’s soccer team, re-connecting with your spouse, or spending time with your aging parents. Implementing the simple strategies in this book will cut down your time involved in investing activities to something like an hour a quarter – yes, only four hours a year!

The last section of the book provides Mr. Swedroe’s “30 Rules of Prudent Investing” – which, on its own provides a fantastic foundation of insight for the individual investor to follow for success. I highly recommend this book for anyone who has searched high and low for the “silver bullet” to investing success. As you may know, there’s no such thing as a real “get rich quick” scheme in the investing world – the real “silver bullet” is this simple, boring, use of index funds and dogged sticktoitiveness. Do yourself a favor and read this book, shut off CNBC, and get back to enjoying life. You’ll do wonders for yourself and your life.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not. If you find the information in this review useful, let me (and McGraw-Hill) know!

How Financial Advisers Get Paid

Apr 19th, 2013

by sraskie.

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As you begin your search for a financial professional it’s going to be important to know how the particular professional you choose will get paid. It will also be important to ask questions not only in regards to their compensation, but who actually pays the adviser. There are generally three ways in which financial advisers and planners get paid.

Commission: An adviser that’s paid on commission generally gets paid based on the underlying product they sell. Commission rates vary depending on the product sold – anywhere from 5% to 50%. Term Life insurance for example, will have roughly a 40% commission rate on the annual premium for the first year. Whole Life insurance is generally 50% the first year. The difference being Term Life may have an annual premium of $1,000 where Whole Life may have an annual premium of $5,000. It can be difficult to be objective when an adviser can make $2,500 versus $400 in commissions. Other commissioned products include load mutual funds that charge a load or commission on the initial purchase (i.e. a $1,000 investment with a 5% load means your net investment is $950), annuity products and individual stocks and bonds purchased through a broker.

Fee-Based: Fee-based is essentially a combination of commissions and fees. Generally speaking a fee-based adviser will get paid on commissions on certain products, and will get paid a fee on different products. For example, an adviser that sells life insurance and annuities as well as investment management can get paid commissions for the life and annuity products, and can choose to be paid a flat fee or percentage of the assets in the investment management account. Some products are fee-based, but pay the adviser a commission to sell them. For example, you invest in an asset management account where the annual fee is 2% to have your money “professionally managed”. You may only see a 2% charge for your fee, but the adviser that sold you the program, may receive a commission. This is generally seen in proprietary asset management programs of various companies and brokers. In both circumstances, the adviser is compensated by the product sold.

Fee-Only: Fee-only means that your adviser or planner gets paid directly by you. Therefore, fee-only advisers and planners are compensated for their advice, not on a product they sell. Fee-only advisers get paid a few different ways. The first way is strictly on an hourly basis, similar to how an attorney gets paid. Generally they will give you an estimate that will show you a range of what your fee will be such as $500-$950 for a financial plan. Another way that advisers get paid is via a flat fee for any assets (investments) of yours that they manage for you. This can range from .25% to 2% depending on the amounts invested. Some planners have minimums (i.e. you need $50,000 of assets to work with them) and some do not. Most will have a graduated fee schedule where the more money you invest, the lower your fees get based on certain thresholds.

Many fee-only advisers will take you “off the clock” meaning that once you become an AUM client (assets under management); they will no longer charge you by the hour for advice and questions. Be careful of advisers that “double dip” by charging fees for both managing your money and by the hour for other questions and planning. Make sure their advice is worth the extra money.

Finally, fee-only is very transparent, meaning that you see exactly what you’re paying either from your checkbook or from your quarterly statement.

Of the three, fee-only is arguably considered to be the most objective, yet not 100% perfect. Think of it this way, it can become extremely difficult (although not impossible) for a commissioned adviser to be truly objective when they only way they are compensated is if they sell you something. It becomes even more difficult if their job is on the line, they have a quota to meet, or an incentive such as a company trip dangling in front of them. That being said, all three ways have their advantages and disadvantages. It all comes down to what you’re comfortable with, and whom you’re comfortable with. Do your homework, ask lots of questions. Above all, any adviser no matter how they get paid should put your interests first – above all else. Consider an adviser or planner that is a fiduciary. This means that they are legally obligated to put your interests first.

Lastly, an advisers commissions and fees are not inclusive of the expense ratios and fees of the products they put you in. For example, you could pay a 1% fee to a fee-only adviser but they have you in a mutual fund that charges 1.5% in expenses. Or a commissioned adviser could sell you an annuity that had fund fees of 1.5% and policy charges of another 1.25%. This is another 2.75% of charges annually in addition to the commissions paid! Read the fine print and know all of what you’re being charged. Good professionals deserve to get paid, but their goal should be to have more of your money working for you, not the other way around.

Your Employer’s Retirement Plan

Mar 13th, 2013

by sraskie.

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Whether you work as a doctor, teacher, office administrator, attorney, or government employee chances are you have access to your employer’s retirement plan such as a 401(k), 403(b), 457, SEP, or SIMPLE. These plans are a great resource to save money into, and some employers will even pay you to participate!

Let’s start with the 401(k). A 401(k) is a savings plan that is started by your employer to encourage both owners of the business and employees to save for retirement. Depending on how much you want to save, you can choose to have a specific dollar amount or percentage of your gross pay directed to your 401(k) account. Your money in your account can be invested tax-deferred in stock or bond mutual funds, company stock (if you work for a publicly traded company), or even a money market account. Your choice of funds will depend on the company that offers the 401(k) through your employer. Generally, you’re going to want to choose funds with low fees and expenses. As of 2013, the maximum amount you can put into your 401(k) is $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older. At age 59 ½ qualified withdrawals are now taxed as ordinary income. Withdrawals before age 59 ½ are subject to penalties with some exceptions.

A cousin to the 401(k) is the 403(b). The 403(b) is very similar to the 401(k) in that you’re allowed to allocate a certain amount or percentage of your gross pay to your account, tax-deferred. Where the 403(b) differs is that it’s only allowed for non-profits such as school districts, hospitals, municipalities, and qualified charitable organizations. Another difference is by law the money in your 403(b) can only be invested in mutual funds or annuity contracts. You’re not allowed to own individual stocks or bonds in it. Like the 401(k), you’re allowed to save (as of 2013) $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older. At age 59 ½ qualified withdrawals are now taxed as ordinary income. Withdrawals before age 59 ½ are subject to penalties with some exceptions.

Branching out in our retirement plan family tree we come to the 457 plan. 457 plans are reserved for certain non-profits such as hospitals, government entities, school districts and colleges and universities. As you may have guessed, 457 plans are similar to their 401(k) and 403(b) counterparts in that money from your gross pay goes into your account tax-deferred. Like the 403(b) the 457 only allows investments in mutual funds or annuity contracts.

Similar to the 401(k) and 403(b), you’re allowed to save up to $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older (for 2013). Unlike the 401(k) and 403(b) the 457 allows you access to your money at any age, as long as you’re separated from service from your employer. For example, if you were 40 years old and have been saving into a 457 since you were age 25 and you saved $50,000 and you were fired, laid off or resigned, you’d have access to your 457 money without penalty; you’d simply pay ordinary income tax on any withdrawals.

Another key point to make is in regards to the aggregation rule. What this means is that you’re only allowed to invest $17,500 (along with the “catch-up” if you qualify) total between a 401(k) and a 403(b). For example, you work as a professor for nine months of the year and save $14,000 in your college’s 403(b). Over the summer, you work part time for a company that offers a 401(k) plan and you want to save money there. Assuming you’re age 40, you’d only be able to save an additional $3,500 to your summer company’s 401(k) – for a total of $17,500.

There is one exception to the aggregation rule. If you have access to a 401(k) or 403(b) and a 457, you are allowed to contribute the maximum to the 401(k) or 403(b) – for a total of $17,500 and then contribute the maximum to the 457 for an annual total of $35,000. The 457 trumps the aggregation rule. Few people may be able to actually sock away $35,000 per year, but it is available to those that work for employers offering both plans or if you work for two or more employers and they offer one or the other.

SEPs and SIMPLEs work a bit different. Typically these plans are available to smaller employers and SEPs are common for those that are self-employed. Both SEPs and SIMPLEs use IRAs as the funding vehicle to place retirement money, but each has different requirements as to contribution limits and participation requirements.

SEPs (Simplified Employee Pensions) can be funded to a maximum of $51,000 annually (for 2013) or 25% of the employee’s salary – whichever is smaller. There can be corresponding tax deductions involved that may be beneficial for solo businesses or businesses with a small number of employees as there are requirements that all employees must participate.

SIMPLEs (Savings Incentive Match PLan for Employees) are another option for smaller businesses looking to start a retirement plan and looking for a cost effective way to start (a 401(k) can be administratively expensive). Essentially, both employer and employees are allowed to participate and certain rules dictate that the employer must make a matching contribution (hence the Match in the name) to participating employees. As of 2013 you can contribute a maximum of $12,000 annually to a SIMPLE plan with an additional “catch-up” contribution of $2,500 if you’re age 50 or older.

The aggregation rule that applies to the 401(k) and 403(b) also applies to SEPs and SIMPLEs. This means that of the four plans for 2013, you’re still only allowed a total contribution of $17,500 annually ($23,000 if you’re age 50 or over). Having a 457 would be the only way to increase this amount.

Like SEPs and SIMPLEs, some 401(k) and 403(b) plans also have the company match. This means that in addition to your contributions, your employer will also make a contribution or “match” to the amount you’re contributing up to a certain percent. Consider taking full advantage of this. It’s free money! There are several reasons why an employer would do this ranging from plan compliance to helping ensure employee satisfaction and loyalty.

Finally, participating in your employer’s plan does not prohibit you from participating in a Traditional or Roth IRA. You are allowed to contribute the maximum allowed by law to both your employer’s plan and your own IRA.

It goes without saying that before you decide to participate, talk with your human resources department (not your cubicle buddy) or a financial professional regarding your options and which option or combination is right for you.

How Dollar-Cost-Averaging Can Work to Your Advantage for Your 401(k)

Feb 6th, 2013

by jblankenship.

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When you invest in your 401(k) plan with salary deferrals from each and every paycheck, you are taking part in a process known as Dollar-Cost-Averaging (DCA). This process can be advantageous when investing periodically over a long span of time, by smoothing out the volatility of the market and giving you an average cost of your investment shares over time.

How does this work, and how can it be advantageous?

Dollar-Cost-Averaging

When deferring income with each paycheck, typically you will be investing in your 401(k) plan each pay period, whether monthly, bi-weekly, or weekly. Each pay period the same amount is deferred and invested, no matter what the price of the underlying investments are at the time. Since you’re always putting the same amount into the investment, when the price of the shares is higher, you purchase fewer shares; when the price is lower, you are purchasing more shares.

Note: DCA can be used with any type of investment account, including a 401(k), 403(b), IRA, or even a non-tax-deferred investment account. We’ll refer to 401(k) accounts throughout the article since this is one of the more common accounts where DCA is employed.

For example, let’s say that you defer $100 every two weeks into your 401(k) plan, and your investment is an index fund. For the first pay period the price of the fund is $10. When you make your deferral and purchase this time, your $100 purchases 10 shares.

Then, in the next pay period the price of the shares of your index fund has increased to $10.50. Now your $100 purchases 9.5238 shares, and you have a total of 19.5238 shares, at a price of $10.50 per share, for a total account value of $205.

On the following pay period the price of your index fund has fallen to $9.50 per share. Your $100 deferred will purchase 10.5263 shares of the fund – you now have a total of 30.0501 shares at a price of $9.50, with a total account value of $285.48.

The table below plays out purchases with random amounts over a year and then tallies the result:

Pay Period	Amount Deferred	Price Per Share	Shares Purchased	Total Shares	Total Value
1	$100	$10.55	9.4787	9.4787	$100.00
2	$100	$10.44	9.5785	19.0572	$198.96
3	$100	$9.92	10.0806	29.1378	$289.05
4	$100	$10.33	9.6805	38.8183	$400.99
5	$100	$11.95	8.3682	47.1865	$563.88
6	$100	$11.36	8.8028	55.9893	$636.04
7	$100	$9.14	10.9409	66.9302	$611.74
8	$100	$9.54	10.4822	77.4124	$738.51
9	$100	$11.67	8.569	85.9814	$1003.40
10	$100	$9.76	10.2459	96.2273	$939.18
11	$100	$10.46	9.5602	105.7875	$1106.54
12	$100	$9.62	10.395	116.1825	$1117.68
13	$100	$10.23	9.7752	125.9577	$1288.55
14	$100	$10.70	9.3458	135.3035	$1447.75
15	$100	$10.40	9.6154	144.9189	$1507.16
16	$100	$11.52	8.6806	153.5995	$1769.47
17	$100	$11.37	8.7951	162.3946	$1846.43
18	$100	$10.91	9.1659	171.5605	$1871.73
19	$100	$11.55	8.658	180.2185	$2081.52
20	$100	$10.37	9.6432	189.8617	$1968.87
21	$100	$10.19	9.8135	199.6752	$2034.69
22	$100	$9.98	10.02	209.6952	$2092.76
23	$100	$11.89	8.4104	218.1056	$2593.28
24	$100	$11.82	8.4602	226.5658	$2678.01
25	$100	$10.33	9.6805	236.2463	$2440.42
26	$100	$11.41	8.7642	245.0105	$2795.57

The table above was created by generating random prices between $9 and $11.99 over the 26 periods. In real life, your investment wouldn’t likely have such wildly-fluctuating values during the course of 26 pay periods – I used this degree of fluctuation to demonstrate the benefit of DCA when the investment is relatively volatile.

The Advantage

If, instead of investing $100 every two weeks you saved up the entire $2600 and invested it at the end of the 26th pay period, you would be purchasing all of the shares at $11.41, for a total of 227.8703 shares. By DCA, your $2600 has increased in value such that you hold 245.0105 shares, with a value of $2795.57 – a net benefit of $195.57.

On the other hand, if you had $2600 to invest at the beginning of the table when the price was $10.55 per share, you would have purchased a total of 246.4455 shares, which would be worth a total of $2811.94 at the end of the 26 periods.

You can see from the table that by Dollar-Cost-Averaging, you achieve an average price per share over the period that is beneficial to you – since you’re purchasing exactly the same dollar amount of shares every time. When the price is high, you buy fewer shares, and when the price is low you buy more shares. By doing this over a long period of time, such as 30 years, you will avoid the risk associated with saving up a large sum of money and (perhaps) purchasing shares in an investment at a relatively high price by comparison over the savings period.

Why Designations Matter

Jan 18th, 2013

by sraskie.

2 comments

Throughout my career I have had the occasion to talk with several financial advisors, planners, insurance agents, brokers, and other industry professionals about some of the reasons why people choose to pursue or not to pursue designations. I have heard differing views on the topic and thought I’d share some of my insights as to why I chose and still choose to pursue designations and degrees.

Before I do, let me start by talking about some of the reasons why the advisors I have spoken to decide not to earn a designation. More often than not, the typical answers that I receive are not having enough time, not sure which designation to pursue, lack of funding to afford the designation, and lack of support on earning the designation – either from their employer or family. On the latter two points, some companies may not be able to “support” the designation – think captive agents that get the CFP® or ChFC® designation. They may be allowed to earn it, but if they are captive agents to a specific company, meaning that they have to be loyal to the company first, they are not allowed to advertise it, put it on business cards or stationery, and most importantly are not allowed to act as a fiduciary – meaning that they have to put the interests of the company they work for first, then the client. This isn’t necessarily a bad thing, just different. Regarding family, many designations take a lot of time, energy and resources away from the family. Although these sacrifices are short-lived, some family members have a hard time with the time and resources being shifted momentarily.

One of the most ridiculous responses I heard came from an advisor I was having a conversation with regarding the coveted CFP® designation. Having found out that I earned it, we were discussing the finer points of what the designation means, what you have to know for the exam and so on. At the end of the conversation the advisor gave me a slap on the back and said, “I already make enough money and don’t need the designation. But have fun paying all those fees!” (Side note: as of this writing the advisor I was speaking to is no longer in the industry).

In my humble opinion there are reasons why you should and why you should not pursue a designation. As you can assimilate from the information above, it becomes clear of why we should not pursue a designation. It’s not for the “money” and it’s certainly not for the prestige (although you feel pretty good when you earn one). You shouldn’t pursue one if you feel forced to do so (would you want to work with an advisor if you knew he or she really didn’t want the letters after their name?).

Most advisors and planners pursue and earn designations because they want to. They want to better themselves, their clients and their industry. Now, I’d be lying if I said that having designations doesn’t increase your income. It certainly can. That being said, the increase in income is (and should always be) a by-product of learning, putting your clients first, and maintaining the integrity of the industry and the designation earned.

The real beauty of earning a designation is it teaches us humility. Why? Because it’s through learning and earning those designations that we truly realize how much we really don’t know – and how much more we need to learn. This industry has so much to offer and so much of it is ever-changing. To not continue to learn, earn designations and better ourselves is a disservice to our colleagues, our profession, and our clients – and most of all, ourselves.

Save 1% More! Here are 7 ways to do it

Nov 10th, 2012

by jblankenship.

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United States (Photo credit: Wikipedia)

Seven bloggers have now published articles encouraging all Americans to commit at least 1% more to retirement savings this year as they make their benefit elections. We have several more bloggers who are going to put their posts up soon. See the original post for details on how to join the action: Calling All Bloggers!

Listed below are the articles in our movement so far:

From Michele Clark: Employer Retirement Accounts: 2013 Contribution Limits

From Roger Wohlner: Need Post-Election Financial Advice? Try the 1% Solution

From Sterling Raskie: A Nifty Little Trick to Increase Savings

From Theresa Chen Wan: Saving for Retirement: The 1% Challenge for 2013

From Mike Piper: Investing Blog Roundup: Saving 1% More

From Robert Wasilewski: Increase Savings Rate By 1%

From Steve Stewart: Seriously. What’s 1 percent gonna do?

Thanks to all who have participated so far – and keep those links coming!

How Keep Your Sanity When the World Around You Isn’t

Sep 3rd, 2012

by jblankenship.

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In my current re-read of Benjamin Graham’s timeless book “The Intelligent Investor”, I ran across the following paragraph and was immediately struck by the simple, deep truth in the lines:

But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and not more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.

Jason Zweig, in his notes for the Revised 4th edition of The Intelligent Investor writes:

This may well be the single most important paragraph in Graham’s entire book. In these 113 words Graham sums up his lifetime of experience. You cannot read these words too often; they are like Kryptonite for bear markets. If you keep them close at hand and let them guide you throughout your investing life, you will survive whatever the markets throw at you.

I couldn’t possibly agree more. This is the exact advice that I have given to many folks who become anxious at market downturns and the like. The point is that you should never have money invested that you’ll need in the short term, something like within two years. That money should be placed in rock solid accounts, such as money markets, checking, CD’s, or good ol’ passbook savings accounts.

This allows you to withdraw the money you’ll need without having to concern yourself with current market conditions. The remainder of your investment portfolio is then invested in the normal way, via stocks, bonds, and the like, which you’ll rebalance on an annual basis. As you rebalance, you’ll replenish the short-term account(s) with the coming couple of years’ worth of funds needed (more years if you’re being conservative!).

This doesn’t mean that you’re burying your head in the sand – rather, it means that you’re not allowing short-term “noise” of the market’s fluctuations to cause you to take actions when you’re better off standing still. Use the quote above to reassure yourself when doubts are clouding your judgment: since you’re not forced to sell, you haven’t lost anything.

Book Review: Low Fee Socially Responsible Investing – Investing in your worldview on your terms

Aug 15th, 2012

by jblankenship.

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Today I’m reviewing a book written by a friend and colleague, Tom Nowak, CFP®. Tom is passionate about Socially Responsible Investing (SRI) and he has written a great overview of the concept. He introduces some very good tools that the average investor can use, either on your own or to help guide conversations with your advisor.

But SRI concepts are available in many forms from many sources – what makes Tom’s book unique is that he develops a framework that allows the individual investor to implement SRI strategies (or for that matter, any investment strategy reflecting a particular worldview) in a very cost-effective manner.

Mr. Nowak starts out with a discussion of fees and how they can have a major impact on your overall investment returns. As you may already know, any reduction that you can achieve on the fees that your investment activities cost you will be returned directly to your bottom line. Tom outlines the options that you can use for investing, pointing out the pros and cons of each alternative. Certain alternatives are more cost effective at various asset levels – and these alternatives are discussed and reviewed at length.

Next, the author outlines his recommended approach for the Ultra-Low Fee SRI portfolio. Interestingly, as Tom points out, this sort of approach could be used for literally any worldview, including SRI in its many forms as well as, for example, whatever you might call the exact opposite of socially-responsible (socially irresponsible? sin-oriented? college fraternity house oriented?).

Tom then follows up with a chapter with Q&A on the approach, which provides excellent insights to help you implement such a strategy. After that chapter is a chapter for your advisor to review as you look to implement your strategy. Advisors can learn quite a lot from reading what Mr. Nowak has to say – I’ve found his insights quite valuable over the years, and the chapter presents his insight very well.

All in all, I think this is a great book for any investor to read – regardless of whether or not you are looking to implement an SRI investing approach. Advisors have a lot to learn from Tom’s approach as well, for helping your clients to implement investment approaches that reflect the client’s particular worldview. Tom does a wonderful job of explaining how to implement very low-cost investment strategies using readily-available tools and investment products.

Tom’s passion for the subject shows through in the book – do yourself a favor and spend some time learning about Tom and his excellent ideas.

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