I haven’t run out of topics to write about – I can go on forever, believe me.  I just want to hear from you, the readers of this blog, as to what topics you’d like me to cover.  It might be an area that I haven’t touched on at all, or maybe it’s a new take on a topic that I’ve already written about.  Don’t be afraid to hit me up with whatever ideas, questions, or situations you have.  It’s up to you to help me out with new ideas to write about so that Getting Your Financial Ducks In A Row is as useful and valuable to you as possible.

So – give me your suggestions.  You can use any of the communication methods available, leave a comment, or use the communication form (on the right), or just send me an email (also over on the right).  If you’re reading this through an RSS feed, you’ll need to visit the blog proper in order to get at these communication methods (try clicking on the title of the post in your reader, that should take you to the native blog, or click on this link – Getting Your Financial Ducks In A Row).

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You can pick up my book, A Social Security Owner's Manual, at Amazon in either the print version or the Kindle version by clicking the links.
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Now is the time to look back and review our actions during this difficult period – review is useful for us to understand what helped us weather the storm and wind up with positive outcomes.  According to some of the things I’ve been seeing and reading, it appears that many folks came through the financial crisis pretty much unscathed.

What We Did Right

We Didn’t Panic – As in most “crisis” situations, it’s a good thing to maintain calm.  In this specific crisis, we held true and didn’t make sudden moves to react to the situation.  Since we had a  well-thought-out plan in place, we stuck to it and, even though we saw our accounts decrease in value – we were able to take advantage of the increases that the stock market provided later.

Good diversification across all asset classes also kept us from feeling the pain that concentrated positions could have caused.  We found that investing globally helps to balance out any one country’s problems so that we are able to retain and grow our funds through thick and thin.

We Didn’t Listen to the Pundits – You know that in this information-deluged age we live in, you can get opinions on the financial world at any moment from dozens of talking heads on the TV and internet.  At any one time you can find someone telling you to buy the market and another telling you you’re crazy if you don’t sell the market.  You did the right thing by recognizing that these folks are entertainers first and foremost.  If it’s fantastic and draws attention, they’ll say it – whether it has merit or not.

We Slowed Borrowing and Living On Credit – Recent reports tell us that consumer non-mortgage credit has dropped off during the past year and a half, when compared to mortgage debt.  Both figures are still high (more than 10% of income is servicing mortgages, and nearly 6% is spent servicing other credit), but these figures have come down from the all-time highs we saw a few years ago.  If what I believe about you, my readers, is true, you are on the much more conservative side of those figures, and you have strived to improve your situation through this crisis when possible.

We Continued Saving – From what I read, it appears that most everyone who is in the position to add to savings and retirement accounts, continued to do so during the financial crisis.  According to Vanguard, a high percentage of retirement plan participants (especially younger participants) have higher balances in their accounts now than they had two years previous – at some of the market highs.

As we all know, one of the most important factors of success in a saving and investing plan is to continue with systematic savings in good times and bad.  Continuing to save and invest even when all the noise going on around you said that you should stay away from investing has worked and worked well forever.  By doing so, you benefited from the dollar-cost-averaging aspect of systematic investing, buying low during the market downturn, and then riding the massive increases we have seen in the market over the past year.

Bottom Line

All in all, we did a good job of recognizing that the markets can’t be controlled, but that we can exercise a degree of control by having a diversified investment plan and by determining that we’ll continue to put aside funds for that eventual sunny day we’re all hoping to see. As I mentioned in a previous article, it’s always good to save 10% to 20% (or more), live within our means, and invest, diversified, for the long term.  These few tenets have served us well – in good times, and as we’ve now seen, in bad.  Keep up the good work!

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You can pick up my book, A Social Security Owner's Manual, at Amazon in either the print version or the Kindle version by clicking the links.
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The reason this is important is because, as individuals, we are doing a poor job of creating success for ourselves.  Recent reports have shown that our overall savings rate (for Americans, anyhow) is essentially nil.  That is to say, we’re mortgaging our futures at a regular rate, month over month, with nothing being put back for the aggregate rainy days that are coming.

The Formula for Success

The basic, stripped down Formula for success is as follows (and don’t be surprised if this is boringly familiar):

Save 10% to 20% of everything that you earn, live debt-free, and invest your money in sensibly managed investments for the long term.

Following this simple Formula has provided many folks from all walks of life with a comfortable retirement, pretty much without regard to the ups and downs of the markets.  The Formula can work for anyone of any means – without the need for complicated projections, analyses, or any of the other fancy services that financial professionals provide.

That’s not to say that there is no value in those additional services – tax savings, estate protection, and portfolio optimization do provide powerful benefits, but not as much until your net worth has increased to a substantial size.  Following The Formula is the first step, the foundation of financial success.

What This Means

For the person just starting to put a real plan in motion, it really isn’t hard to get The Formula to work for you – the biggest roadblock is instilling the discipline into yourself to follow it.  It could be as simple as working together with your spouse, each of you holding the other accountable for maintaining the plan; in fact it’s essential that both of you are on the same page.  But often it is necessary to get some help.

Even though this process seems simple, it is at the earliest stages that guidance is essential to keep you on track.  It requires you to analyze your monthly expenses and income, consider your debt situation and any savings plans already in place, and then develop and work your plan to apply The Formula to your situation.  Guidance can be vital as you work through the process and can be critical to keeping you focused and on track.

If you don’t already have an advisor to help you to develop and work your plan, you should strongly consider getting one.  Many fee-only financial planners (but not all) can provide hourly service to help with just such a plan – you can search for this sort of advisor on the internet:  www.NAPFA.org and www.GarrettPlanningNetwork.com are the best places to start.  You could also go to my “How To Get Started” page to initiate a conversation your own situation.

The Point

So, the point of all this is – as Americans we have done a terrible job of preparing for our futures, but it’s never too late to start.  No matter where you are in the spectrum of potential financial success, putting The Formula into place (if you haven’t already) will improve your situation.  If enough of us do these simple things and stick to the plan, a brighter future will be in store for all of us.

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You can pick up my book, A Social Security Owner's Manual, at Amazon in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

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What’s the Difference?

You’re probably wondering – what’s the difference between a broker and, for example, a fee-only advisor?  You’re right to be confused, because until you start working with one or the other and you know what the difference is, they look pretty much the same from the outside.  Here’s the difference:

Brokers are salesmen. It is their job to sell you an investment product, and that’s how they get paid.  They are required by law to ensure that the product is “suitable” to your situation.

Fee-only advisors are advisors. Fee-only advisors are bound by law to act as a fiduciary.  It is their job to advise you on the appropriate strategies and tactics – investment moves that are in your best interest.

That’s a pretty big difference in itself – but since that differential makes the fee-only advisor look SO much better (and since this writer is a fee-only advisor), I wanted to point out what research has born out to be true about the recommendations that you get from a broker.

What Can a Broker Do For You?

There is a study done by researchers at Harvard and the University of Oregon (Bergstresser, Chalmers, and Tufano), which strives to identify the possible benefits to the consumer of financial services in purchasing investments via a broker. They looked at five possible benefits:

1. Assistance in selecting funds that are harder to find or evaluate.
2. Access to funds with lower costs excluding distribution costs.
3. Access to higher performing funds.
4. Superior asset allocation.
5. Attenuation of behavioral investor biases (in other words, saving the investor from himself)

Ultimately, the researchers “found it difficult to identify the tangible benefits delivered by brokers.”  But that’s getting ahead of ourselves.  We’ll take each category separately and briefly describe the findings.

Assistance in selecting funds that are harder to find or evaluate

It is true that brokers often direct investors into smaller, younger funds that have less track record or are not covered by major rating services.  The costs (especially in time) to the individual would be enormous in researching these funds. If the other benefits are brought about by utilizing these harder to find or evaluate funds, then there would be a benefit to working with the brokerage.  What we’ll see is that the rest of the evidence doesn’t bring that conclusion.

Access to funds with lower costs excluding distribution costs

The researchers found that the funds sold through the broker channel do not have lower costs excluding distribution fees.  In other words, even if funds exist that are of a lower cost, the brokers are not (in general) directing investors to those funds.  Across the board, the annual cost of a brokered stock fund was on average 2 basis points (bp) higher (.02%), not including commissions or 12(b)1 fees.  And the average annual cost of a bond fund was an amazing 23bp higher, and money market funds were on average 4bp greater.

Access to higher performing funds

The overall return, as well as the risk-adjusted return, is lower for the funds that the broker chooses, versus funds that are directly purchased via other channels (e.g., a fee-only advisor or through personal research by the investor).  Stock funds underperformed direct-purchased funds by an average of 7.5bp (.075%) – and using risk adjustments caused these figures to get even worse.  Bond funds underperformed as well, but money market funds did provide a slightly better return, by a total of 18bp on average.

Superior asset allocation

While a broker’s asset allocation recommendation is different from that of other investment channels, over time the outcome is pretty much the same for either type of investor.  The difference is that, on average, the broker tends to direct a higher percentage of investors into bonds (as opposed to stocks).  Since stocks, over a long run, outperform bonds and bonds demonstrate lower risk (as measured by standard deviation), this difference in allocation weights tends to even out between the two.

Attenuation of behavioral investor biases

Lastly, the research shows that most broker-driven investors are much more sensitive to short-term performance in the market than other investors.  This leads to “performance chasing”, which in general does not bear greater returns, while at the same time increases incremental transaction costs.  Transaction costs benefit the broker, of course.

But wait, there’s more!

In addition to the research summarized above, you need to know about how a broker is typically paid.  I already mentioned that the broker is paid to sell the investor products – how does that work?  There are many types of fees which can impact an investor’s account:

• Front end loads: this is a commission charged when you purchase the fund.  Typically these can be anywhere from 3% to 5% or more of the purchase, although at much higher balances the fees can be reduced and even eliminated.
• Back end loads: this is a commission charged when you sell the fund.  Often, this is used to keep an investor in a fund for a specific period of time, during which other fees can be transacted from the account.  After a period of time, these back end loads are waived.
• Annual loads:  this is an annual commission based on the holdings in the account, and can be one of the most expensive ways to hold investments.
• 12(b)1 fees: this is also an annual fee based on the holdings in the account, and often is the most elusive to identify – while representing the greatest drain to the investor.  This fee is usually pretty small in relation to other fees (sub 1%) but it is charged across all classes of funds, whether a front-end, back-end, or annual load.  What really hurts is that the 12(b)1 fee is specifically for marketing the underlying investment.  In other words, as an investor in the fund, you’re paying to help bring in more investors.

While it’s not conclusive, some of the results found in the research paper indicate what you might expect:  that brokers sell the investments that pay them the most.  For example, as the front-end load or 12(b)1 fee increases for a particular fund, there is an attendant increase in the sales of the fund.  Not unexpected, it’s basic human nature.

Conclusion

The research shows no tangible benefit to working with a broker – in fact, results are often worse with a broker.  Add to that the costs of working with a broker, above and beyond the dismal results that you achieve, a conclusion isn’t hard to come by:  it makes more sense to either do the research on your own and purchase funds directly, or to work with a fee-only financial advisor who will do the research and operate as a fiduciary to ensure that the investment choices you make are in your best interests.

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You can pick up my book, A Social Security Owner's Manual, at Amazon in either the print version or the Kindle version by clicking the links.
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Of course, many advances have occurred since 1918, and as such it is expected that the death rate will be dramatically less than the 2.5% of the infected rate that occurred then. First of all, these days we have vaccines available, albeit fewer doses than we’d hoped for by now.  Secondly, we have quite a few advance plans ready to go – school closings, business readiness and travel bans, to name a few – to help with management and containing the pandemic.  And thirdly, our treatments are far more advanced than what little was available back then.  But these reasons aren’t what I was referring to in the title of this post…

The Bright Side of H1N1

There are no absolutes in life, especially when it comes to global relations and economics… but I believe that in the evolution of the H1N1 pandemic to date we’ve seen some baby steps toward reconciliation – a more “normal” economic environment. While there are bound to be some short term negatives, global focus on resolving this pandemic quite likely will help to lead our worldwide economy out of the doldrums that we’ve been experiencing.  Don’t get me wrong, I don’t think it’s reasonable to think that we will see world markets rallying in short order.  In fact, the pandemic could lead to a dampening effect – but in the end result this could be good as well, by forestalling too-rapid growth in the economy, thereby negating inflationary concerns.

It’s not a sure thing by any stretch, but it’s my guess that we will come out of this crisis in much better condition than we’re going into it… what do you think?

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Confidence is one of your most important success ingredients. With it, you can achieve most anything. Without it, there is no psychological pill that can make you succeed.

Faith is the ability to believe even when you have no reason to. Faith is necessary sometimes to move forward and do something you don’t know if you can do, or when the world around you is telling you that you cannot. This is also when a trusted guide can be useful to help you figure out what is valid and what is not.

Experience gives you the proof you want and need to build future confidence on, and is something you get after you use faith and confidence first to achieve what you want. Experience is developed incrementally – in baby steps at first, with more momentum as you gain more confidence.

It is easy to make grand gains when the greater forces like “the economy” are going in your favor. Those who are truly successful make gains by having faith and confidence in themselves no matter what direction the so-called greater forces around them appear to be going. Short-term “noise” doesn’t bother these folks one bit.

In all things you can benefit by strengthening your confidence and faith in yourself. Seek guidance from others who have the experience that you lack.  Look to and recall your past successes as a foundation to build your confidence in yourself and your plans.

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You can pick up my book, A Social Security Owner's Manual, at Amazon in either the print version or the Kindle version by clicking the links.
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One of the questions that I often ask folks as we’re working on financial matters is – “what is it that you want to DO?”  And in this case, DO is properly capitalized, because the context of the question is with regard to life.  “What is it that you want to DO in your life?”

Deep down, we all have the desire to matter.  We want to, in some way, create a legacy of our life, so that this time we’ve spent here doesn’t seem like a waste of time.  Not that what we do every day – caring for our families, performing our job, etc., is a waste of time.  But if we’re not cognizant of a greater purpose for our life, oftentimes life seems unfulfilled.  It doesn’t have to be grandiose, we all have our little corners of the world that we can impact in a positive way that will leave a legacy long after we’re gone.

Believe me, I’m not in any way saying that I have all the answers.  In fact, I have quite a few questions that you might want to ask yourself as you consider just “what is it that you want to DO?”.  These questions are primarily from a financial standpoint (duh, financial planner, remember?) but have a greater reach, as in how money interplays with your aims for your life.

• How would you describe your relationship with money?  Is it a means to an end, or is it the goal you’re aiming toward?  If you answered the latter, what are you going to do with the sum of money when you get it?
• What in your life brings meaning to your existence?  It may be volunteer work, your job, or just being with your family.  How would a drastic reduction in your financial situation, such as loss of a job, impact your meaningful activities?  Would a dramatic improvement in your financial situation, such as winning the lottery, lead to a more meaningful life?
• If you’ve got an idea of what you’d like to accomplish in your life to leave a legacy, how does money affect your ability to do “your thing”?  Are you doing those things now – that is, making those contributions – that will help to leave the impact you’re hoping to leave on the world?
• Quite often, it is said, that we don’t really get to know our personal strengths until we’ve faced adversity.  If you’ve suffered a financial setback, what personal attributes do you have that you can use to help you deal with the situation and get yourself (and your family) through the crisis?
• As you consider your personal values, is there anything that you’re lacking?  Is it possible that we have too much “stuff” in our lives that keeps us from truly appreciating and evoking our values?
• Consider the above questions again, only substitute time for money in the question… and then do it again, substituting talents.

Pretty sure we haven’t resolved anything here today – but hopefully some of the questions I’ve asked have sparked you to action (or at the very least, deep thought).  Because the actions we take in our lives are our only way to create that legacy – so that in the end we can look back on our life and feel satisfied that we’ve done our best.  That’s what it’s all about, right?

Take care, jb

You can pick up my book, A Social Security Owner's Manual, at Amazon in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

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