One of the most important parts of your overall financial plan is the investment plan. The investment plan is made up of three distinct parts: present value, projection of future inflows and outflows, and allocation. It is allocation that we’re most interested in with this article. Allocation is the process of determining the “mix” of your investment assets: stocks, bonds, real estate, etc. as well as domestic and international categories. Allocation is determined by the philosophy that you choose to follow with regard to investment management. Our philosophy is summed up as follows: Diversify Reduce Costs Pay Attention to Economic Signals Maintain Discipline – Stick To Your Plan Now, there are three primary schools of thought that are often relied upon to develop an Investment Philosophy: technical analysis, fundamental analysis, efficient markets hypothesis. Technical Analysis is the review of charts of stocks and funds, with the belief that patterns within the […]
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What Do Minimums Really Mean?
Some financial planning firms require clients to have a certain amount of money before the firm will work with them. Common minimums may range from $250,000 to over $1 million. Generally the reason why firms have minimums is to either attract a certain clientele, provide economies of scale or both. But what do minimums really mean? To answer that question, think of it this way. Is a minimum really saying “You’re not important until you have a certain amount of money to invest.”? Additionally, is the firm really concerned about their clients if the firm has minimums? It would appear that they are more concerned with money first, clients second. Granted, I may be being a little hard on firms that have minimums. But what about the folks just starting out? Who is teaching them how to get to their first $250,000? How do they become educated to increase their […]
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Inter-Family Loan Topics
Often, the topic of Inter-Family Loans comes up in my discussions with clients. Many times a parent wishes to help out a child with the purchase of a home, or some other financial goal – but they don’t want to just hand over the money with no responsibility attached. Inter-family loans can be a good way to approach this topic – the child continues to have fiscal responsibility, and the parent is able to earn a bit on the loan, while still feeling as if they’re in a “helping” position with the child. Below are a few items to think about, along with the additional topic of co-signing loans with family members. Should I lend money to a family member? Lending money to a family member may seem like the right thing to do. After all, what could go wrong? Your son, sister, father, or cousin really needs your help, […]
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Buy Term and Invest the Difference?
A topic often argued in the financial service world, especially in the life insurance sector, is whether or not an individual should buy term and invest the difference or buy a cash value life insurance policy. How this argument generally goes is on one side you’ll have someone arguing that an individual should buy a cash value life insurance policy. This individual (generally a commissioned salesperson) will argue that buying a cash value life insurance policy (such as whole life) is a better option for a client since it generates cash value over time and “forces” the client to save. Often they’ll argue that the client wouldn’t save for retirement otherwise. On the flip side of that argument you’ll have someone (perhaps from our office) suggest the client should buy term life insurance and invest the difference in price from the whole life policy and the term life policy in […]
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Advice I Would Give My Younger Self
Last week marked the 30th anniversary of the date Marty McFly traveled 30 years into the future, from 1985 to 2015. A lot has happened in the past 30 years. Smartphones are part of our regular vocabulary, millions of individuals do their shopping online, and markets are still unpredictable. Naturally, I’ve changed over the last 30 years. And if I had a DeLorean that could take me back in time I’d try to impart some wisdom on my younger self. Unfortunately, the closest thing I have to a DeLorean is a silver mini-van (with sliding rather than gull wing doors) lacking a flux capacitor. My hope is that younger readers can benefit from what I am about to tell my younger self. From the moment you start earning money, save 10% of what you make. Whether it’s mowing lawns or stocking shelves you have the gift of time to […]
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Identity Theft Protection
Whether they’re snatching your purse, diving into your dumpster, stealing your mail, or hacking into your computer, they’re out to get you. Who are they? Identity thieves. Identity thieves can empty your bank account, max out your credit cards, open new accounts in your name, and purchase furniture, cars, and even homes on the basis of your credit history. What if they give your personal information to the police during an arrest and then don’t show up for a court date? You could be arrested and jailed. And what will you get for their efforts? You’ll get the headache and expense of cleaning up the mess they leave behind. Not to mention the potential loss of money, even jobs, that goes along with this problem. You may never be able to completely prevent your identity from being stolen, but here are some steps you can take to help protect yourself from becoming […]
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Diversification: I Know I Should, But Why?
Any discussion of the tenets of long-term investing includes the recommendation for diversification. This concept is delivered almost without thought – after all, as children we are taught “Don’t put all your eggs in one basket!”. But have you ever stopped to consider just why we should diversify? Of course, in the example of the saying about the eggs, it’s simple spreading of risk: if you have all your eggs in one basket and you drop that basket… all your eggs have broken! By spreading your eggs into a second basket, if one basket is dropped, only those eggs in that basket will break, and you’ve still got one basket of good, unbroken eggs. What if we add a third basket? A fourth? As you might imagine, it soon becomes too clumsy to carry so many baskets (potentially one for each egg). One person couldn’t possibly manage twelve baskets effectively just to […]
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Are You Biased? (Hint: Yes, You Are!)
There are several behavioral heuristics and biases that can lead to poor financial decisions. For brevity, we will focus on a few; mental accounting, the endowment effect, loss aversion and status quo bias. For each bias, we will provide a definition and then provide examples of how the biases can lead to poor financial decisions. Mental accounting is the way individuals code and evaluate transactions, investments and other financial outcomes. An example is when employees with access to company stock have 50 percent of company stock in their retirement plan and the remaining money split evenly between stock and bond funds. These employees make the mistake of owning too much company stock (not enough diversification). Mental accounting puts company stock into its own “asset class.” The endowment effect, developed by Richard Thaler is the tendency to place more value on an object once an individual owns it; especially if it’s […]
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Advice to the Masses May Not Apply to Individuals
Last week on my ride home from a meeting I had the opportunity to tune into a nationally syndicated talk show regarding personal finance. The host is very popular among listeners and has written several best sellers. Many churches and schools follow the financial program designed to educate individuals on how to set a budget, get out of debt and save for retirement. Generally, the advice given is applicable to many individuals. Sometimes it’s not. A listener called into the show and explained that she had approximately $100,000 in an annuity in an IRA. The annuity paid an interest rate of 2% and had a current surrender charge of 4% – just over $4,000. The caller was asking the host whether or not she should surrender the annuity and roll it over to a non-annuity IRA invested in mutual funds. In a matter of seconds the recommendation was to surrender […]
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Personality Influences Financial Decisions
The recent volatility in the stock market has everyone a bit uneasy – even folks who have worked with a trusted financial adviser for years. But if you’ve never worked with an adviser before, you may be surprised to find that one of the first things he or she will do is ask you to fill out a risk analysis questionnaire. This questionnaire is designed to help you understand your financial decisions and the process of making decisions. It’s all tied to your personality, your own unique world-view. Why is risk analysis important before you make decisions with your money? Risk tolerance is an important part of investing – that should be understood at the outset. But the real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, how outside forces […]
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A New-Hire Checklist
Starting a new job can be very overwhelming. Often, new-hires go through a barrage of training, information overload and multiple booklets covering procedures, processes and application. Somewhere in that mix is the benefit package. Here is where the new employee can sign up for important health insurance coverage, retirement savings plans, and other benefits such as life insurance and disability. In the stress and whirlwind of the on-boarding process, sometimes benefits can get pushed to the side, and then after time, forgotten about. Here’s a checklist of what a new employee can do to make sure they sign up for these precious benefits and some information on how to move forward. Select the appropriate health coverage. Some employers have one carrier that provides coverage with different options from that carrier. Options may include HMO, PPO or HSA plans. The premiums the employee pays will depend on the deductibles in the […]
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How to Interview Your (Potential) Financial Adviser
As individuals need help with their finances and investments they will likely turn to the help of a qualified professional. Their future financial adviser may come via referral from a trusted friend or family member, or through an extensive Internet search. The following is a list of questions (and answers to look for) that individuals can ask their potential adviser to see if he or she is likely to be a good fit and more importantly, act in the client’s best interest. Are you a fiduciary? If yes, move to question 2. If no, thank them for their time and move to the next adviser on your list. Advisers that are fiduciaries are legally bound to put their clients’ best interests first. In other words, regardless of compensation, products offered or company affiliation, fiduciary advisers must act in the best interest of their clients. Everything else is secondary. How do […]
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How to Prioritize Your Time and Money
Sometime ago I wrote about needs versus wants. Along those lines I’d like to talk about priorities. It’s pretty common that we heard our friends or family say “I don’t have the time” or “I don’t have the money” (of course, we’ve never said these words). And periodically, I’ll hear these words uttered by my students (no time to study), generally after a not-so-good exam score. But what these folks are really saying is “It’s not a priority right now.” For many of us, it’s not about having more time or more money. It’s really about prioritizing the time and money we have. When we reprioritize what’s important to us, it’s amazing the things we can accomplish and the money we can save. Here are some tips to prioritize your time and money. In fact, for many folks time is money. Prioritize your savings. This can be done by paying […]
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Correlation, Risk and Diversification
Many investors understand the importance of asset allocation and diversification. They choose among various assets to invest in such as stocks, bonds, real estate and commodities. Without getting too technical, the reason why investors choose different asset allocation is due to their correlation (often signified by the Greek letter rho ρ) to the overall stock market. Assets with a correlation of +1 (perfect positive), move identically to each other. That is, when one asset moves in a particular direction, the other moves in the exact same fashion. Assets with a correlation of -1 (perfect negative), move exactly opposite of each other. That is, when one asset zigs, the other asset zags. Generally, the benefits of diversification begin anytime correlation is less than +1. For example, a portfolio with two securities with a correlation of .89 will move similar to each other, but not exactly the same. Thus there is a […]
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Have You Saved Enough for Retirement?
One of the reasons that retirement funding is a mystery to most folks is the uncertainty that comes with trying to determine how much is enough – enough savings set aside so that we don’t run out of money during retirement. The answer to this question begins with an understanding of your day-to-day living expenses, and how those expenses may change in retirement. This is a simple enough process, although it does take some effort. The difficult part is to determine what the funding requirement is in order to provide the income you’ll need to cover your living expenses – for as much as forty years or more! There is a rule of thumb (more on this later) that you can use to come up with a rough guess – but without using sophisticated computer modeling and analysis, your level of assuredness is limited. According to a recent survey by […]
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How to Invest
Occasionally, someone will ask me a question in the following different ways: “Did you see what the market did today?” or “How did the market do today?” To be honest, I’d love to use the line that Charley Ellis has used from the movie Gone with the Wind; “Frankly my dear, I don’t give a damn.” Professionally, my response is more in line with “I couldn’t tell you.” or “I don’t follow the market really.” The response is not meant to be rude or abrupt, but more to simply say that for most investors (myself included); they shouldn’t be worried about what the market is doing on a day to day basis. This is especially true for the Dow Jones Industrial Average. A price weighted index of 30 stocks is hardly representative of the market, yet it’s what most people think and refer to as “the market” when they ask […]
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The Second Most Important Factor to Investing Success
On these very pages not too long ago, I pointed out the most important factor to achieving investing success, which is consistent accumulation. The second most important factor? Asset allocation. Asset allocation is the process of dividing your investment “pile” into various different types of investments in an effort to maximize your exposure to the unique benefits of each type of asset class – while at the same time utilizing the risk as efficiently as possible. When it comes to asset allocation, there are two primary factors which help to determine how you might allocate your investment assets: risk tolerance and time horizon. Risk tolerance deals with whether or not you can sleep at night knowing that your investment could fall (or rise!) by 15%, for example. If you’re a person who feels compelled to monitor your investments every day and can’t stand it when you see a loss, you […]
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Perspective
A number of years ago while in my garden I was tending to my raspberry patch. It had been a long winter and I feared that many had not survived the cold Wisconsin winter. In the spring, the vigorous plants shot through the soil and in just a few months I had a glorious stand of robust plants. To my chagrin, the tall, leafy canes were lacking berries. I didn’t even see any flowers blossoming. For two weeks I would go out and check the patch to see if there were any signs of blossoms or berries and each time I went out, I can back in to the house disappointed. Had something happened? I began to question what the winter had done to them or if I had prevented their fruiting in any way. After all, this was a pretty easy variety to grow and ever-bearing nonetheless. Just as […]
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There is No Free Lunch (or Dinner)
A few days ago my mailbox was graced with the postcard you see at the top of this post. In case the print is too small it’s essentially an offering for a free dinner at a local restaurant while the dinner’s hosts plan to offer a seminar on achieving more retirement income. My initial reaction was to laugh at the card, and then my laughter changed to concern. How many individuals were sent this malarkey? Here are some of the “finer” bullet points from the list of discussion topics: Avoid the long delays and costs of probate Opportunities and solutions to help protect your assets for the future Avoid significant tax losses when passing on your assets It became apparent that this free dinner seminar was nothing more than a sales pitch for a company to sell life insurance and annuities to unsuspecting individuals. A search on the Internet provided […]
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Why Financial Planning?
I am always advocating creating a plan for your financial life – but why plan? Maybe we can identify some factors which may motivate you to develop plans for your life, incorporating financial factors with the rest of your life. Following are some of the more important factors that you may want to think about: It is a way to prepare for the inevitable future. This fits in with one definition of planning, which is “intelligent cooperation with the inevitable.” Planning identifies problems and points the way to solutions. Taking a systematic, thorough look at the situation and thinking about the future possibilities can bring these things to light. It helps us to do first things first. In other words, it provides a rationale for assigning priorities. Should we save more for retirement, or for college? Should we pay off our home mortgage? Planning helps to coordinate your various goals […]
Sterling Raskie, MSFS, CFP®, ChFC®
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