Monthly Archives: July 2013

Don’t confuse a good story with the truth

A lot of business pundits make sensational predictions.  When they don’t pan out, they still get invited back to make more predictions because accuracy isn’t their objective; grabbing your attention is.  Whether it’s a newsletter, an article in a paper or magazine or the financial news show, the object is to get your attention and to sell you something.  We love a good story and the chances are some portion of the audience will buy what’s being sold.

Keep this in mind: we quite often don’t even know the past.  How much harder is it to accurately predict the future?  Don’t be fooled by a good story even if reinforces our own biases.  Thanks to modern technology we are constantly being bombarded to sales pitches to all kinds.   Scepticism is more important than ever in an age of omnipresent media.





One’s age is like a treasure chest of realities experienced.

“What reasons has he to envy a young person? For the possibilities that young person has, the future that is in store for him? ‘No thank you.’ He will think ‘instead of possibilities, I have realities in my past—not only the reality of work done and love loved but of suffering suffered. These are the things of which I am most proud—though these are things that cannot inspire envy.”   —Viktor Frankl, The Doctor and the Soul

We are a culture that worships youth.  An article in Financial Advisor magazine by Mitch Anthony says this:

One’s age, as Frankl so poignantly stated, is like a treasure chest of realities experienced, family and friends loved, work that has brought value and, yes, times of suffering that have shaped us. As we age, we know who we are, we know where we’ve been, and we know what we can do. Wisdom and experience are difficult to quantify, but this I know for sure––these values have worth in the marketplace. Age, rather than speaking of cultural insignificance, should speak of elevated significance. Rather than speaking of the exhaustion of personal resources, age should speak of the collection and multiplication of such. We don’t have to become less as we age; we can compound in our later years. Just like the magical effect of compounding on our wealth in the later years of saving, the wealth of knowledge and experience compounds in the third season of life.

One other advantage of age is that if you have saved money over your lifetime you now have the benefit of the assets you have accumulated.  That, and the wisdom and experiences of a lifetime makes you possibly more interesting and with more freedom to do things.

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The Solution for Generation Y’s problems is Us

A recent article in a financial magazine made a clear distinction between the Baby Boom generation and the 20-somethings today.

Boomers had it good, reaping “the rewards of the chemical revolution, the golden age of manufacturing, the computer revolution, the information age, energy abundance and globalization” — not to mention the debt-fueled gains that “turned the U.S. into today’s debtor nation” — so they could afford to wait until they were in their forties to start saving, the website says.

Gen Yers, meanwhile, have to contend with “a nearly bankrupt nation, rising global competition from emerging countries, crumbling infrastructure and insolvent retirement and welfare programs,” according to MarketWatch.

Worse, Gen Y, its vanguard just entering its peak earnings phase, takes a jaundiced view of capital markets that have been rattled since the late 1990s by meltdowns, recessions, Ponzi schemes, scandals and volatility, the article says.

The answer?  Get started early rather than wait for middle age to begin to invest.  The most valuable asset in a person’s life is time and the power of compounding.  And to go along with this there’s one more thing:

MarketWatch suggests they “find a good and trustworthy adviser.” The website adds: “While advisers do charge fees that can undermine returns, in this case it’s still a net positive over the high cash many Gen Y’ers are holding.”

We could not agree more.  Even if the only place you can save is in your employer’s 401(k) plan, we can help you create an investment portfolio that will help you invest like a professional.

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Learning From Gandolfini’s Estate Plan ‘Disaster’

An article in Private Wealth calls James Gandolfini’s estate plan a disaster.

Tony Soprano may have been an expert at hiding his money from the feds, but actor James Gandolfini, the recently deceased actor who portrayed the fictional New Jersey mob boss on TV, apparently was not.

Moreover, advisors say that wealthy families can take some lessons from the mistakes the award-winning actor made in mapping out his estate plan.

Federal and state tax collectors will take more than $30 million of Gandolfini’s estimated $70 million estate, according to published reports. Gandolfini, who starred in the acclaimed HBO series The Sopranos from 1999 to 2007, died of a heart attack while vacationing in Rome last month at age 51. Estate attorney William Zabel, who reviewed Gandolfini’s will for the New York Daily News, called it “a disaster.”

People rarely plan well for their death.  That’s one of the reasons I wrote BEFORE I GO, to help people plan for the one thing that we can guarantee will happen to us all. 

The reason is psychological.  Planning for death forces us to realize that we are mortal and the end comes for all of us.  In addition, Gandolfini died in the prime of his life, illustrating perfectly that the assumption that we’re going to live to a ripe old age is not well founded.  We can be struck down by a heart attack, a bus, or some fatal disease.  That’s why once we have accumulated a modicum of wealth, we need to meet with a financial planner, an estate planner and a tax expert.  We should also be prepared to involve insurance professionals. 

If 29-year-old Mark Zuckerberg doesn’t have a platoon of professionals looking into these issues, he’s making a big mistake.  His wealth just increased by $3.8 billion … today.



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Roth 401(k)s catch on with younger investors

From the current issue of Financial Planning magazine:

As Roth 401(k) plans continue to spread, young workers increasingly are voting to go Roth. In the first quarter of 2013, 10% of all participants in Wells Fargo-administered defined contribution plans contributed to a Roth 401(k), when available, up from 8.9% a year earlier. Leading the way were employees under age 30: 16.9% chose the Roth route, a jump from 15.2% participation in last year’s first quarter. (Only 4% of participants in their 60s chose the Roth version this year.)

The rate at which government debt is rising and the belief that future tax rates may be higher than they are today, saving in a Roth plan which allows people to withdraw money tax-free is becoming increasingly attractive.

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Behavioral Finance and Loss Aversion

it’s often said that the two primary emotions exhibited by investors is greed and fear.  Those emotions are exhibited at various times and one of them is when portfolios need to be rebalanced.  After a great year in the market some investors are reluctant to sell securities that have appreciated a lot.  It is common to believe that stocks that have gone up a lot will continue to go up.   This is known as “chasing the hot hand.”

But this characteristic is also exhibited after a bad year in the market.  After a steep decline in stocks the typical investor is dead set against re-balancing to bring the stock portion of the portfolio back to the asset allocation guidelines.  This is an example of “loss aversion” and causes people to be overly fearful of losses, imagining that he will lose all his money.  This is why using a portfolio manager who has learned how to overcome his emotions and stick to a strategy is so important.

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Why 401(k) Fees are Not the Primary Issue

A pair of university professors have once again tried to prove that the reason people get poor results in their 401(k) plans is because of high fees.  This is a perennial subject and will generate a lot of discussion without helping anyone.

The primary factors that determine how much money there is in a 401(k) plan at retirement are

  • How much money employees put into the plan
  • Whether the company provides a matching contribution
  • How well the money is invested

The fact is that people put too little into these plans, many employers do not put in a company match, and employees don’t know how to create an effective portfolio from the choices that are available.

Not knowing how best to invest the 401(k) is not the employees’ fault.  They are not investment professionals.  Information about the investment choices is limited.  Most people don’t have the time or inclination to do the research.  That is why we are beginning an initiative to help people who want to make intelligent choices in their 401(k) plan do a better job.

The focus on fees reminds us of the old story about a man who lost his car keys at night and kept searching for them under a street light because that’s where the light was better.  Fees are easy to measure while investor behavior is harder to quantify.  That’s why the fee focus is so misplaced.

Of course, all things being equal, low-cost funds are better than the same fund that charge higher fees.  In our business, we try to invest in the lowest cost class of funds that we wish to use.  But the focus on expenses can actually backfire.  For example, most foreign funds have higher fees than domestic funds.  Yet a properly diversified portfolio should be exposed to foreign markets.  If the investor is persuaded to invest in the funds with the lowest expenses he may forgo investing in the markets  that may make him the most money.

Free advice is usually worth what you pay for it.  In many cases it can be misleading.


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Behavioral Finance Lingo

Behavioral finance is the recognition that people often act irrationally, and this can have a deleterious effect on people’s finances.  Here are a few of the terms that are applied to mental perspectives that can lead us into trouble.

  • Someone says that it was obvious back in 2007 that financial stocks would crash as homes became virtual ATMs.  The term for this bias is known as HINDSIGHT.  Using hindsight, facts often appear obvious.
  • Someone is nostalgic for the days of earning 12% interest on CDs back in 1981, forgetting about high taxes and inflation in that period.  The concept that applies is known as FRAMING.  The individual should be framing the situation in inflation-adjusted returns because he had large losses in spending power back then, especially after taxes.

We will have more on this subject in the future.



Second Careers

As people reach the traditional retirement age many decide that they don’t want to spend the rest of their lives as retirees.  Instead they opt to begin a second career.

One of the advantages of changing careers later in life is that many of these people are financially  secure, making the transition to a new career much less hazardous. According to an article by Donna Mitchell in Financial Planning magazine,  career changes are common for older Americans.  According to statistics from the AARP,  they found that more than 80% of the 51 – 55 year-olds working full-time in 1992 had left their employers by 1996.  Half of the workers had taken positions with new employers by 2006.  Almost 66% of those older workers who changed jobs had switched occupations.

These changes are done for various reasons: personal fulfillment, a rebound after a layoff or to start their own business.  If you plan to make the transition make sure that you know what you are doing.

  • Make a financial plan with the assistance of an RIA.
  • Make sure you have the financial resources to begin the new career.
  • Make sure that if the new career does not work out you won’t destroy your retirement plans.
  • Make sure your new career is something you really want to pursue.
  • Many older people find that they have the expertise to be hired as a consultant, a low-risk, low investment way of beginning a second career.  In view of the financial commitment that companies are forced to make when they hire a full-time employee, consulting is becoming more attractive for many.
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Gold and Silver

Until the precious metals began going down, metal mania had gripped some investors.  Not only could you buy silver and gold bars, but you could buy mutual funds and ETFs that allowed you to own gold second-hand.  The problem with investing commodities is that they don’t produce any income and, in fact, cost money to store.

Both gold and silver have had a history of dizzying volatility.  It seems to go in spurts.  According to an article by Ann Marsh  in the December 2011 issue of Financial Planning magazine, adjusted for inflation gold reached a high of $2305 during the last bubble with ended in january 1980.

The rationale behind investing in gold (and silver to a lesser extent) is that it is a hedge against inflation.  Another driver is the rise of the Indian and Chinese middle class, both of which are buying more gold jewelry; and by industrial demand, for silver in particular.

There is nothing wrong with owning gold, silver, or the ETFs that are a substitute for buying the actual metal.  But keep in mind that these a speculative investments with a long history of wild swoops.  Don’t over-extend in these kinds of securities.

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