Monthly Archives: July 2014

If you’re rich, will your kids stay rich?

Different countries have different ways of expressing the same beliefs about wealth: “Shirtsleeves to shirtsleeves in three generations” is the one I most often hear. In Japan, it’s “Rice paddies to rice paddies in three generations”. In China, “Wealth never survives three generations.” In fact, for 70% of all wealthy families, the money has been spent, or otherwise lost before the end of the second generation.

People who have enough money to consider themselves, ‘rich” – those with at least $10 million — worry about their kids squandering the money they’re given or inherited.

According to a study by U.S. Trust, 75% of families worth over $5 million made it on their own. In other words, they built it, mostly by starting a successful business.

Unfortunately, that doesn’t mean that their kids are equally smart or hard working. And it doesn’t mean that their parents are wise investors.

That means there’s a market out there for advisors who can teach the kids (and often the parents) the ins and outs of investing. This provides these families with the means to keep the wealth they have earned and keep it for the next generation, and the next after that.

But just as important is passing on the social, intellectual and spiritual capital that created the wealth in the first place. Too often the children of wealthy families fail to appreciate the work and sacrifice it took to create that wealth, and assume it will always be there for them.

At Korving & Company often serve several generations of the same family. If you have concerns about your children’s ability to manage money, call us for a consultation.

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Retirement Issues for Small Business Owners

Small business owners facing retirement have issues that corporate employees don’t have. Most can’t simply announce their decision to retire and walk away.

Most small business people have a large part of their net worth tied up in the business. They often assume that they will be able to realize the value of their business to fund their retirement.

There are several problems with this. The first problem is that the value of a small business is very dependent on the economy. For example, a business tied to the construction industry that may have been worth $10 million at the peak of the cycle may be worth only a fraction of that once the economy turned down. The second problem is that the business owner may have an exaggerated idea of the value of his business and its worth when he’s no longer around.

Small businesses often depend on the owner to generate business. In business it’s often personal relationships that generate new and repeat customers. If the owner retires and leaves, the business frequently dies. For that reason, many buyers of small businesses require the previous owner to continue working for a number of years during a transition.

This means is that succession planning is vital to the financial well-being of the small business owner.

Of course, the ideal answer for small business owners is to have their retirement assets outside of their business. Business valuations, economic cycles, and succession planning remain important to the small business owner. But having a fully funded retirement portfolio makes retirement for the small business owner more certain and a lot less stressful.

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Teach your kids about money

Kids learn about money from their parents.

They observe what parents do and what they say about money and pick it up by osmosis.  It’s the same way they learn to talk, and end up talking in the same dialect as their parents.

An article in the Wall Street Journal by Beth Kobliner tells us that

Three out of four American teens lack the skills to decipher a pay stub. That’s just one of the sobering findings from the first international test of teenagers’ financial literacy. American 15-year-olds posted barely average scores, with the U.S. ranking in the middle of the 18 countries whose students participated.

That tells us a lot about the financial skills of the average parent.

What’s to be done?

As a parent of young children, plan to getting better educated about saving, credit cards, debt, investing and all the things that make you financially literate.  If you don’t want to read books on the subject, get help from people whose job it is to educate you, like RIAs who are Certified Financial Planners.

At the very least, you can visit the website: Money as you grow, “20 things kids need to know to live financially smart lives.”

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Dow 17,000 is just another number.

Market pundits and the financial press always make a big deal out of markets reaching new highs … and a really big deal when it’s a round number. So for those who think that Dow 17,000 is a big deal, here’s a little history lesson about the Dow and other milestones that were a “Big Deal.”

November 23, 1954: The Dow Jones Industrial Average closes at 382.74.  The first time it closed above the peak it reached just before the 1929 crash. That’s a span of 25 years.

In the interim, the world saw the Great Depression and World War II.

November 14, 1972: The Dow Jones Industrial Average closes above 1,000 (1,003.16) for the first time.  It took 10 years before it broke through this level again.

December 9, 1974: Dow Jones Industrial Average index hits 570.01.

November 3, 1982: The Dow Jones Industrial Average closes at 1,065.49.

May 20, 1985: Dow Jones industrial average closes above 1300 for first time.

December 11, 1985: Dow Jones industrial average closes above 1500 for first time.

January 8, 1987: Dow Jones industrial average closes above 2000 for first time.

October 19, 1987: “Black Monday” Dow Jones Industrial Average falls 22.6%, the largest one-day drop in recorded stock market history.

January 29, 1989: Dow Jones Industrial Average regains all of the 508-point loss since October 1987.

April 17, 1991: Dow Jones Industrial Average closes above 3,000 for first time.

February 1995: Dow tops 4,000

November 1995: Dow tops 5,000

October 1996: Dow tops 6,000

February 1997: Dow tops 7,000

July 1997: Dow tops 8000

March 1999: Dow tops 10,000

January 2006: Dow tops 11,000

October 2006: Dow tops 12,000

April 2007: Dow tops 13,000

October 2007: Dow tops 14,000

2008: Beginning of the “Great Recession”

March 2009: Dow closes below 7,000

October 2009: Dow tops 10,000

July 2014: Dow tops 17,000

We need to avoid “irrational exuberance” as well as the belief that every milestone marks the top of the market. That is why careful, intelligent portfolio construction is so very important. No one knows what the future holds. We can be fairly confident that new highs will be reached. We just don’t know when and what route we will take to get there.

The issue for most people is not what the market does, but what their portfolio does and how it supports their lifestyle. For guidance, contact us.

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Warren Buffett and You.

An interesting, and instructive, article in Investment Advisor magazine made some great points about the Buffett legend.  Like most legends, it’s part truth and part myth.  In Buffett’s case there is more myth than truth.

Don’t get me wrong, Buffett is one of the world’s richest men, and a famous investor.  But it’s not a rags-to-riches story.  Son of a Congressman, young Warren had an elite education.  He bought a farm while in high school, not something you can do with the income from a paper route.

The legend is that he’s just a folksy stock picker with a buy-and-hold strategy.  The truth is that he made his first millions as a hedge fund manager, raking off 25% of the profits over a 6% hurdle rate.  His most famous investments came from bailing out firms in distress like GE and GEICO when they were in financial trouble.  Buffett got sweetheart deals from them because he had them by the throat and could lend them billions of dollars when they needed it fast.

That’s the edge that Buffett has that none of my other readers have. (Hi Warren)

One observer of Buffett wrote:

By oversimplifying this glorified investor named Buffett the general public gets the false perception that portfolio management is so easy a caveman can do it. And so we see commercials with babies trading from their cribs and middle aged men trading an account in their free time.

If you’re not Warren Buffett, what should your objective be with your investments?  Think about your goals.  See if they are reasonable.  Determine what it will take to get you there.  If you need help with this, get the advice of a professional.  If you are fortunate enough to have already reached your financial goals, decide what it takes to make sure you don’t lose it.

And then, unless you are determined to make a career out of investment management, hire a competent, credentialed, experienced, fee-only Registered Investment Advisor to manage your portfolio for you.  In other words, call Korving & Company – today – and make an appointment.

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Don’t make these common mistakes when planning your retirement.

Planning to retire? Have all your ducks in a row? Know where your retirement income’s going to come from? Great! But don’t make some basic mistakes or you may find yourself working longer or living on a reduced income.

Retirement income is like a three legged stool. Take one of the legs away and you fall over.

The first leg of the stool is Social Security. Depending on your income goals, do it right and you can cover part of your retirement income from this source. Do it wrong and you can leave lots of money on the table.

The second leg is a pension. Many people have guaranteed pensions provided by their employer.  But these are gradually disappearing, replaced by 401(k) and similar plans known as “defined contribution” plans. If you don’t have a pension but want a second guaranteed lifetime income you can look into annuities that pay you a fixed income for life.

The third leg of the stool is your investment portfolio. This is where most people make mistakes and it can have a big impact in your retirement.

Mistake number one is leaving “orphan” 401(k) plans behind as you change jobs. These plans often represent a large part of a typical retiree’s investment assets. Our advice for people who move from one company to another is to roll their 401 (k) assets into an IRA. This gives you much more flexibility and many more investment choices, often at a lower cost than the ones you have in the typical 401(k).

Mistake number two is trying to time the market. Many people are tempted to jump in and out of the market based on nothing but TV talking heads, rumors, or their guess about what the market is going to do in the near future. Timing the market is almost always counter-productive. Instead, create a well balanced portfolio that can weather market volatility and stick with it.

Mistake number three is “set it and forget it.” The biggest factor influencing portfolio returns is asset allocation. And the one thing you can be sure of is that over time your asset allocation will change. You need to rebalance your portfolio to insure that your portfolio does not becoming more aggressive than you realize. If it does, you could find yourself facing a major loss just as you’re ready to retire. Rebalancing lets you “buy low and sell high,” something that everyone wants to do.

Mistake number four is to assume that the planning process ends with your retirement. The typical retiree will live another 25 year after reaching retirement age. To maintain you purchasing power your money continues to have to work hard for you. Otherwise inflation and medical expenses are going to deplete your portfolio and reduce your standard of living. Retirement plans should assume that you will live to at least 90, perhaps to 100.

Retirement planning is complicated and is best done with the help of an expert. Check out our website and feel free to give us a call. We wrote the book on retirement and estate planning.

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Market Myth #2: It’s all about beating the market.

For many amateur investors the object is to beat the market.  They are abetted in this belief by the many magazines and newsletters that make the market the benchmark of what a successful investor should emulate.  People spend hours scouring the media looking for stock tips and investing ideas as if investing was a sport, like horse race, where the object is to beat the others to the finish line.

The fact is that “beating the market” does not address any individual’s actual financial goals.  It’s a meaningless statistic.  And it’s dangerous.

The fact is that most professional investors don’t beat the market on a consistent basis.  Even index funds, designed to replicate the market, don’t actually beat the market.  At best they provide market rates of return minus a fee.  Attempting to beat the market exposes the investor to more risk than is prudent.

Your portfolio should be built around your needs and consistent with your risk tolerance.

What does this mean?  Your portfolio should provide a return that’s keeping you ahead of the cost of living, that allows you to retire in comfort, and is conservative enough that you will not be scared out of the market during the inevitable corrections.

Want to create a portfolio that’s right for you?  Contact us.

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Market myth #1: the stock market can make you rich.

This is one of a series of posts about common market myths that can be dangerous to your wealth.

The market is rarely the place where fortunes are made.  Real people get rich by creating and running great companies.  Bill Gates became the richest man by building and running Microsoft.  Steve Jobs the same way.  The Walton Family, ditto.

In the less rarefied world of multi-millionaires, millionaires and semi-millionaires the same thing is true.  People get rich (or well-to-do) by starting a business, studying and becoming a professional or just working for a living and saving part of what they earn.

This is not to disparage the market as a  tool for protecting  wealth, maintaining purchasing power, living well in retirement and getting a fair rate of return on your money.  But the idea that you can get rich by trading stocks is a myth that can actually destroy your financial well-being.

One of the best ways of avoiding the temptation to use the market as a “casino,” a place where you can “win the lottery” is to turn to a professional investment advisor.  Someone who knows what’s possible and what’s not.  Someone who is in the business of getting you a fair rate of return on your money while minimizing the risk that you will lose it.  An independent, fee only RIA is someone who will not try to sell you one the latest investment fad that the  wire-houses are selling, but who will act in your best interest, because that’s in his best interest.

Have a question about the markets?  Ask us.

 

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Retirement Insecurity and What to do about it.

Would you care to guess what percentage of men age 51 years or older, making over $75,000 per year, who feel very confident about maintaining their current lifestyle in retirement?

According to the Journal of Financial Planning (July 2014) the number is less than half:

43% to be exact.

Women of the same age and the same income are even less secure:

Only 32% feel very confident that they can maintain their lifestyle in retirement.

If you are in the majority who are unsure about being able to retire and not cut back, isn’t it time you got a financial physical? Check out our website.  Give us a call. It won’t cost you anything. We won’t try to sell you anything (we hate that when we’re on the receiving end of a sales pitch).

After looking at these statistics, it may explain why we have such a large number of women clients as well as retirees. Retirement should be a time to enjoy life, to do the things you never had the time to do before. It’s not the time to worry about money.

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What to do when couples disagree on investing

It’s well known in the investment business that women are more risk averse than men. There are, of course, exceptions and I should qualify that by saying that’s true of “most” women and men.

In most cases this does not cause problems when couples invest. That’s because there is usually a division of labor with one spouse making most of the investment decisions. However, when spouses collaborate on investing, a significant difference of opinion can cause a lot of stress in a marriage. Differences in money management styles between two partners can ruin a marriage.

That’s the time for the couple to meet with a trusted financial advisor who can provide unbiased advice and professional expertise. Getting an intermediary involved in what could be a serious dispute usually helps. This often allows a couple to come to an understanding that both can agree works for them.

If you and your partner have disagreements about money and investing, get in touch with us.

And don’t forget to read the first three chapters of BEFORE I GO.  It’s free.

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