Monthly Archives: October 2015

Why People are Scared to Get Professional Investment Advice

Nearly three quarters (71 %) of Americans say some aspect of talking to a financial advisor scares them according to a survey conducted by Harris Poll.

The reasons varied but cost was one of the major factors.

  • 49% said that cost was the top concern. They were scared that talking to a financial advisor will “end up costing me a lot of money,” according to the poll.
  • 47% said they were hesitant to trust a financial advisor with their personal financial information.
  • 41% said they were concerned that a financial advisor would not be able to help them with their finances.
  • Millennials were significantly more concerned about talking to investment professionals than people 45 or older.
  • Nearly four in ten people (38%) avoided taking to a professional advisor because they feared that advisors would give them bad news about their finances.

Here’s the reality. A Registered Investment Advisor (RIA) can actually save people money by helping them make intelligent investment decisions. If that person is also a CFP®, they should be able to provide planning services that span the spectrum from advice on investing, retirement, and insurance, to tax and estate planning. Most advisors simply charge you based on the amount of assets that they manage, and provide all the other services as part of that fee!

If an RIA is going to provide investment guidance, they need to have a complete picture of the client’s financial situation. Just as a physician gives his patients a physical, an investment professional provides his clients with periodic financial physicals.

Finally, professional advisors don’t just dole out the bad news that people fear. If a client comes to us after having made some bad financial decisions, we often help them create a roadmap to help get back on track and headed towards achieving their goal.  Most advisors will provide a free introductory consultation to see if they can help.

VISIT OUR WEBSITE AND GET A FREE LOOK AT OUR BOOK ON ESTATE PLANNING.

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The Folly of Trying to Time the Market (Illustrated)

The problems of market timing came vividly to our attention recently. We were shown the portfolio of someone that was actively involved with their investments and reads a lot about investing strategies. This person managed their retirement portfolio quite actively, often making substantial changes to their account. When the stock market began to drop in August, they watched the value of their account decline. (See chart below)

spx

This person had about 80% of their account in stock funds up until Friday, August 21st. On that day the decline got to him and he sold all the stock funds. It turns out that this person sold out of stocks within two trading days of the market bottom. By the time they came to see us, their account was mostly in bonds.

Referring again to the chart, notice that as of October 28th the market actually had a positive return year to date. By trying to time the market, this investor locked in a loss and was wondering what to do now.

This investor made two mistakes. First, they thought they could time that market and get out when things were bad and buy back in when things were better. Timing the market is a term that is used when people buy or sell based on market gyrations, often trying to get in when they think it’s at a low point and get out when they think it’s at a high point. Some people get lucky and may do it once or twice but it’s simply not possible to do this consistently. The second mistake was that they had created portfolios that were out of line with their personal risk tolerance – they started out much too heavily in stocks and then swung too far in a conservative direction when the stock market went down and is now too heavily invested in bonds.

Most people will look at the value of their investments only occasionally. Some will do it daily; it is like a game to them. It’s also counter-productive. The secret to long-term investing success is to create a portfolio that is properly aligned with your personal risk tolerance and financial goals, so that you don’t have to get concerned with every market move. .

Not every stock market recovery is as V-shaped as the one illustrated in this chart. However, it’s a great illustration of the opportunities that are missed by trying to guess short term market moves. We believe in prudent investing for the long term and design portfolios that reflect the risk tolerance of our clients. If you are interested in a free consultation of your portfolio, contact us.

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Avoid Self-Destructive Investor Behavior

Charles Munger is Vice Chairman of Berkshire Hathaway.  Munger and Warren Buffett are viewed by many as the best investment team in the country.  He provided some excellent investment insight:

“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.  You need to keep raw emotions under control.”

Dalbar, Inc. has studied the returns of the average stock fund investor and compared it to the average stock fund.  Over the last 20 years investors sacrificed nearly half of their potential returns by making elementary mistakes such as:

  • Trying to time the market – thinking you can get out before a market decline and get back in when the market is down.  It never seems to work.
  • Chasing hot investments – from chasing internet stocks in the 1990s to real estate ten years later often leads to financial disaster.
  • Abandoning investment plans – if you have a strategy, and it’s sound, stick with it for the long term.
  • Avoiding out-of-favor areas – for some reason, people want bargains in the store but avoid them in the market.  Don’t be part of the herd.

Few amateur investors have the training or discipline that allows them to avoid these costly mistakes.  One of the most important services that a trusted investment manager can provide is to remain disciplined, stick with the plan, remember the goal and focus on the long term.

For more information about professional investment management visit Korving & Co.

Korving & Co. is a fee-only Registered Investment Advisor (RIA) offering unbiased investment advice.

Arie and Stephen Korving are CERTIFIED FINANCIAL PLANNER™ professionals.

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Want a Short Term Market Forecast?

John Kenneth Galbraith is quoted as saying that “The function of economic forecasting is to make astrology look respectable.”

One of the most common questions that we are asked at social functions when people find out that we are in the investment business is “where’s the market headed from here?” It’s an important question, but in the short-term the answer is unknowable.

Barron’s Magazine created a graph that tracked the average of Wall Street’s top strategist’s prediction for the past 15 years versus the actual return for the market. The strategists got it wrong every year. That’s why we really don’t react to the talking heads on the cable news shows and the forecasts in newspapers and magazines. We are not paid to make short-term predictions, we are paid to get our clients a fair return on their money and to avoid major losses that could lead to financial ruin.

Investment decisions are made based on factors that we know. Things such as our clients’ time horizon; the amount of money they have to invest, their tolerance for risk, and their income sources. Then we make sure we are properly diversified. Knowing what you don’t know is as important as knowing what you do know. Guessing is not a strategy and we have no interest in making astrology look respectable.

If you want more information on Korving & Company click HERE.  To read the first three chapters of our book BEFORE I GO click HERE.

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It’s National Estate Planning Awareness Week

We are reminded by an attorney friend of ours that October 19-25 is National Estate Planning Awareness Week. We are told that most Americans don’t have an estate plan. That means that there will be both confusion and probably squabbling when one of these people dies. Even worse, the whole thing can end up in court.

Contrary to popular belief, estate planning is not just for the wealthy. It’s for everyone who has someone they care about. Over the decades we have frequently helped people cope with the death of a spouse, a parent or just a good friend. Even with a up-to-date will or trust there is inevitably a great many loose ends that need attention.

Even those who have the proper documents in place often overlook the fact that they usually don’t get into the kind of detail that the people who are left behind really need. That’s why we have published a set of books specifically designed to cover the subject of estate planning and more. You can get a copy of BEFORE I GO and BEFORE I GO WORKBOOK from Korving & Company or order it from Amazon.com.

To read the first three chapters free, go HERE. And if your estate plan is non-existent or out of date, this is a wake-up call.

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Would You Make a 0% Interest Loan?

Did you know that the U.S. Treasury has sold $1 trillion (yes, trillion with a T) dollars worth of Treasury bills that pay no interest? Why would anyone lend out his or her money without charging interest? One answer might be because the alternatives seem worse. In fact, for a brief moment in 2008 investors were willing to earn negative interest and actually pay for a U.S. Government guarantee to get back less than they put in!

To understand the alternatives you have to realize that the people who do this are not mom and pop investors. They are the huge players who round to the nearest million and deal in billions of dollars. They don’t have the option of putting their money under the mattress.

These people don’t deal in physical dollars, so when they raise cash it has to go somewhere else. Not doing something with their money is not an option. When both stocks and bonds are going down, the only relatively safe haven is the U.S. Treasury market, and the safest part of that market is short-term Treasury notes. When there is not a big enough supply of notes but you need to buy anyway, you accept a negative interest rate.

Of course, individual investors have been willing to leave their “safe” money in money market accounts paying virtually zero percent for several years now. That’s a rational decision since literally putting your money under your mattress or burying it in the back yard leaves you vulnerable to thieves and robbers. But it may make the smaller investor feel better that the “big boys” with their billions are sometimes worse off than the retail investor when it comes to finding a safe haven.

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Avoid These Common Retirement Account Rollover Mistakes

If you are one of the people who are uncertain of the basic financial steps to take when you retire, you are not alone. Author and public speaker Ed Slott recently recounted how little most people really know about what to do with their 401(k)s, IRAs and other retirement assets when it comes time to leave work.

Most people do not know what to do with their retirement plans (commonly referred to with obscure names like 401(k), 403(b), 457, and TSP) once they retire. Many people simply leave the plan with their former employer because they don’t know what else to do. But that could end up being a mistake. Others know they can roll their plan into a Rollover IRA, but are not aware that if they don’t do it exactly right, they could be faced with a big tax bill.

Handling IRAs is often fraught with danger. There is a big difference between a rollover and a direct transfer. Rollovers are distributions from a retirement plan. Sometimes they are paid directly to you via check. You then have 60 days to move the assets into a new IRA or you will be taxed. If the rollover is paid directly to you, it is customary to have 20% automatically withheld for taxes. Counter-intuitively, you have to replace the 20% withholding when you fund the new IRA or that amount will be considered a taxable distribution and you will owe tax on the amount withheld. You can only make one rollover per 12 month period. If you make more than one rollover per year, you will be taxed.

A direct transfer is one where your IRA assets are moved from one custodian to another without passing through your hands. Under current law you can make as many direct transfers per year without triggering a tax penalty and there is no withholding.

When you are retired and reach the age of 70 ½, you will encounter Required Minimum Distributions. If these are not handled correctly, they can trigger huge tax consequences. If an individual fails to take out the Required Minimum Distribution (RMD) from a retirement plan, there is a 50 percent penalty tax on the shortfall.

Even many people in the investment industry do not understand the rules well. Slott notes that many financial companies do not provide advice on these topics because they are so focused on accumulating assets that they do not train their advisors on “decumulation.” Decumulation is a term that applies to retirees once they begin to take money from their retirement plans to supplement their other income sources.

“Every time the IRA or 401(k) money is touched, it’s like an eggshell; you break it and it’s over…. You mess up with a rollover and you can lose an IRA.”

Retirement is a time when people want to relax and pursue their leisure activities. Unfortunately, the rules actually get even more complicated. Make sure that you take time to learn the rules, or find a professional that does, before you move money from a retirement account.

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Why roll your 401(k) over when you retire?

According to an article in 401(k) Specialist Magazine, 401(k) providers favor proprietary products. What does this mean to the typical worker? Here’s the bottom line:

“Mutual fund companies that are trustees of 401(k) plans must serve plan participants’ needs, but they also have an incentive to promote their own funds.
The analysis suggests that these trustees tend to favor their own funds, especially the poor-quality funds.”

The article goes on to say that these fund companies often make decisions that appear to have an adverse affect on employees’ retirement security.

The investment industry is, unfortunately, rife with conflicts of interest and bad apples. That is why a prudent investor should work with a trusted investment professional who is a fiduciary. A fiduciary has an obligation to place the client’s interests ahead of his own. As a rule of thumb, a fee-only, independent, Registered Investment Advisor, who does not work for one of the large investment firms that have to answer to public shareholders, and who has access to virtually all investment vehicles, has fewer conflicts.

As we mentioned in a recent article:

A fee-only RIA works for you. Stockbrokers, insurance agents, even mutual fund managers, work for the companies that pay them. They are legally required to work in the best interest of their employers, not their clients. Some of them do try to work in their clients’ best interests, but there can be large financial incentives to do otherwise. A fee-only RIA works only for you. We act in your best interest and use our expertise to allow you to take advantage of opportunities in good markets and weather the bad ones.

This gets back to the original question. Rolling your 401(k) into an IRA with someone who isn’t trying to get you to invest in “poor quality funds,” does not have a conflict of interest, and is legally obligated to put your interests ahead of his own is a good reason to roll your 401(k) into an IRA.

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A Client Asks: What’s the Benefit of Inflation?

One of our retired clients sent us a question recently.

“I can’t understand the FED condoning and promoting any inflation rate. To me inflation means that the value of money is simply depreciating at the inflation rate. Further, any investment paying less than the inflation rate is losing money. A quick review of CD rates and government bonds show it is a rare one that even approaches the promoted 2% rate. It seems to me to be a de-facto admission of wanting to screw conservative investors and forcing them into riskier investments… Where is there any benefit to the financial well-being of the ordinary citizens?”

I suspect that there are a lot of people who feel the same way. It’s a good question. Who wants ever rising prices?

Here’s how I addressed his question.

Let me answer your inflation question first. My personal opinion is that 0% inflation is ideal, and I suspect that you agree. However, lots of people see “modest” rates of inflation (say 2%) as healthy because is indicated a growing economy. Here’s a quote from an article you may want to read:

Rising prices reflect a growing economy. Prices typically rise for one of two reasons: Either there’s a sudden shortage of supply, or demand goes up. Supply shocks—like a disruption in the flow of oil from Libya—are usually bad news, because prices rise with no corresponding increase in economic activity. That’s like a tax that takes money out of people’s pockets without providing any benefit in return. But when prices rise because demand increases, that means consumers are spending more money, economic activity is picking up, and hiring is likely to increase.

A case can be made that in a dynamic economy you can never get perfect stability (e.g. perfectly stable prices) so it’s better for there to be more demand than supply – driving prices up – rather than less demand than supply – causing prices to fall (deflation). Of course we have to realize that “prices” here includes the price of labor as well as goods and services. That’s why people can command raises in a growing economy – because employers have to bid for a limited supply of labor. On the other hand wages are stagnant or even decline when there are more people than jobs.

But for retirees on a fixed income inflation is mostly a negative. Your pension is fixed. Social Security is indexed for inflation but those official inflation numbers don’t take food and fuel costs into consideration and those have been going up faster than the “official” rate. The stock market also benefits from modest inflation.

Which gets us to the Federal Reserve which has kept interest rates near zero for quite a while. It’s doing this to encourage business borrowing which is supposed to lead to economic expansion but the actual effect has been muted. That’s because other government policies have not been helpful to private enterprise. In effect you have seen the results of two government policies in conflict. It’s really a testimony to the resilience of private industry that the economy is doing as well as it is.

The effect on conservative investors (the ones who prefer CDs or government bonds to stocks) has been bad. It’s absolutely true that after inflation and taxes the saver is losing purchasing power in today’s interest rate environment. The FED is not doing this to hurt conservative investors but that’s been the effect. The artificially low rates will not last forever and the Fed has indicated they want to raise rates. They key question is when, and by how much.

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Are Retirees Focused on the Wrong Thing in Their Portfolios?

According to a recent study, a middle class couple aged 65 has a 43% chance that one of them will live to age 95. The challenge for this couple is to continue to enjoy their lifestyle and have enough money to live worry-free. Once you stop working you are dependent on income sources like pensions, annuities, social security payments and withdrawals from the savings you have accumulated over the years.

Most of these retirement income sources are fixed once we retire and are out of our control. It’s the retirement savings component that has people concerned. Most retirees don’t want to run out of money before they run out of time. For many they, themselves, are the income source that makes the difference between just getting by and enjoying life. Many retirees focus on the dividends and interest that their portfolios create. That may not be the best answer. Let’s examine the problems associated with this approach.

For the last five years the interest rate on high quality bonds (and CDs) has been close to zero. People who have chosen the “safety” of U.S. Treasury bonds or CDs have actually lost purchasing power after you take inflation and taxes into consideration. The same holds true for owners of tax-free municipal bonds. Those who bought bonds 10, 15, even 20 year ago when interest rates were higher have realized that bonds eventually come due. And when bonds mature, new bonds pay whatever the current interest rate is. That has meant a huge drop in income for many people who depend largely on interest payments.

Dividend payments are also subject to disruption. The financial crisis of 2008 was devastating for many investors. Those who owned bank stocks were particularly impacted. Bank stocks were a favorite for many income investors at that time because they produced lots of dividend income. Most banks slashed or eliminated their dividends, and some went out of business completely. Even companies that were not considered banks, like General Electric, were forced to cut their dividends. Dividends are nice income sources, especially in a low interest rate environment, but they are not guaranteed and you have to be careful about having too much of your portfolio concentrated in any one stock or industry.

The preferred method of planning for withdrawals from retirement savings is to take a “total return” approach. Total return refers to the growth in value of a portfolio from all sources, not just dividends and interest but also capital appreciation. In many cases, capital appreciation provides more return than either dividends or interest.

So how does one go about taking an income from a total return portfolio? Many advisors use 4% as a good starting point for withdrawals. That means for every $100,000 in your portfolio you withdraw $4,000 (4%) per year to live on while investing the rest. The goal is to invest the portfolio is such a way that over the long term, the growth offsets the withdrawals you are taking. It’s like a farmer harvesting a crop, leaving enough so that your portfolio has the chance to actually grow a little over time.

Of course, as we age other factors enter into our lives and the retirement equation, often headlined by medical problems related to aging. We will deal with these issues in another essay.

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