Category Archives: individual investor

Aunt Jennie’s Talents

Image result for image of older woman giving money

The Parable of the Talents is known to everyone who ever attended Sunday school.  A man prepares for a long journey by entrusting three servants with heavy bags of silver (talents) while he is gone.  In those days coins were weighed and a “talent” was about 75 pounds.  He gave 10 talents to one, five to the second and one talent to the third.  The first two servants invested the silver.  The third, being fearful. dug a hole and hid the money for safekeeping.  When the man returned, the first two gave the man twice what had been entrusted to them.  But the third just gave the man his money back.  For this poor stewardship the third servant was cast out.

I was reminded of this story when a lady came to us after receiving an inheritance from her Aunt Jennie.  After being grateful for her good fortune she wondered what to do.  Banks today are paying a pittance on deposits, so putting it in the bank was not all that much different from digging a hole to hide the money from thieves.  She wanted to be a good steward of her inheritance.

She wanted to honor Aunt Jennie by taking care of her money wisely and not squander it.  Aunt Jennie worked hard for her company, spent a lifetime being frugal and made wise investments.  My future client knew her own limitations. She was not an experienced investor.  She had to decide if she wanted to spend her time learning investing from the ground up.  With all the information out there, which expert or school of thought do you listen to?  Did she want to spend her time reading fine print, studying balance sheets or did she want to continue doing those things she enjoyed by finding an experienced professional she could trust to shepherd the money for her.

She chose us because of our caring professionalism.  We listened carefully to her objectives.  We explained the risks and rewards involved in the investing process.  We explained our investment process with the key focus on risk control and wide diversification.  We believe in wise investing, steady growth, and the assurance that your money will keep working for you. With over 30 years’ experience we have weathered all kinds of markets successfully.  Our knowledge and experience allows our clients to focus on those things they enjoy.  They know that their investments will be there for as long as they need them and beyond to help their children and grandchildren.

Aunt Jennie’s talents have grown and our client is happy.  Aunt Jennie would be proud.

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Why do smart people use financial advisors?

What is the real value to hiring a financial advisor, and who uses them?  What is the value proposition?  What makes one car with four doors and wheels worth $300,000 and other $30,000?  Although we might have an answer, the answer differs from person to person.

People use financial advisors for many reasons.  Some use them because they absolutely need them, others because they want them. Paying a fee for advice and guidance to a professional who uses the tools and tactics of a CFP™ (CERTIFIED FINANCIAL PLANNER™) and an experienced Registered Investment Advisor who is a fiduciary can add meaningful value compared to what the average investor experiences.

Many middle-class investors are anxious about their finances and are not interested in learning the details of managing their money.  This anxiety often results with money left on the sidelines because they don’t know what to do or are afraid of making mistakes. That means earning a fraction of 1% at the bank when the Dow Jones Industrial Average (DJIA) is up over 25% in the last 12 months.

There are others who are interested in learning about investing and may want to hire an advisor to “look over their shoulder.”  They want to hire an “investment coach.”

A third category are people who hire professionals because they are busy doing things that are more important to them: building a career or a business, being with family, or living an active retirement.  They hire an expert to manage their money the same way they hire a lawyer for estate planning, a CPA to prepare their taxes, and a doctor to keep them healthy.

A fourth category is people who were making their own investment decisions but ended up making a huge financial mistake.  This leads me to a story about a really smart, highly paid high tech executive who is very knowledgeable about investing; but he hired an advisor:

It’s not because he lacks the knowledge or interest, obviously. Rather, he figured out he had behavioral blind spots and understood he was at risk of great financial loss. He’s paying someone just to take that risk off his plate.

Determining your goals, controlling risk, managing portfolios well, and knowing your limitations – knowing you have “blind spots” – has led many smart people to hire an advisor.

Vanguard, the hugely successful purveyor or no-load mutual funds (that appeal to do-it-yourselfers) estimates that a financial advisor is worth about 3% net in annual returns.  They attribute this to the seven services that a good advisor provides:

  1. Creating a suitable asset allocation strategy.
  2. Cost-effective implementation.
  3. Rebalancing
  4. Behavioral coaching
  5. Asset location
  6. Spending strategy.
  7. Total return versus income investing.

If you have an advisor but he is not meeting your objectives, ask us for a second opinion.  If you don’t have an advisor but may want one, we offer a free one-hour consultation to see if we are compatible.

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New Years Resolutions for 2017

As another year winds to a close, we wanted to present you with some New Years resolutions designed to improve your financial health in the coming year.

  • Update your estate plan. Has there been a change in your family over the last year?  A marriage, a new baby, a death in the family?  If so, you need to update your estate plan, your insurance policies and your beneficiary designations.
  • Update your internet passwords. Are you using the internet to pay bills, shop, or access your investment accounts?  You will want to update your passwords and make them harder to guess.
  • Review your investments. Have you reviewed your portfolio recently?  Is it still aligned with your needs and goals?  If not, make some changes.
  • Get a personal “Risk Number.” Do you know how much risk you can take?  Most people don’t really know.  Resolve to get your personal “Risk Number“this year.  If you don’t know yours, click here to figure it out.
  • Get your portfolio’s “Risk Number.” Do you know how risky your investments are?  Most people don’t know how much risk they are taking.  Get your portfolio’s “Risk Number” and compare it to yours.  If it’s not the same, you need to consult your financial advisor.
  • Update your financial plan. If you don’t know where you’re going you probably won’t get there.  What’s your financial plan?  If you answered: “I don’t have one” resolve to get one this year.
  • Set your financial goals. Do you know how much you need to save to retire?  Here are some guidelines:

A 30-year-old can open a retirement account and make regular monthly contributions.  By investing properly and aiming for a modest 6% per year rate of return:

  • Saving just $200/month, by age 67 his account will have grown to nearly $350,000.
  • By saving $500 per month the account will be worth over $850,000.
  • Saving $1,000 per month will make our 30-year-old a millionaire by age 59.

 

If you have problems with any of these resolutions, you should definitely consider working with a financial advisor; someone who will be like a health coach for your personal finances.  Resolve to find one this year.

Think of the Advisor as your Sherpa, as it were, whose job it is to guide you amid the extreme altitudes and treacherous passes in investing’s hazardous terrain. That is to say, an Advisor is not someone you hire to beat the market for you, but rather someone who can help you achieve your personal financial objectives as “a facilitator, mentor, and market strategist” for those who, on their own, struggle to achieve their goals.

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Who do you trust?

The latest issue of Wealth Management magazine dealt with the upcoming election.

One of the more interesting things about our recent presidential election (and it’s a long list) is that the traditional political battle lines have not only moved, they’ve been decimated—broken into such unrecognizable shapes that the head spins.

What the Editor found interesting is that neither candidate projects warm feelings toward Wall Street for different reasons.

For both parties and their supporters, Wall Street, and by extension financial services, is to be viewed with deep suspicion and skepticism.

The editor finds this troubling.  We’re not so sure.  When you turn your financial affairs over to another there has to be a certain level of trust.  However that trust must be reinforced over time and “Wall Street” has done enough damage to the trust that people have placed in it that it deserves to be viewed with suspicion and skepticism.

Trust is generated when promises made are promises kept.   The problem is that too often the promises that the major Wall Street firms have made were deceptive.  Wall Street firms like to pretend that they have the best interests of their clients in mind.  The truth is that the firms view their clients as customers and their brokers as the sales force.  The object is to generate commissions via the sales of products created to generate profits for the firm.  And if it benefits the client, that’s nice but it’s a by-product of the sales effort.

That’s why the growth of independent Registered Investment Advisory firms has been a good thing for people seeking investment advice that they can trust.  RIAs who charge fees for their services are not compensated for selling Wall Street products.  Because they work for their clients, not for Wall Street firms, they do not have divided loyalties.  They are supposed to be fiduciaries, not salesmen.  Not to say that there are no bad apples in the basket, but the vast majority of them will work to earn your trust.

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Is bigger really better?

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Everyone wants to see their business grow.  That’s true whether you own a small restaurant or an investment firm.  Some investors look at the size of the firm as an indication of the quality of the advice they will get, assuming that bigger is better.

But that is often the opposite of what they will experience.  Most people are aware that some of the best restaurants are small, with just a few tables, catering to a select clientele.  For the same reason, small investment firms are often better for their clients than large firms.

Large firms are the training ground for smaller firms.  Large firms recruit people who have no experience as investment managers and train them in selling their company’s products.  Once a financial advisor gains experience, he sees ways that his clients can be served better.  That’s the point at which he forms his own small firm where clients get the benefit of his knowledge and experience.

Clients who do business with small firms typically deal directly with the owners, who work for them, rather than employees who work for a paycheck.  As everyone knows, it makes a lot of difference when you’re dealing with the owner of a business rather than an employee.

Small firms are more flexible in meeting the needs of individuals.  Everyone is not the same.  Everyone has a different set of experiences, a different array of needs, and seeks a different level of service.  Large firms create policies and procedures that stack people in silos and try to impose uniform rules on everyone.  The larger the organization, the greater the need for uniformity and the less the business cares about any one individual.

If you have an investment portfolio worth a million dollars, an investment firm with assets-under-management (AUM) of $100 million will care about you and do its best to address your needs.  A firm with  AUM of $1 billion dollars will not care about you as an individual, you’re a statistic.

Korving & Company is growing Registered Investment Firm (RIA), but doing so in a way that makes sure that we always know our clients, care about them as individuals, and go out of our way to meet their individual needs.

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What’s the Difference Between an IRA and a Roth IRA

A questioner on Investopedia.com asks:

I contribute about 10% to my 401k. I want to know more about Roth IRAs. I have one with my company, but haven’t contributed any percentage yet as I am not sure how much I should contribute. What exactly is a Roth IRA? Additionally, what is the ideal contribution to a 401k for someone making $48K a year?

Here was my reply:

A Roth IRA is a retirement account.  It differs from a regular IRA in two important aspects.  First the negative: you do not get a tax deduction for contributing to a Roth IRA.  But there is a big positive: you do not have to pay taxes on money you take out during retirement.  And, like a regular IRA, your money grows sheltered from taxes.  There’s also another bonus to Roth IRAs: unlike regular IRAs, there are no rules requiring you to take annual required minimum distributions (RMDs) from your Roth IRA, even after you reach age 70 1/2.

In general, the tax benefits of being able to get money out of a Roth IRA outweigh the advantages of the immediate tax deduction you get from making a contribution to a regular IRA.  The younger you are and the lower your tax bracket, the bigger the benefit of a Roth IRA.

There is no “ideal” contribution to a 401k plan unless there is a company match.  You should always take full advantage of a company match because it is  essentially “free money” that the company gives you.

Have a question for us?  Ask away:

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Pay No Commissions

time to invest

New clients to Korving & Company will pay no commissions on stock and ETF trades when they open an account with us between June 16th and December 31st 2016.

We use Charles Schwab as our custodian and Schwab has made this limited-time promotion to encourage new clients to open accounts with RIA’s like Korving & Company.

The promotion is called “Make the Move” and it’s designed to:
• Give you an opportunity to experience the value and benefits of working with us.
• Execute commission-free trades to offset the cost of realigning assets to one of our portfolios.

Contact us for more information.

Earning Serious Trust

 

Consumer research tells us that investors are confused about the available options when it comes to managing their wealth.  They don’t really know the difference between brokers, advisors who work for large investment firms and independent advisors.  Charles Schwab is starting an information campaign to explain the value propositions of the independent (Registered Investment Advisor) RIA model by using language that resonates with high-net-worth clients.

The reason for Schwab’s initiative  is stated well by Janet Stanzak, principal of Financial Empowerment LLC and the 2015 chair of the FPA.

“High-net-worth investors would much rather work with someone who takes their entire financial situation into consideration, so it makes total sense for them to be doing this.”

We agree.

 

 

 

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Slow and steady wins the race

Tortoise-and-the-Hare

 

We have all heard Aesop’s Fable about the race between the tortoise and the hare.  The hare, convinced that he was much faster than the tortoise, took time out for a meal and a nap.   When he woke up he realized his mistake but the tortoise crossed the finish line first.

It seems that this fable is especially true about how people grow rich when investing.   There are some spectacularly wealth people who got that way virtually over night – we have all read about them – but the vast majority of the “High Net Worth” (HNW) people –  those with at least $3 million in investable assets – did it the tortoise way.

The interesting thing about these HNW people is that they rose from the poor and the middle class; they did not inherit their wealth.

A study by Bank of America and U.S. Trust found that 77% – more than three quarters – of their clients grew their wealth slowly.  83% said that they grew rich by making small wins rather than taking large risks.  They grew their wealth by careful investing and avoiding major losses.

In our practice we have met quite a few people who managed to turn modest incomes into multi-million dollar portfolios.  We have also spoken with people who took big investment risks only to fail, and have to continue to work long after they planned to retire.

It’s up to each one of us to decide what race we wish to run.  But keep in mind that the odds favor the tortoise over the hare.  And if you have a problem with the slow-but-steady approach to wealth, get a good RIA who will guide you.

 

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The Trouble with 401(k) Plans

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The 401(k) plan is now the primary retirement plan for employees in the private sector and Ted Benna isn’t happy.  Benna is regarded as the “father” of the 401(k) plan but now he calls his child a “monster.”

There are several problems modern with 401(k) type plans.

  1. They are too complicated. The typical 401(k) plan has dozens of investment options. These are often included to satisfy government regulatory demands for broad diversification.  For the plan sponsor, who has a fiduciary responsibility, more is better.  However, for the typical worker, this just creates confusion.  He or she is not an expert in portfolio construction.  Investment choices are often made when an employee gets a new job and there are other things that are more pressing than creating the perfect portfolio.  Which leads to the second problem.
  1. Employees are given too little information. Along with a list of funds available to the employee, the primary information provided is the past performance of the funds in the plan.  However, we are constantly reminded that past performance is no guarantee of future results.  But if past performance is the main thing that the employee goes by, he or she will often invest in high-flying funds that are likely to expose them to the highest risk, setting them up for losses when the market turns.
  1. There are no in-house financial experts available to employees. Employee benefits departments are not equipped to provide guidance to their employees; that’s not their function.  In fact, they are discouraged from providing any information beyond the list of investment options and on-line links to mutual fund prospectuses.  Doing more exposes the company to liability if the employee becomes unhappy.

What’s the answer?  Until there are major revisions to 401(k) plans, it’s up to the employee to get help.  One answer is to meet with a financial advisor – an RIA – who is able and willing to accept the responsibility of providing advice and creating an appropriate portfolio using the options available in the plan.  There will probably be a fee associated with this advice, but the result should be a portfolio that reflects the employee’s financial goals and risk tolerance.

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