Thursday, April 30, 2009

Gift-giving season calls for resourcefulness

We post a daily financial tip on Twitter @family_finances. For the past week or so, we've been giving advice for the gift-giving season. The summer usually abounds with invitations for graduation parties, weddings and other similar occasions. Keep your purchases reasonable. Here are all of the Twitter tips gathered into one spot.

- Gift season is approaching. Graduations, weddings. Don’t overspend. Your gift won’t be remembered in a few years, but your presence will.

- Gift cards are a nice gift, but watch the fees. Keep your receipt; they don’t always work.

- Don’t go into debt to buy someone a gift, even for your own children. Buy what you can afford.

- Store wrapping for gifts is sometimes free. Skip it if it’s not. Seriously, you can wrap your own gift.

- Look for sales now for gifts you’ll need to give in a few months. People spend the most when purchases are impulsive.

- When buying for children, be sure to ask for sizes before you purchase. Don’t make someone return something. That’s a pain.

- Think about buying for Christmas now. If you spend the next six months or so looking casually, you may find the best bargains.

- For a graduate, think about a great book on finances as a gift. If they’re going out on their own for the first time, that’s information they need.

- For a young couple getting married, a great gift is a check. They’ll get plenty of vases and trinkets. Think practical.

- For a new grandchild, consider opening an account to pay for their college. Every time you get the urge to buy them a toy, instead, contribute.

- For a housewarming, consider a card with a certificate good for free lawn-mowing, house-washing or other service. They’ll need the help.

- A gift of time is priceless to someone who has their hands full with children. Free babysitting is always a great gift.

Tuesday, April 28, 2009

The challenge of tinkering with capitalism

By Dan Danford

A friend of mine (and a very bright guy) was recently pondering the merits of socialism. I think he’d concede that Cold War ideologies carry little influence today, and that capitalism easily won that battle (not so easy for citizens behind the Iron Curtain, however). Yet, I also think he’d like to soften capitalism, and make it friendlier and more compassionate. He’s a sensitive guy, and he likes to help as many folks as possible.

Capitalism got us here. No doubt, socialism could never create the living standards we all take for granted today. No rewards for creativity or innovation results in neither of those things, and they've been responsible for myriad advances in everything from safety to medicine.

But, he’d recognize that war as already won, and suggest that today’s world calls for a different model, somewhere between yesterday’s extremes. A different point along the capitalizm/socialism continuum.

Unfortunately, creativity and innovation swing somewhere in that balance, too. Personal recognition and reward for exceptional effort are the very essence of capitalism. I’d suggest that many Americans who aspire to creativity and innovation do so precisely because they've been freed from challenges inherent to earlier socialistic regimes.

Compare the relative accomplishments under both systems in the 40s, 50s, and 60s - especially the standards of living among middle classes. There's no real comparison where it really counts: how the typical, usual, or normal citizens live their daily lives. The human quest to see result for our efforts - in a nicely manicured lawn or a well-prepared family meal - extends into the public and workplace.

Noted financial journalist C.W. Barron once noted that "everything can be improved," and I agree with that. Society keeps evolving and the problems and solutions are increasingly complex. I don't tout capitalism because it's morally superior, but because it's done more for more folks than any other contemporary system. Certainly, it could be better, but it's just as certainly been better than socialism.

Corruption is always a problem. Corruption exists under every social system (damn it!), but capitalism stands alone as the only system that has raised so many people out of poverty and despair worldwide. It's frustrating, perhaps, but capitalism mostly works.

Personally, I’ve grown quite weary of the whole "corporate greed" theme. I suppose it is inevitable, given the situation with bank bailouts and Wall Street shenanigans. Most of us work for decent companies, though, which exist to serve customers. They are profit-making organizations, but those profits fuel our entire system.

Basic economics. At its simplest, there are just two basic types of economic activity. Producers and consumers. Producers are farmers and businesses, and maybe some professionals. They are, in essence, the people who create, grow, manufacture, or provide valuable services for a profit.

Everyone else is a consumer. All of us consume things, of course, but many people work in jobs that consume, too. Take public education, for instance. There’s no question that teachers do meaningful work, and contribute mightily to society. So do judges, and fireman, and legislators. Still, it’s important to note that they all are paid with tax money.

The same thing goes for other government workers, social agencies, non-profit and charitable groups. The money that flows to them in taxes or other support originates from society’s producers. Those groups, in turn, pay their workers who pay their taxes and consume more goods. But the spigot of money flows directly from farmers, and businesses, and other people and firms who support them.

According to a recent article on, the single largest employer in Kansas City, Missouri, is (are you ready for this?) the Federal Government. Think about that for a second. Now think about this: no producers, no taxes, no money. Wages and taxes from producers and their employees cover the entire cost of education, social agencies, and government.

I don’t make excuses. I despise criminal or unethical behavior, but - although numbers in the news often seem quite large – crime is such a wee part of corporate America. Yet, some folks think every business is bad and every MBA is a crook. Often, these mistaken souls are teachers, social workers, and civil servants who live and work (one way or another) downstream from corporate profits.

No easy answers. I understand my friend’s points. There's clear need for regulatory and government activity, and unhampered capitalism can be dangerous. There’s a definite role for government and a need for balance.
But I also fear unintended consequences. Some of our most regulated activities – medicine and public education, to name just a few - display ample reasons for concern. Regulation itself can create massive barriers to entry, and monopoly status (check out the pharmaceutical industry). Consumer pricing, access, and service suffer because well-intentioned regulations favor incumbent vendors. Incentives for creativity and innovation fall idle.

Personal recognition and rewards are the very essence of capitalism. They are the key elements missing from socialism. Until those statements are reconciled, there is little hope for success in socialism.

Monday, April 27, 2009

Investing in gold is not a solid idea

On Mondays, we answer questions from readers. If you have a question, post it in the comments section.

QUESTION: With the recent downturn in the stock market, I’m looking at investing in gold or other precious metals. What do you think of this strategy?

ANSWER: I always try to be diplomatic, but this is dumb, dumb, dumb. There are always a group of folks selling this stuff and they rise to new levels anytime a general panic occurs. The theory is that gold (or any of this stuff) has "intrinsic" value - that is, when the world goes to hell and people stop using paper money, you'll be able to swap your gold for groceries. C'mon. If our currency collapses, do you really think that the corner gas station or Wal-Mart is going to set up a "precious metals desk" at the check-up lane?

Even with the recent run-up in prices, gold has been a poor long-term investment. The price per ounce can (and has) stagnated for decades at a time. I guess it's okay to note that prices jumped hundreds of percent in short order, but it's also important to realize that they sat silent for years before that. In my opinion, this is a classic case of opportunistic marketing. Economic things look rough, so we'll scare people into buying gold.

At best, gold or other precious metals - even other commodities - could be a tiny part of a diversified investment portfolio. There are times when price increases in hard assets might - I said might - offset losses in other securities. But larger stakes in something as emotional as gold are really just a gambler's bet. And the people selling it are making an emotional appeal at your most vulnerable moment. Stick to mainstream investments and your opportunities for long-term success increase.

Thursday, April 23, 2009

T. Boone Pickens puts his money where his mouth is

I attended a financial symposium at the University of Missouri/Columbia on April 22 and one of the highlights was an appearance by T. Boone Pickens. Mr. Pickens was speaking at a state energy summit and our symposium group was invited to attend. Most readers will recognize the name, but for the uninitiated, T. Boone Pickens is a billionaire businessman and one of America’s top philanthropists.

I was very impressed by both his energy and passion. He has undertaken a personal agenda to reduce America's dependence on foreign oil. As a 40-year veteran of the oil industry, he has unique insight into this challenge. He revealed that we still purchase immense quantities of oil from “people who are our enemies,” and until we fix that “our country and economy are vulnerable.”

He will be 81 years old in a few weeks. I hope I am that sharp when I reach his age. He explained why he felt buying foreign oil was such a problem, and how he intends to fix it. Specifically, he feels that natural gas is the “bridge” fuel until more reliable and powerful batteries or technologies. Right now, batteries are incapable of powering an 18-wheeler, and he says that's a major part of our challenge. Over-the-road trucks (6.5 million in use today) burn a tremendous amount of diesel fuel and that's a significant portion of our reliance on foreign oil.

Mr. Pickens addressed questions from the audience. People asked about hybrid cars and/or battery operated cars. “I'm in favor of anything that's American," he said. However, hybrid or fuel cell cars will not in themselves solve the problem at this point.

Most impressively, Mr. Pickens has put $55 million of his own money into this campaign. He says his years of politics are now over, and his campaign is designed as a bipartisan project on a grass roots level. He suggested that everybody in the audience visit his website and register as a supporter. Millions have done so already, and this is the principal vehicle to promote change both in Washington, D.C. and among the American population.

It was a rare treat to see someone with such success and passion in advancing age. I've always liked people who “put their money where their mouth is" and Mr. Pickens is surely doing that on this issue. It was a fun and rewarding hour.

You need professional help, part 2

By Jason T. White, ph.D

Jason is a principal and director of investments for the Family Investment Center. As many families attempt to cut expenses, we’ve seen some question why the help of a professional advisor Is necessary. Jason had some thoughts on this that he wanted to share with our readers. He has a Ph.D. in Economics and Political Science from University of Missouri in Kansas City.
This is the second of a two-part series on why you need professional help. Keep reading below this entry for more.


Some have sought the “safety and protection” of precious metals like gold. Actually, many investment advisors don’t mind using a dab of gold as a hedge against price inflation. However, traders gripped by the twin demons of fear and mania often take gold ownership to extremes. Unfortunately, adjusted for inflation, gold currently sells for approximately the same price it did in 1980. Professional advice can help you build a properly diversified long-run portfolio with much better outcomes.

Political headwinds

Politics is a philosophical, emotional and important discipline to many, including us. Invariably, there will be highs and lows as your candidates/party wins and loses elections, and the political pendulum swings right to left to right… you get the idea. Navigating uncertain political times is an important role of a professional advisor. Our job involves taking a dispassionate view of the political landscape and guiding investors in a prudent course of action. For the record, we are not currently recommending stockpiling guns and gold, but profit opportunities abound in many financial sectors that are quite different from the “sweet spots” we found during the Bush years.

The Resurgence of Lord Keynes

So, what is an investor to do when confronted with $9 trillion dollars in expected federal budget deficit spending over the next few years? In a word: hedge. And what has historically proven to be the best hedge pockets for prospering in an expected future inflationary environment – stocks and real estate. Your home likely accounts for a significant percentage of your net worth, so it is our view that when it comes to investment strategy, you should keep a reasonable portion of your investment portfolio in stock mutual funds. The stock price volatility of the past 16 months has made this a particularly gut-wrenching decision for many to stick to, but that is exactly why you need a professional financial advisor to coach you through this period of uncertainty.

Zigging when others zag

Traders are moving in and out of the market on daily, even hourly, news and data releases. This is not what professional investors do. While changing one’s overall asset allocation between stocks and bonds may be appropriate in your individual financial situation, and Family Investment Center exists to help you figure that out, jumping in and out of the market or radically altering your long-term asset allocation based on short-run “noise” is not a prudent strategy. In fact, this may be the single biggest impediment to long-term investment success. FIC will help you stay the course in these trying times.

Staying the course

During the period 1990 to 2007, which included two recessions, the return of the S&P 500 stocks averaged 9.5 percent per year. According to Advanced Equities Wealth Management, a fellow advisory firm like us, being out of the market for the 10 best days each year would have reduced this historical gain to an 11.5 percent average annual LOSS. It is axiomatic that the stock market will be volatile in the short-run, but it is the long-run steady players that find the pot of gold at the end of the rainbow.

Manage debt with prudence

We are in an era of consumer retrenching and deleveraging. The national savings rate among consumers has risen from none to 5 percent nationally in just a few calendar quarters. We strongly believe that our clients should work had to pay down high interest credit cards and other consumer debt. But given the choice of paying down principal on a 4 percent, 15-or-30 year home mortgage versus investing in the market, which sports the potential for twice the annual return over long-run, the advice from a professional investment advisor should be not to abandon a well thought out investment strategy in the face of short-term transitory challenges to the market. Market returns will return to their mean in time.

Media Doom and Gloom

Are we embroiled in the worst economy since the early 80’s, the mid 70’s or (gasp!) the Great Depression? We think not. In a predominately capitalist system, business cycle theory teaches that periods of bubble and bust are a normal part of long-term economic growth and stock market appreciation. Think of the fable of the tortoise and the hare. You can imagine all the little pink-nosed bunny traders lying panting on the side of the race track as they acquire positions and sell them minutes, hours or days later in an effort to capture a bit of appreciation from volatility. Family Investment Center advisors avoid that trap by adopting the behavior of the wise old tortoise; properly allocating assets for individual and institutional investors, plodding steadily forward in the face of short-run adversity, adjusting the portfolio on the basis of principal, not emotion, and emerging at the finish line happier, healthier and wealthier, and VICTORIOUS!

Tuesday, April 21, 2009

You need professional help

By Jason T. White, Ph.D.

Jason is a principal and director of investments for the Family Investment Center. As many families attempt to cut expenses, we’ve seen some question why the help of a professional advisor Is necessary. Jason had some thoughts on this that he wanted to share with our readers. He has a Ph.D. in Economics and Political Science from University of Missouri in Kansas City.
We’ll share his thoughts today and later this week.

Personal Training
A professional financial advisor is a little like a personal trainer. Their job is to motivate us to do things we might otherwise do on our own, and to know how to achieve long-term objectives.

Father’s Wisdom
Chances are dad or mom was the first person who took a real interest in teaching us how to save and accumulate wealth. You socked away a portion of your allowance, lawn-mowing or baby-sitting money for a rainy day. Your advisor can rekindle this forgotten or neglected family value of personal saving.

A Friend’s Ear
We have an unwritten rule at the Family Investment Center to talk about half as much of the time as our clients do. Our purpose in meeting with you is not to teach you advanced financial theory (although we will if you want!), but rather to clearly develop an understanding of your personal financial needs, goals, objectives, fears and values. A friend is there to listen and advise. This is what we strive to be.

Preventative Maintenance
When the engine blows a cylinder, the best mechanic in the world can’t save it. It’s toast. We manage our client portfolios designing backup systems, warning lights and stress tests to prevent you from laying a thick streak of Pennzoil in Turn 4 at Daytona.

Apocalypse Now?

Hardly. I have yet to witness the four horsemen on a final ride to destroy capitalism. But, if you watch too much CNBC, Fox, Cramer, Dobbs or even Leno, you might think the end is near. Hogwash! A seasoned investment professional will help you keep control of the trait most destructive to wealth accumulation: your emotions.

I Need the Market to Settle Down
Given a sufficient time horizon, I can guarantee you which way the market is headed – UP! It is not a question of “if” simply “when.” One of the biggest mistakes you can make as an investor is to “sit out a few plays” during a bear market. Odds are you will miss a big chunk up the upside rally when it comes – and they always do. A quality investment advisor will do everything he or she can to keep you in the game.

Tough Love and Fairness
When a fee-only investment advisor (no commissions) takes a position, it is with your best interests at heart. Our objectives are perfectly aligned with yours – we want you to growth wealthy, and when you do, we both prosper. The 20th century commissioned brokerage world is disappearing fast because of a misalignment with client objectives.

The Rise of the Equity Class
Wealthy people are made during hard times. Family Investment Center understands the transition to the ownership society. Stock market fortunes are NOT made in bull markets; they are made when the bears are roaring and traders start looking for the exits. You need an advisor to remind you why you have chosen to be an investor, and what the ultimate benefit of that choice will be.

Dollar-Cost Averaging Discipline
When stock market averages decline, the trader often feels he or she is “throwing good money after bad” when it comes to continuing his or her monthly savings program. The investor comes to recognize, through professional guidance, that these rare major declines should be viewed as generational buying opportunities. Instead of ceasing contributions like the trader, the investor digs a little deeper and tries to maximizing savings in their 401(k), IRA and other investment vehicles. Be an investor, not a trader.

Recognize the Obvious – Then Execute!
Everybody knows the name of the game in investing: “Buy Low and Sell High.” The biggest problem we see is do-it-yourself investors having the chutzpah to buy when others are capitulating. A financial coach or leader on your team can make all the difference in your long-term investment success.

Are You Selling Your House Now?
Across the country, housing prices have nosedived with the same velocity as stock prices. Rational behavior would be to treat both asset classes equally. Why would you sell your stock portfolio after a price decline, but not sell your house? Stock prices are likely to bounce back much quicker as the recession becomes a memory. A professional advisor can help you navigate these land mines.

Monday, April 20, 2009

Surviving a bad economy

I have a weekly podcast on financial matters on Dad's Divorce, My latest commentary was posted today. This week's podcast discussed how to survive a bad economy. You can listen to it here:

Financial planning fees explained

On Mondays, we post questions from our readers, followed by an answer from Dan Danford. Feel free to post your own questions in our comments or @ reply to us on Twitter @family_finances.

QUESTION: I need some financial help and I understand the need to shop around. I read some articles about choosing an advisor, but I’m very confused about fees. How do you compare fees from one advisor to another? How important is that?

ANSWER: Since you asked, I’m going to share my best thinking on the subject. This will take a few minutes, but the subject requires some explanation and depth. I started Family Investment Center as an alternative to conventional fee structures, so I’ve given this subject a lot of thought.
And it is important. The investment world is extremely competitive. There is a stockbroker on almost every corner. There is a bank - with a discount broker in the lobby and a trust department upstairs - at almost every major intersection. Add in insurance agents and financial planners, and it all begins to run together with alarming sameness.
But it’s not really the same.

Some consumers focus on fees because it seems an easy (and important) thing to compare. If you are so inclined, you can visit a number of potential managers and collect their published fee schedule. You’d need to collect schedules from banks, brokers, investment advisors, financial planners, and (in some cases) insurance agents. By studying these documents, you’d probably arrive at a pyramid of fees.
This would be a great approach except for one thing. All options aren’t equal. We aren’t talking about a loaf of bread here, or two dealers offering identical cars. Instead, we are considering a field where there are thousands of products, and widely varying degrees of professional competence. We’re also working in the realm of horrendously complex cost structures amid an ocean of hidden fees.
Take that bank trust department, for instance. Fees shown on their schedule might omit profits they earn from their own family of mutual funds. It’s also likely that very small print discloses other administrative fees earned from outside mutual funds. They probably get income from clients plus income from selected investment options.

This isn’t illegal or necessarily unethical, but it helps disguise the total fees you pay. Looking at the published fee schedule, it’s unlikely that you’ll come away with a helpful understanding of total costs.
Similarly, just try to decipher the fees you’ll pay in an insurance product or brokerage account. It seems so simple, but I guarantee that you’ll go nuts trying to find a “bottom line” on these costs. Trying to compare costs within one industry is hard enough, across industries (insurance versus banking, for instance) is nearly impossible! It takes a carefully trained eye.
Second, and this is very important, all these options aren’t equal anyway. Since when does a broker equal an insurance agent equal a bank? Doesn’t quality of products or management mean anything?
Are all stockbrokers equal? Does the newest broker, fresh from a 12-week training course, offer similar value as the experienced professional in the corner office? Which offers better value, a fifteen-year insurance agent or a brand new trust officer? If you’re getting ready to invest $100,000, which should you trust more?

There’s a fair chance that the bank’s trust officer never passed a securities examination (trust departments are specifically exempted from the routine exams required of brokers, insurance professionals, and investment advisors). In fact, a discount broker in the bank’s lobby (where licenses are required) is potentially better tested than the trust investment officer! Does that affect your view of their investment advice?
None of this discussion is meant to slander good professionals working in the investment arena. However, it does reveal some difficulty in evaluating investment services, especially on the sole basis of fees.

It’s important to realize that I created Family Investment Center after spending 15 years in the trust/investment industry. I specialized in employee benefits and large IRAs, which offered unique insight into investment services and fees. You could say that I developed some expertise about industry costs and fees.
Here are some important lessons that I learned.
Commissions distort investment advice. They lead investment salespeople to recommend one option over others that might do a better job or cost less. In fact, the sales commission alone virtually assures that a product costs more than other options in the marketplace.
I often hear professionals say that they aren’t personally influenced by sales commissions. Consider this: Would brokerage firms, insurance companies, or banks (experts in generating income) use them if they didn’t work? Come on.
Similarly, “in-house” investments (banks or brokers offering their own mutual funds, for example) create a related distortion. The need for profits compels the organization to favor these over other choices. Of course, there’s also a built-in (and largely hidden) fee for consumers. Some groups offer a fee “discount” if you choose their products or funds – more illusion than reality.
Note also that in-house options rarely match performance offered through outside funds and managers. This may seem a small point, but it’s not. If a firm recommends inferior mutual funds, then they are – in essence – placing organizational profit motives above client needs.
Hidden fees are higher fees. I once reviewed a company pension plan offered through a national trade group. My client insisted that it was free. Buried deep in the fine print, dozens of pages into the plan prospectus, I found a disclosure of nine different charges taken against the account. Nine different and expensive fees!
In most of the investment business, sales skills are more important than investment skills. In a commissioned environment, survival requires sales. Products offered in this environment cater to consumer whims, not investment quality.

Admittedly, I consider investment fees from a different perspective than most consumers. That’s unavoidable since I have professional knowledge and experience in evaluating costs and fees. With the prior explanations as background, here’s why I’m glad you asked about fees:
Family Investment Center was created using a very simple concept. No hidden fees. Clients know right up front how much they’ll pay for our service. They know we provide honest evaluation, unbiased research, and friendly, local service. We scan the universe for quality managers and we don’t sell any “house” funds or investments.
In fact, we employ a variety of methods to control total investment costs. We charge fair and reasonable fees for the services we provide. In fact, total fees are actually lower than most other options in the marketplace.
We aren’t unique. There are hundreds of advisory firms nationwide operating in a “fee-only” environment. I prefer the term commission-Free because it’s a better description of what we do and how we operate. Again, there are hundreds of us.

Take away the commissions, and false expertise disappears, too. Education, skills, experience, and knowledge are where significant value is added.
The crucial point is that it takes judgment, skill, and experience to properly engage this knowledge for your benefit. Of thirty similar mutual funds, which one (or ones) is the best choice for your situation? Which one (or ones) fit best with other securities to meld a quality-diversified portfolio? Which one (or ones) offers the best tax efficiency for a family in your circumstances?
You may be able to find a cheaper alternative (or something that looks cheaper). Just like you can find a cheaper lawyer or a low-cost doctor. Truth is, every lawyer belongs to the bar association and every doctor holds a medical license. Chances are good, though, that you’ll look beyond price in choosing the right one for your situation. Cost, while a factor, isn’t the only factor.
Fees are only part of the picture. You have to consider everything else to arrive at value. Commission-free investing offers top value for most families. That’s why I love to talk about fees.

Thursday, April 16, 2009

Life insurance revisited

Life insurance is one of life's essentials, particularly for those who have children. I've been doing podcasts now for a while for the Dad's Divorce web site, which I encourage you to visit, particularly if you're facing a divorce.

Here's a link to the podcast if you'd like to learn more about life insurance.

Tuesday, April 14, 2009

In a free market economy, should government get involved in business?

Like most Americans, I am keeping a watchful eye on the bailout of the auto industry. Generally speaking, I’m a free market guy, so I tremble when the government gets involved in business. On the other hand, Peter Lynch famously advised, “Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it.” American automakers seem to prove his point.
Part of the problem, of course, is that government is already involved with these companies. Over the years, various programs from tax breaks to emission standards to union workplace rules created an artificial marketplace for American autos. In themselves, most of these things seem good, but the combined consequences, intentional or not, impact the markets, for both consumers and manufacturers. When times are good, the impact may look slight. Nothing looks slight today, however.
Are some companies too important to our citizens and economy to fail? Clearly, there are some very important people who think so. They argue that carmakers and the suppliers who support them employ millions of people who would be at best temporarily or at worst permanently displaced. That’s a huge additional burden for a country already disabled by a huge recession. Plus, the manufacture and sale of autos plays a large role in our national economy, and global trade. These are powerful arguments and, for now, they seem to have won the day. The government stepped in, loaned them money, and assumed an oversight role.
In that oversight role, they kicked out one top executive and ordered Chrysler to consummate a quick merger. Those are big steps, and they raise a lot of eyebrows on Wall Street.
I think the jury is still out on this issue. Like so much else in business or government, we’ll look back on this with a lot more clarity. I have concerns about government saving some businesses, but not others. I’m skeptical that career politicians know enough about business to make good personnel or other decisions. I cringe when Congress acts on polls taken in the barber shop or union hall. Still, with all these concerns, I’m hopeful that steps already taken avert disaster and keep good people working. These are unique times and call for unique measures.
More than anything, I fear unintentional consequences. So many good ideas in government create a dark side consequence. Sadly, many great ideas are short-term, but the consequences are long-term. That’s my concern about government intervention. Maybe this time is different.

Monday, April 13, 2009

Tax refunds more about psychology than finance

On Mondays, we post a question and answer from a reader. Here's an appropriate question for the week in which some of us write a nice big, fat check to the government.
QUESTION: I usually get a large tax refund every year. I use it to pay off debt or buy something I want. Is that a mistake? Am I letting the government borrow my money for free?

ANSWER: I hear stuff like this all the time. Yes, the government is "using" your money all year long and then sending it back to you at tax time. But, really, would you rather save it yourself and write them a big check each April? My experience is that people hate writing that check and most prefer an annual refund. From a pure financial standpoint, the best case scenario is that your withholding taxes match exactly your tax due. That isn't likely to happen, though, and psychology suggests a refund is more palatable than writing a check. After thirty years in the investment business, I've discovered that psychology trumps math for almost everyone!

A great way to start the week

The Wall Street Journal's Charles Passy interviewed me for a piece on how advisors make an impression on clients. There are some great tips in it from other advisors. I'm delighted to be one of the people quoted in the column. You can find it here. Thanks for including me, Charles!

Thursday, April 9, 2009

Day trading: is it back?

Lee Eisenberg has a nice piece that's worth reading in today's Daily Beast.He describes the perils of finance and investments as well as anyone. What he describes here, I think, is a common hazard. Investing isn't entertainment or - at least - it isn't all entertainment. Many of us take joy in watching football, but it's completely different for the players. The guy in the stands places an occasional bet, but there's a genuine stake in every play for every player. Similarly, an occasional bet or "day trade" might be a fun diversion, but most financial decisions have real consequences, and there's real danger if it gets much beyond that. I say go to Vegas if you want to gamble. Family investing is too important for that.
Read Lee's piece here:

Monday, April 6, 2009

Credit repair usually is a scam

On Mondays, we post a question from a reader and answer from Dan Danford. If you have a question, please post it in the comments section or e-mail us.

QUESTION: I get offers from places that want to help me repair my credit. Are these organizations credible? Can they do what they say they can do? What can I do on my own?

ANSWER FROM DAN DANFORD: Few credit counseling companies are credible. Look at it this way: how could a company earn money and make profits from people who are in financial trouble? They don't have money to pay for this service. All you need to know is that there's no profit in it, so it can't work well as a stand-alone company.

So they aren't stand-alone companies. For the most part they are part of bigger organizations with other products to sell. In the past decade, mortgage companies used this device extensively. The credit "counseling" service was actually a sales tool for refinancing the house (again and again and again). Mortgages companies often made huge profits, so those groups could afford to hire credit "counselors." In fact, these people were carefully-trained recruiters for mortgage companies. If any good could come from our current economic woes, it is that this type of credit counseling and mortgage scam is rarer today than it was five years ago. Sadly, other organizations were (and are) waiting in the wings.

One exception is worthy of mention. Faith-based financial programs have become more common as more and more families struggle with debt. Many times, these groups teach about money and team younger families with experienced volunteer mentors who help devise and implement a financial plan. Ongoing encouragement and genuine advice can produce dramatic results. Dave Ramsey, especially, has created quality educational materials and step-by-step guidelines for fixing a broken family.

The sad truth is that getting out of debt is much harder than getting in. There are no quick fixes, and it takes a lot of foresight and discipline. Those aren't things you can buy at a store and they aren't things someone can do for you. Therefore, right now, credit counseling isn't a viable product in the marketplace. Better to visit the library for a good book on personal finance.

Friday, April 3, 2009

Teaching your kids about money

We give out a daily financial tip on Twitter @family_finances. During the past two weeks, we've given out tips for teaching your children about money. We thought it would be valuable to list all of the tips here together.

Can you explain your household budget to your kids? Get them involved early so they understand how money works.

An allowance should be earned by doing small chores. Teach your kids money is earned, not freely given.

When your kids receive money, require them to save some and give some to charity, and only spend a portion.

Do your kids know that you support charities? If not, it’s good for them to know. Teach them why you support what you do.

When it comes time to choose a college, don’t allow kids to think you can afford anything they want. Tell them there are limits to what you will spend.

Don’t bankrupt your own retirement to pay for kids’ college. They can borrow for college. You can’t borrow for retirement.

Help kids understand your values and why you won’t buy certain things. Give them a good reason and you’ll teach them something.

Grown children need to support themselves. You aren’t doing them any favors by giving them handouts.

Watch the spending on fast food. It adds up quick and it’s not healthy, either. Teach your kids how to eat on the go without fried food.

Live your financial life in ways that are consistent with what you teach your kids. They’ll notice if you aren’t consistent.