10 Dumbest Money Moves

Ever made a big mistake with your money?  Lots of us have.  In a recent article called "My 10 Dumbest Money Moves - And How You Can Avoid Them," Stacy Johnson of MoneyTalkNews discusses ten frequently-made money mistakes and what you can do to avoid making them.  The ten mistakes he describes include:

1) Not having a goal.
2) Not having a spending plan.
3) Attempting to derive self-esteem from possessions.
4) Doing what everyone else is doing.
5) Starting to save large and late rather than small and soon.
6) Paying interest to buy things that drop in value.
7) Turning down free money.
8) Buying a new car.
9) Buying more house than you need or can afford.
10) Not protecting your good credit.

To read the full article, click here.

Coffee, Wine, and Children: Choose Experience and Expertise

By Dan Danford, MBA, CFP®

Founder and CEO of Family Investment Center

It’s the toughest hurdle we face.  People just assume that all investment people and firms are alike.  That’s a bit like assuming that all coffee is alike, or all wine is alike, or all children are alike.  The idea makes me laugh. 

It’s simply not true.  I lead a local team that manages nearly $100 million for clients.  Actually manages it; follow it daily, analyze the investments, and make changes as necessary.  Every single day, and we’ve been doing it for almost fifteen years.  It’s an awesome responsibility, and we take it very seriously. 

Few of your acquaintances have this kind of expertise or experience.  In fact, few people in this region have this kind of expertise.  You may know others who sell investments or insurance or mutual funds, but they probably don’t manage portfolios.  Selling is very different from managing, and it’s very dangerous to confuse the two.

You may know a lot about investing, but it’s likely a very limited view.  Even if you’ve been doing it for a long time, you’ve only observed one set of circumstances.  You know only the investments that you’ve owned since you started.  That’s a very small sample size.

Plus, how would you know that something else didn’t work better?  Every decision has an opportunity cost, and few do-it-yourselfers (even fewer investment salespeople) carefully review all options.  Financial success is always about choosing pathways to a particular objective, but different paths may be safer, or faster, or easier. 

Seriously, I get it.  You want convenience, simplicity, and value for your family.  And you know that finance and investing is important for accomplishing your dreams.  Here’s the key: ask someone who really knows the answers.  Seek out genuine expertise and experience.

Advisors – like coffee, wine, and children – aren’t all the same.

 

How not to blow it with financial aid

In Rachel Louise Ensign's Wall Street Journal article "How Not to Blow It With Financial Aid," she explains common mistakes parents and students make when seeking help with college costs.  Some of the common mistakes include:

• Earning too much at the wrong time.
• Letting the wrong family members hold college money.
• Making assumptions about what schools will offer.
• Thinking merit money is all about grades and SATs.
• Not applying for all the aid you're eligible for.
• Figuring the "expected family contribution" is all you're paying.
• Going for the loan with the lowest interest rate.
• Thinking an aid offer is set in stone.
• Figuring aid will be about the same all four years.

Click here to read the full article for more information.

Which political party is better for the market?

Have the markets performed better with Democrats or Republicans in office?  You may be surprised!  Check out this article by Jerry Webman, Chief Economist at Oppenheimer Funds:

http://blog.oppenheimerfunds.com/2012/09/04/which-party-is-better-for-the-markets/

Should I Buy an Annuity? Some Keys Points to Consider

What is an annuity? Annuity payments are different from annuity products. Annuity payments are just an equal stream of payments over a specified period of time. So, if someone agrees to pay you $500 per month for 10 years, that’s an annuity payment.

An annuity product is a formal contract promising a certain payment stream. Simply, for a price, you can buy a specified stream of payments, usually from an insurance company. You trade a lump sum (or, in some cases, multiple payments) for a promised payment stream. The stream could be a specified number of years or it could be your “lifetime.” In fact, it is often your “lifetime” and/or the “lifetime of your spouse.” Sometimes, the amount is decreased to your surviving spouse.

The issuer of an annuity – usually an insurance company or pension plan - faces a lot of uncertainty. An actuary is a trained mathematician in these specialized calculations. He or she looks at your age and gender to estimate how long you (and/or your spouse) will live. Once they estimate the duration of payments, they estimate the investment pool necessary to pay them. Today’s retirement lifespan can last 30-35 years, and that’s a lot of uncertainty.

To protect the issuer, an actuary needs reliable estimates for both longevity and investment earnings. If they pay you too much or too long, then the issuer loses money. For a pension plan, this mistake means that the company sponsor will need to add more money to the plan. For an insurance company, that deficit comes out of reserves or profits. Neither of these options are acceptable, so actuaries tend to be (need to be) conservative in making estimates.

What’s this mean to you or me? Partly, it means that we are likely to do better than those estimates. Estimates are necessarily based on the conservative end of a conservative spectrum of investment returns. That’s how actuaries protect the issuer.

There’s a strong chance we can do better. Why? First, we can use a broader pool of investments for our portfolio. Second, we can adjust the portfolio as conditions change (the actuary has to estimate the future today). Third, there’s no margin built into our model for insurance company profit.

In the end, the residual of these factors – any amounts accumulated over the above the actuary’s estimate – may be passed on to our beneficiaries. Remember, most annuity products are exhausted after the annuitant (or annuitants) dies. There is no surplus to the buyer when an actuary overestimates longevity or underestimates investment returns.

That brings up another really important point. An annuity’s stream of payments is inflexible. Should an emergency – or an opportunity – arise, there is no way to interrupt the payment stream. This lack of flexibility is a huge issue for today’s typical retirement horizon.

Another related point is that inflation wreaks havoc on long-term annuity payments. Think back to your salary in 1987. Would you like to live on that amount today? Could you live on that amount today? Now, leap ahead to 2027; how much will today’s monthly annuity payment buy in tomorrow’s world? Avoid any annuity product that doesn’t include an annual Cost of Living Adjustment (COLA). It will reduce the early payments, but add genuine value down the road.

My last point is also important. Don’t buy an annuity product without comparing prices. Every insurance company uses their own actuaries and estimates. These can vary quite a bit at any point in time. Any buyer, especially those with larger sums to invest, should seek quotations from several highly-rated insurers. Most local insurance agents represent just one company, and I’d always recommend a second opinion before buying.

Dan Danford, CFP® is Principal/CEO of Family Investment Center in St. Joseph, MO. The firm offers commission-free investment services for families, businesses, and nonprofit groups.

Investment Update

Recent years seem to have brought more bad investment news than good, so it’s nice to enjoy some positive markets. Sometimes we have to remind ourselves that good years are normal and that recent bad years are abnormal!

Bob Siemens, one of my early mentors, used to remind us that a market bottom is the “point of maximum pessimism” and that a top is a “point of maximum optimism.” He also used to say that a rising market “climbs a wall of worry.”

I share these thoughts because I’m fairly confident we have passed the point of maximum pessimism, and that 2012’s stock market is certainly climbing a wall of worry. Both points create some enthusiasm for investing over the next few years.

What about the presidential election? What about the Federal Reserve’s artificial low interest rates? What about the European debt crisis? What about geopolitical issues in the Middle East or Asia or Africa? Troubling, all, but not devastating for investors.

The most influential factor for investors today is noise. Stupid, senseless, loud, relentless, and insulting market noise. You can’t escape it and it creates a false sense of urgency about finance and investing. Noise blares from every television, computer, magazine, newspaper, and billboard. There’s a Crisis Everywhere … crisis … crisis … crisis. Mostly, it’s absurd.

Stop the madness! We are going to continue doing what has worked best in the past and we expect it to put money in our collective pockets. Our process and policies are based on facts, studies, and proven techniques. We aren’t responding to crises, or whims, or screeching monkeys on television. We are carefully selecting managers and/or securities to meet the specific needs of your portfolio and family.

Our promise when we started in 1998 was simple. We would invest client money using the same principles, strategies, securities, and safety that we use for ourselves. In other words, we treat your family in exactly the same way we treat our own. It’s still true and it’s still our promise.

Our goal in 1998 was also simple. We wanted to build the premier investment management firm in this region. Frankly, we welcome your questions and ideas. Anyone on our team will be pleased to talk with you by telephone, email, or in person. We are proud to serve your family, and we are happy to explain things or discuss alternatives. Every discussion makes us better!

Dan Danford

Founder/CEO

Family Investment Center

How is our money backed in a financial crisis?

With many parts of the world experiencing financial crisis, what has backed the money for all these years?

In the video below, Dan Danford, CFP®, Founder and Chief Executive Officer of Family Investment Center, explains what is backing our currency, the currency of other nations, and why it all doesn't just fall apart when countries face perilous economic issues.  Danford also addresses the functions of monetary and fiscal policies, which were created to help in times of a financial crisis.